Originally published on July 7, 2014
The Case for Uranium
The last four years have taken quite a toll on uranium prices. The current price of uranium is at $28 per pound, a far cry from its 2007 highs. At that time, the price of uranium peaked above $130 per pound but started losing value, along with the rest of the global market, during the Global Financial Crisis. Over the next three years, uranium lost 70% of its value, dropping to $40 per pound.
As the global economy began to recover, uranium prices followed suit, hitting above $70 per pound. However, in 2011 a tragic tsunami hit Japan's Fukushima nuclear power plant causing Japan's emergency shutdown of nuclear reactors. This catastrophic event caused further downward momentum on uranium prices to its current price today of $28 per pound, the lowest price seen in 9 years.
While the case of uranium prices looks dire, the current reality is a classic example of supply and demand's effect on prices.
Uranium and Supply
Today it costs an average of $70 per pound to mine uranium. With a current spot price of $28 per pound, you can imagine that miners are losing money per pound of uranium mined. In order to weather the current price pressure, mining companies are beginning to idle existing mining projects and postpone new or planned projects. A continuation of this process will eventually cause a supply restriction to uranium.
Currently there are 430 operating nuclear reactors around the world that consume 175 million pounds of uranium annually. Miners are currently producing 145-165 million pounds annually. Up until December 2013, the 10 million pound shortfall in supply was fulfilled by the "Megatons to Megawatts" program. The Megatons to Megawatts was a 20 year agreement between the Russian Federation and the United Stated for the conversion of 500 metric tons of Russian highly enriched uranium from nuclear warheads to low-enriched uranium to fuel U.S. nuclear reactors. Over the life of the Megatons to Megawatts program, the low-enriched uranium provided about one-third of the enrichment services needed to fabricate fuel for U.S. nuclear reactors. The program was successfully completed in December of last year. Normally such a large source of supply drying up would cause a price spike in the underlying commodity. However, the market didn't see a price spike in uranium because of outstanding supply from Japanese stockpiles accumulated since shutting down their nuclear reactors in 2011. That will come to an end and supply will begin to dry up as Japan plans its restart of its nuclear reactors later this year.
Uranium and Demand
Global demand for uranium is increasing. Nuclear power generates 20% of the electricity supply in the U.S., and the percentage only increases throughout the developed world to an astounding 70% of electricity in France. As the technology needed to build reactors becomes more readily available, emerging markets, such as India and China, are quickly becoming major consumers of nuclear generated electricity.
In addition to Japan restarting its reactors, there are 71 new plants currently under construction around the world today, with the first of these coming online later this year. Moreover, there are 160 additional reactors approved to begin construction and another 320 reactors in the proposal process.
It's not "if" but "when"
We know that supply and demand factors point to a rise in uranium prices, but when will this happen?
As previously mentioned Japan will begin its restart of reactors later this year and continue through 2016. As these restarts ramp up, the above ground supply that has bridged the gap between supply and demand will be rapidly consumed.
An important factor to note is that uranium supply contracts signed at higher prices several years ago are still active, allowing companies to generate sales prices that are above current market rates. Those long term contracts will begin to expire over the next couple of years, forcing renegotiations with power producers. At current spot prices, it is not feasible for uranium miners to sign long term contracts where they are guaranteeing themselves losses for years to come. These negotiations will likely be the first trigger that reverses uranium's abnormally low prices.
The fundamental supply and demand factors alone point to a price increase of more than double. Add the potential for further supply disruption out of Russia over recent and proposed sanctions from the U.S. and E.U., uranium spot prices could absolutely soar. It's important however to realize prices need to increase 150% just to reach a point where miners of the heavy metal can break even. Not every mining company will make it through the storm so it is important to look at companies that are fundamentally healthy to survive this time. If they can make it through the lean years, they will most certainly thrive in the boom years.
This article contains the opinions of the author but not necessarily the opinions of Vulcan Investments, LLC. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.