Market paralysis ignores uranium's compelling projections

The Melbourne-based financial services group BGF Capital Group says that the frozen minds of investors and developers may well see a critical shortage of uranium in two to four years time.

PERTH - 

A study on the uranium market by Australia's BGF Capital claimed that any conventional analysis would overwhelmingly show the uranium price must move higher to underwrite the supply response needed for the growing demand for uranium and to fill the shortfall from exhaustion of stockpiles and weapons conversion programmes.

Analyst Warwick Grigor, a well known commentator on the Australian resources scene, said that right now the world is more concerned about what is happening this week than next year "as the drive for liquidity is causing a meltdown in asset and commodity prices.

"The longer the short-term focus is dominant the more critical will be the shortage of uranium, two to four years out. Whether the price moves up much in anticipation of this shortage will depend upon whether speculators are willing to lead the market again," he said.

It was only four years ago that no-one was focusing on uranium. The uranium oxide price was still about $US15/lb. Then the global warming debate gathered momentum, at the same time that the rising dragon in China really started to show aggressive demand.

"In traditional markets of supply and demand this would have led to a rising uranium price. That rise would have prompted a supply response and new mines all within an industry acceptable timeframe.

"However, enter the power of the demonic hedge funds. They quickly latched onto the appreciation that the values, and volumes of commodities traded were not that large when compared to the financial muscle they could muster when their aggressive gearing factors were considered."

Their arrival quickly overruled supply and demand economics, converting the role of the speculator from the risk taker at the margin to the primary driver of the market, frequently accounting for 50-60% of daily turnover. All commodities ran in price, particularly those that the Chinese wanted. It was a classic case of speculators "front-running" the Chinese orders.

The bubble in uranium equities on stock markets in Canada and Australia has burst along with the collapse of the uranium price, and both these developments have strangled any meaningful supply response in the short term.

Grigor said the only significant new sources of supply increase have been Paladin Resources' Langer Heinrich mine in Namibia, now operating at 2.6 million lbs per annum (1,200 tonnes pa U₃O₈), and continuing expansions in Kazakhstan, though at a slower rate than forecast.

The BGF Capital study said 15 months ago, with record uranium prices, there threatened to be a flood of new mines as prices greater than $US120/lb would have made even 200-300 ppm U₃O₈ mines "economic in many cases."

However, with the price just hitting $US44/lb at the time of producing this study, uranium was one of the "most down-and out sectors" today.

There is a view that this price is too low to encourage development of new mines with industry sources saying that there needs to be a long term sustainable price of at least $US40-60/lb. However, in spite of this Paladin is on target to commission its Kayelekera mine in 2009, in Malawi, at the rate of 2.8 M lb U₃O₈ (1,300 t) pa.

Established producers are looking at ways to expand production in the near term. The world's second largest uranium mine operated by ERA Ltd, Ranger in Australia's Northern Territory, is bringing on stream an 880,000 lb U₃O₈ (400t) pa laterite treatment plant and it is well advanced with testing for a 1.1-1.3 M lb U₃O₈ (500-600 t) pa heap leaching operating of its 50 Mt stockpile of low grade, 800 ppm material.

The report said South Australia is a good example of where there is a production resurgence. The "wonderful rich" Beverley Four Mile project is due to achieve commercial production of 2.8 M lb (1,300t) pa of U₃O₈ from an ISL operation from one of the world's most promising discoveries in 20 years. The ability to piggyback onto the infrastructure at the Beverley Mine, only a few km away, "will make this one of the most profitable mines in the world."

Not so with the proposed Honeymoon mine in the same region. It was scheduled to produce at 880,000 lb pa U₃O₈ (400t) pa from 2009.

Grigor said industry experts have reservations about the leaching kinetics and recovery rates due to a heavily oxidising geological environment.

BGF Capital concluded that on all estimates demand for uranium is significantly higher than mine supply, for an extended period. A critical shortage has been forecast for the stop-gap sources of conversion of weapons grade product to power station quality and from the running down of stockpiles to exhaustion over the next few years.

There is no obvious and assured mine supply to make up for this shortfall yet. With uranium prices having fallen to current levels, no-one seems to be in hurry to step up to the plate.

According to the World Nuclear Organisation, 78,500t U₃O₈ will be required to extract the 66,500t of uranium feed for the 439 operating nuclear power plants. Each GWe of increased capacity will require 195 tpa of uranium and three times this for the first fuel load.

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