The reason for utilities behaving like this is that there exist forecasts calculating a supply surplus until 2016, whereupon a deficit is expected. However, these forecasts are dubious and not reliable anymore. Since December 2013, 4 uranium mines with an annual output of 22.4 million pounds (around 15% of global mine output estimated for 2014) have temporarily suspended their operations: Ranger Mine (Australia), Rössing (Namibia), Cominak and Somair (Niger). Ranger and Rössing, both operated by Rio Tinto, are fighting with leaking toxic sludge, whereas Areva has not yet been successful in negotiating a new royalty scheme with the Nigerien Government. It is still unclear when Areva’s mines will open up again. In particular, Areva is not capable of profitably operating its Nigerien mines at current low uranium prices if the government indeed will increase royalties from 5.5% to 12%.
“Although the value of the uranium production from Nigerien mines is not terribly significant in dollar terms – approximately $500 million per year in today’s prices – what is significant is that France derives 78% of its electricity from nuclear reactors, and approximately 1/3 of the fuel for those reactors comes from Niger. Areva operates the mines, and is the third largest uranium mining company in the world in terms of production, mining 17% of the world’s uranium supply last year. 45% of that production came from Niger. It isn’t too difficult to guess how badly things could turn out for France if their Nigerien supply of uranium was abruptly cut off – 26% of France’s power-generating capability would be shut down.”
-- Canon Bryan in “Bombed Areva suffers from ‘This Is Africa’ Syndrome”, May 2013
In May 2013, 23 people were killed and 13 Areva employees were injured when rebels bombed an uranium mine. Africa is one of the toughest places for mining commodities. A safe and reliable mining jurisdiction is key for long-term security of uranium supply, yet most deposits occur in somewhat problematic systems of justice, including Kazakhstan, Russia, and Australia. Canada is the best place in the world to do uranium exploration and mining.
Uranium is (still) one of the few commodity markets experiencing (and thus showing investors) that increased exploration expenditures result in higher resources discovered:
Such a general, broadly manifested perception of uranium supply and demand gives us confidence in the market that vast amounts of funds are to be invested primarily into Canadian exploration – first and foremost the Athabasca Basin in Saskatchewan – during the next decades in case vast amounts of uranium are required globally. However, it is only a question of time when more uranium resources cannot be added simply by increasing exploration investments. Those few companies that today own the most prospective undeveloped properties around the Athabasca Basin are ready to thrive the most – no matter if uranium prices remain depressed, because new discoveries create new value as long as the matter has value.
As laid out in our previous articles in November and December, the Canadian Athabasca Basin is expected to become the place to be for future uranium supply. That is the reason why foreign mining companies like Rio Tinto from Australia have been forcefully trying to put a foot in that door during the last few years. Located in one of the world’s safest and most favorable mining jurisdictions, the Athabasca Basin is home to the largest and highest grade uranium mines worldwide; however most importantly, it is still largely under-explored and hosts many deposits yet to be discovered.
Early next week, we will publish a follow-up article on how investors can best profit from rising uranium prices, namely with exploration companies making new discoveries in the prolific Athabasca Basin. We will look into the aspects of what makes up a prospective property and look into other important features of a well-positioned exploration company: People, Partnerships and Structure.
Disclaimer: The author does not hold any equities of any of the companies mentioned above. Neither Rockstone Research Ltd. nor the author was remunerated by any of the companies mentioned herein to produce or publish this content. Please read the full disclaimer at www.rockstone-research.com as none of this content is to be construed as an "investment advice."