Investors in the uranium space are like Goldilocks: They have three major ways to play, says David A. Talbot, senior mining analyst at Dundee Capital Markets. The Athabasca Basin entices with high rewards for high risks. U.S.-based in-situ recovery offers stable cash flow from stable operations. And companies challenged by current market prices that are positioning themselves smartly for an upswing also provide opportunity. In this interview with The Energy Report, Talbot explains the turbulent currents roiling the uranium space, and names eight players he thinks are positioned just right.
The Energy Report: David, the uranium spot price has recovered to a 52-week high of about $35 per pound ($35/lb) after nearly three months in the doldrums. What drove the rise?
David Talbot: This uranium price rally is due to a few temporary news items, and perhaps one real supply/demand story. The Cameco Corp. strike was a driver, as it was headline news, but now the strike is over. It wouldn't have impacted the market anyway, unless it had lasted for several months, but investors did get excited.
There is risk with regard to Russia due to increasingly harsh sanctions, but this is simply a worry at this point. We have a hard time believing that Europe and the U.S. are going to cut off 24% and 18%, respectively, of their own nuclear fuel sources. If the cuts do happen, the impact might be huge, however.
Finally, ConverDyn Corp. (private), the U.S. uranium converter, is suing the U.S. Department of Energy to stop it from dumping stockpile supply into the spot market to the detriment of uranium companies and converters.
But the spot market is tighter due to a decrease in spot supply. Paladin Energy Ltd.'s Kayelekera Mine, which used to sell 3.3 million pounds (3.3 Mlb) of U3O8 in the spot annually, is now closed. Paladin sold a 25% interest in Langer Heinrich Mine to the Chinese. That 1.3 Mlb used to be sold in the spot, and now it's going directly to the China National Nuclear Corp. Uzbekistan has annual production of 6.2 Mlb of U3O8. I believe only 1 Mlb of that was contracted previously, and most of the rest had been sold into spot. Combined, that's about 10 Mlb removed from annual spot sales, not to mention lower spot sales from Uranium Energy Corp., Ur-Energy Inc. and other producers that have curtailed production at these prices. I think the longer prices stay down, the less incentive there is to develop projects or continue mining at some operations.
TER: The price is back up to where it was stalled for a number of months earlier. Do you think it's going to continue to rise?
DT: We're not confident that we are in a sustainable price rally. We might see a leveling off or rebalancing in the $30–35/lb range. We really don't expect the price to sink back down below $30/lb. Until we see meaningful supply cuts and Japanese restarts spurring uranium purchases, the market remains oversupplied, perhaps through 2017, by our estimates.
TER: The spread between spot and contract price is shrinking. What's your estimate for 2015 for both of those prices?
DT: The spread shrank as the spot price rose, and the term price remained stagnant over the same period. Historically, there was no spread between these two prices, but starting about 2005–2006, when investors started to buy spot uranium, we did see a separation. It's likely that utilities won't contract as much uranium with such a large spread, and that's why term volumes are down so much, in part.
Recently, the spread between spot and term dropped to about $7.50/lb. That's almost a three-year low. Over the past decade, the average has been about $10.50/lb. Our price forecast for 2015 is $40/lb for spot U3O8, and $58/lb for term U3O8. We expect to start seeing an influx of term contracting to cover future uranium requirements by the nuclear utilities, which is very important. Term contract volumes have only been 85 Mlb combined over the past two years, versus about 350 Mlb that has physically been used in the reactors. Term volumes have more than tripled over last year, but still, something has to give.
The Ux Consulting charts of uncovered uranium requirements at reactors show a steepening slope on the graph, suggesting that the urgency of procuring fuel is increasing. This happened in 2005–2007, when many utilities rushed to the market at the same time and prices rose dramatically. When the heavy contracting was done, the line on the chart flattened and prices fell. As we're seeing an increasingly steep uncovered requirement trend line again, we believe when contracting does begin, it will feed off itself, specifically for 2017 and beyond, and prices could take off.