Near-term oversupply is suppressing uranium prices but there are signs of upside movement, says Colin Healey, research analyst with Haywood Securities. In this interview with The Mining Report, he notes that non-discretionary buying in the uranium spot market returned in Q3/14 after a lengthy absence and that the 71 reactors being built around the world should support Haywood's long-term $75/lb uranium forecast. Healey also discusses companies suited to perform in the current market and beyond.
The Mining Report: The spot price for uranium stayed below $30 per pound ($30/lb) in May through late July. Since then the price popped up above $36/lb before settling at around $35/lb. Is that the near-term floor?
Colin Healey: It's a difficult call. Two things give us hope that we may see support at current levels. We saw the return of non-discretionary buying to the spot market in Q3/14 after an absence of three consecutive quarters—something we haven't seen since 2005. We look for non-discretionary buying to thin the market of available material and underpin support for uranium prices at current levels. The return of non-discretionary buying is important.
We also look for greater activity in the term market where an increase in contracting activity should also increase the competition for material in the spot market. We expect a sustainable rally in the spot market to coincide with progressive increases in the term price over the next 24 months. As of this week we saw no new interest in the term market, but much of that is traded off-market. We're watching closely for anything that might move the term price. We saw the UxC Consulting Co. (UxC) weekly spot price come up $0.85 to $36.50/lb, which adds some confidence.
TMR: Are there signs that non-discretionary buying will continue?
CH: It's difficult to get transparent data on that. In the most recent quarter we saw the first return of non-discretionary buying as a small component of the total volume in the spot market. If that materializes into a trend, then we might have some evidence that it is returning in a meaningful way.
TMR: Why didn't the end of Russia's "Megatons to Megawatts" create greater price strength in the uranium space in 2014? And what's responsible for the overhang on uranium prices now?
CH: As a major source of secondary uranium supply, the loss of the Megatons to Megawatts program was a significant event. It shifted the balance in total supply in favor of primary sources—although any impact will be tempered in the near term by the fact that the market remains oversupplied. The program was structured with a defined timeline and as such its end was not a shock. There's a form of replacement agreement in place between the United States Enrichment Corp. (USEC) and Techsnabexport (TENEX), the commercial subsidiary of Russia's Ministry of Atomic Energy, for delivery of enriched uranium to the U.S. with the U.S. delivering natural uranium in return, which covers about half the deliveries received under the Megatons to Megawatts program.
That agreement appears to include an option to double the initial volume at the option of the USEC. The agreement is effectively a separative work unit (SWU) purchase contract where USEC is paying for enrichment services embedded in the Low Enriched Uranium (LEU) product TENEX is supplying.
The good news is that this structure should mean that utilities are more reliant on primary uranium production than before and that should be ultimately bullish for uranium prices. Nevertheless, the market has been oversupplied for several years. Total supply in 2013 was about 207 million pounds (207 Mlb) versus demand of around 172 Mlb, reflecting a surplus of about 35 Mlb. In 2014, we estimate a surplus of 20 Mlb, which contributes to an overhang in prices.
TMR: Haywood forecasts the 2015 spot price at $39.50/lb, but in 2016 that jumps to $53/lb. What are the catalysts that are going to push the price 34% higher?
CH: We're looking for progressive growth in long-term and spot prices based on a more normalized demand-supply relationship. Prices remain low as the market continues to be oversupplied, and as a result, as much as 30% of current primary supply is thought to be uneconomic at current spot prices. Driving our appreciating forecast are the 71 reactors currently under construction globally, coupled with a rationalization on the production side, whereby benchmark uranium prices will begin to move toward the marginal cost of production, which itself will shift with eventual production atrophy.
The global reactor construction pipeline is important. New reactor fuel loadings require about three times more uranium than the average annual burn of the same reactor, so there's an increase in demand when a fixed pipeline of new reactors comes on-line. We also believe that a return to nuclear power in Japan will help the situation. We're looking for between two and six units to be restarted in 2015. Our price forecast is underpinned by an assumption of tight demand-supply balance in uranium markets by 2017 with the price coming up to a point that rationalizes the majority of current production, plus provides an incentive for new mines.