Uranium is Heating Up

Uranium prices appear to be bottoming, as China buys major supplies from Cameco (NYSE:CCJ). On June 24, China agreed to buy more than 10,000 tons of uranium oxide – yellowcake – over 10 years from Cameco.

According to Thomas Neff, a physicist and uranium industry analyst at the Massachusetts Institute of Technology, China is buying unprecedented amounts of uranium. Based on public information, China may purchase about 5,000 metric tonnes of yellowcake this year. That’s more than twice as much as China consumes.

Clearly, China is building up stockpiles for its long list of new reactors. According to the China Nuclear Energy Association, China plans to build at least 60 new reactors by 2020. The average 1,000-megawatt reactor costs about $3 billion. Loading a new reactor requires about 400 tonnes of uranium to start. Take 60 reactors, times 400 tonnes each. That’s 24,000 tonnes of uranium (over 52 million pounds) – about all of the world’s current output for one year.

New nuclear plants represent a game-changing aspect for future uranium demand and pricing. Even though the reactors may not come online for several years, the knowledge of hard future demand creates a solid floor for the uranium mining industry. Increased demand, just from China, could cause uranium prices to jump by about 32% next year, to about $55 per pound, according to RBC Capital Markets. And future speculative interest could drive prices to the $60-80 range – almost double the current price level.

Higher prices would be a relief for suffering uranium investors. Uranium prices have tumbled about 70% since peaking at $136 a pound in July 2007. Part of the tumble was due to increased output. According to data from Cameco, there were at least 27 new mines, in nine countries, coming on line in the past 10 years. This has added nearly 65 million pounds a year to global output.

The strong uranium market of 2006 and 2007 stimulated the development of new supply. But with current pricing in the $40 per pound range, the economics don’t support new mines. It’s certainly not enough to ensure adequate supply for future requirements.

According to the World Nuclear Association, China’s demand for uranium may rise to 20,000 tons a year by 2020. That translates into more than a third of the 50,500 tons mined globally last year. The thing is, all of the world’s current uranium output currently has a market, supplying the existing global demand for nuclear power.

Now we’re going to see an explosion (no pun intended) of uranium demand from China, on top of the existing user base (plus other new demand from India and numerous other locales in the world).

Where will China obtain its future uranium? According to China National Nuclear Corp., it’s exploring for the fuel in Niger, Namibia, Zimbabwe and Mongolia. Indeed, we’re just beginning to see the initial stages of China going abroad to buy stakes in uranium mines, similar to what we’re already seeing with China and oil.

Thus, don’t be surprised to see uranium in shortage by the second half of this decade. Looking ahead, there’s just not enough new production in the planning stages. The world needs new mines, but startup costs are much more expensive than 10 or 20 years ago.

Meanwhile, much of the world’s uranium comes from mines that have been in operation for a long time. That, and decommissioned nuclear warheads from the Cold War days. But this latter source is nearing exhaustion.

Bottom line in all of this is that we’re right at the bottom of the curve for uranium pricing. Going forward, we’re watching as the new demand unfolds, to make uranium investments all that much more valuable.

Regards,

Byron King
for The Daily Reckoning