have turned bullish, the more than three-year downtrend has finally broken!
As can be seen from the graph provided by www.infomine.com the uranium price went parabolic from
September 2006 until July 2007 before declining and settling at a base price
of $40/lb. We have been monitoring pricing levels closely, (hence our buy
signal last month) and have patiently waited for a sustained breakout on the charts
supported by fundamental catalysts (all of which have been seen over the past
month). The three years of negative/flat action now looks to be broken and
the bulls are off waving the entry flag.
We expect the price move may have been caused by a combination of
factors including an article highlighting that Chinese companies have been
stockpiling the yellow cake, the news out of the National Department and
Reform Commission and the AREVA deal.
Combine the three factors mentioned above and the leaked word out of
World Nuclear Association Symposium in London that uranium producers have
quietly been purchasing physical uranium throughout the year and we have the
catalyst for the resurrection of the uranium markets.
. .If you subscribe to my view that uranium prices will retest the previous
high ($138 at least), then all we are really seeing is some bargain-basement
shopping as early bullish money takes advantage of depressed prices.
Excuse the basic lesson in uranium: Uranium is a key ingredient to
the formation of nuclear power. The same story that has driven commodity
markets for the past decade also applies to uranium—the emerging
markets and the middle-class story. Just as the newly emerging middle class
seeks milk, chocolate, more modern housing, they also seek air conditioning,
fridges, iPhones chargers and many other devices,
which require ELECTRICITY. Nuclear power is one of the cheapest forms of
electricity and is actually one of the cleanest. Oh the irony for the
greenies, the most effective means to reducing carbon emissions from power
sources comes from what has always been regarded as toxic electricity.
Nuclear energy is comparable with wind, solar and hydro in carbon
emission output and although not perfect is much safer than 1986 when the
Chernobyl disaster struck.
Currently, nuclear reactors supply c.16% of the world's electricity.
In early November, news came from the National Department and Reform
Commission that China has increased their target for nuclear power for 2020
to 112GW, this is up 60% over their previous guidance of 70GW. This increase
is significant and if it comes to fruition will be a key catalyst for the
re-emergence of the uranium and nuclear industry. This increase translates to
China depending on c.7% of their 2020 electricity generation from nuclear
sources—this will require a substantial accumulation of uranium.
Currently the Western world accounts for the majority of nuclear reactors 264
of 431 worldwide (61%). There is an estimated additional 60 rectors globally
under construction, 150 planned and 327 proposed.
This is a significant new demand in anybody's book. World demand
today is about 75,000–80,000 tons of uranium per year. If new Chinese
demand proves to be accurate, you can expect (estimate) 42, 1,000 MW stations.
Each station requires a first fill of 500 tons uranium and c.200 tons per
year thereafter. Therefore, it is possible reactors will need first fill
total (500 tons x 42) 21,000 tons of uranium + (200 tons per year x 42) 8,400
tons per year thereafter—this is additional demand remember.
Some of the biggest mines in the world are lucky to produce 5,000
tons per year, so this is a material increase that will drive the price
northward. The current Chinese uranium consumption is estimated around 1,700
tons per year. Recent articles have suggested that China will need to source
over 8,500 tons (supports our number above) of uranium per year from other
countries by 2020.
Other news suggests our Arab friends have been moving strongly back
into the uranium market, Saudi Arabia and United Arab Emirates are already
building nuclear reactors with Kuwait set to join the party next year. On
November 4, AREVA announced that it signed a major long-term uranium contract
with China Guangdong Nuclear Power Corporation (CGNPC). AREVA signed a
long-term contract for the supply of 20,000 tons of uranium over a ten-year
period. AREVA states the contract is worth around US$3.5 billion. This
amounts to a purchase price of approximately US$67 per pound over the 10-year
life of the contract. We do not see this a necessarily a good price for AREVA
if our predictions are remotely close to the mark but it was still offered at
a significant premium to the recent $40 floor and provides AREVA a strong
platform to leverage additional funding requirements as they expand
operations. We expect uranium to be in enormous demand over the coming decade
and seeing many uranium companies double in price the past month shows some
investors feel the same way. America is however not accumulating the yellow
cake; they will simply have to purchase uranium at much higher prices (much
like rare earths) in the future.
America was a founder of the nuclear scene and currently relies on
nuclear power for more than 20% of their electricity. The Russians (who are
the fourth biggest producers) are building nuclear reactors around the globe
as quick as they can for willing buyers. The Russians have been winning
contracts because they have been prepared to take the waste back (which has
value) from the clients. The company Rosatom is
estimated to be building 15 of the 60 reactors currently under construction
in the world. A smart move from our Russian friends!
If our stock selection is correct, uranium stocks should move into a
consolidation pattern before the next move up. Uranium remains an
underappreciated and under-owned asset and there are not too many assets 58%
cheaper than they were in 2007. Canada, Australia and Kazakhstan are the
three main uranium-producing countries. In terms of dependence on foreign sources
for energy, the U.S. must surely sleep easier with security of supply coming
from Australia and Canada rather than the Middle East.