U.S. uranium producer Cameco Corporation (USA) (NYSE:CCJ) has been saying all year that uranium demand will increase at a 3% Compound Annual Growth Rate, or “CAGR,” over the next 10 years. Recently, a new report by GlobalData suggested that uranium demand will increase by a 4% CAGR over the next eight years. Either way, with the supply side looking increasingly challenged, uranium prices are likely to go higher.
Last week, a key Areva uranium mine in Niger suffered a serious suicide bomb attack. This is just the latest in a string of unfortunate events impacting global supply. Niger was a top-five producing country in 2012. Another top-five producer last year was Namibia. Taken together, production from the three African countries Niger, Namibia and Malawi, represented the second-largest source of uranium after number one producer Kazakhstan.
Supply Side Far Less Certain
In terms of recoverable resources (as of 2011), among the top 14 countries are Kazakhstan, Russia, Niger, South Africa, Namibia, Uzbekistan, Ukraine, and Mongolia. Hardly a reassuring bunch to rely on when it comes to security of supply for end-users! Clearly, the supply side of the equation is fairly uncertain. With demand likely to rise by 3%-4%, how will end users be able to count on reliable supply?
Recently, there’s been a rash of newsletter writers and pundits calling for a spike in uranium prices and uranium stocks. For example, Casey Research hosted a well done and well-received Webinar and posted this video clip. Both Mickey Fulp, (the Mercenary Geologist) and Jeb Handwerger have been very vocal on the topic. Even billionaire Rick Rule of Sprott has been heavily promoting the uranium bull thesis. Further reading can be found….[here], [here], [here] and [here].
What uranium price is necessary to make the uranium renaissance come true? I think that $70-$80 per pound would do the trick. With the current spot price at $40 per pound, does that mean prices have to double?
Spot Uranium Prices Not Highly Relevant, Long-Term Contract Prices are Key
Not necessarily — because the current spot price is not the relevant benchmark. Spot prices are important for commodities that trade with contract terms set quarterly or annually. They’re also good indicators of market sentiment. For coking coal, a quarter or third of the total market might trade in the spot market. For uranium, contract terms are 5-10 years.
Thus, the real figure to watch is the long-term benchmark uranium price, currently $57 per pound. Just a 30% increase would drive the long-term price above $70. How likely is a 30% increase? Well, just before Japan’s Fukushima accident in March, 2011, the long-term uranium price was $73 per pound. Fast forward two years, uranium demand has returned, recently surpassing that of pre-Fukushima days.
A sustainable rebound in the long-term price above $70 per pound is not a stretch. In fact, the long-term contract price could move well beyond $70 this time around. Since Fukushima, the uranium cost curve has moved decidedly higher. That’s why we’ve seen several industry giants delay and/or cancel mega-uranium projects. The long-term “incentive price” — i.e., the price necessary for large greenfield projects to get funded — is thought to be $75-$85 per pound.
