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.
Higher costs and the above mentioned security-of-supply concerns should support long-term prices in the $80s or $90s per pound. To be clear, we may not see those prices next quarter or even next year, but they’re coming. This would not cause angst among utility customers, because the cost to utility customers of uranium fuel is a relatively small part of operating costs.
Which Uranium Companies Should You Buy?
Cameco Corporation (USA) (NYSE:CCJ) is a powerhouse in North America and has ample organic growth opportunities. Its stock could be poised for a nice move. For investors looking for bigger returns, albeit with more risk, uranium juniors are worth looking into.
Denison Mines Corp (USA) (NYSEMKT:DNN) is an emerging star in Canada. Having sold its U.S. assets to Energy Fuels, Denison is the top exploration play in and around the Athabasca region. The company is frequently mentioned as a takeout target, with Rio Tinto plc (ADR) (NYSE:RIO), Areva and Cameco Corporation (USA) (NYSE:CCJ) cited as the most likely suitors. Denison Mines Corp (USA) (NYSEMKT:DNN) recently finalized the acquisition of Fission Energy. The company now has a range of early-stage to later-stage exploration and development projects. The Athabasca region has the highest-grade uranium ores in the world.
Energy Fuels generated a lot of buzz last week by announcing its intent to acquire Strathmore Minerals. The new and improved Energy Fuels would be the largest uranium company in the U.S. In addition to a combined 127 million lbs of NI 43-101 compliant resources, Energy Fuels owns the White Mesa Mill, the only operating conventional uranium mill in the U.S. White Mesa has permitted annual capacity of 8 million pounds. See these excellent articles on Energy Fuels, [here] and [here].
Uranium Energy Corp. (NYSEMKT:UEC) is another highly prospective U.S. uranium company. Uranium Energy is in production and is growing. It utilizes an in-situ approach called solution mining to extract uranium. The company has a cluster of in-situ mining development projects in Texas, in close proximity to the its Hobson Facility. Uranium Energy Corp. (NYSEMKT:UEC) is looking to make additional tuck-in acquisitions of assets within trucking distance of Hobson.
Conclusion
There have been many recent articles written on investment blogs and by professional newsletter writers about a bull market in uranium stocks. Most articles recommend buying Cameco Corporation (USA) (NYSE:CCJ) to ride the upside. Investors watching the spot uranium price may miss a big move in uranium stocks because the long-term contract price is the key variable. Cameco Corporation (USA) (NYSE:CCJ) will provide good returns when uranium prices rebound. Substantially higher returns could be possible, albeit with greater risk, by investing in junior miners like Denison Mines, Energy Fuels and Uranium Energy.
The article New Report States Uranium Demand to Grow at 4% CAGR originally appeared on Fool.com and is written by Peter Epstein.
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