Spot uranium price ignores fundamentals

Year 2014 sent mixed signals to the uranium market.

The players keep talking about an excessive supply and all major uranium producers except for Kazatomprom had to cut production. Only Kazatomprom and Cameco managed to increase their revenue in 2014. In the meantime, China, India, and Russia have been commissioning new reactors. Cameco has run first batches of ore through its Cigar Lake plant (design capacity stands at 18,600 t U per annum).

CGNPC of China plans to start production at its Husab mine in Namibia this May. All this new supply will meet the demand from new reactor builds. Hence, the anticipated uranium price rise due to new demand may not happen as main players, and first of all China, will try to ensure their independence from external supply. The main reason for price correction may be not the growing demand but the producers’ inability to meet the consumers’ price expectations.

Growth factors

Japanese demand is no longer a factor in the uranium marketplace as not a single reactor was restarted in 2014. Only two reactors at the Takahama powerplant were approved for restart last December and, since the Fukushima incident in March 2011, only one reactor at the Oi plant was restarted in July 2012.

The market players we queried are certain that nuclear plants in Japan will eventually have to restart as the current electricity costs in Japan are simply too high. Yet, the authorities pace themselves on granting approvals and it is not impossible that gradual restarts will not affect the market as much as did the Japanese reactors’ shutdown. The market watches every move by the Japanese authorities and it is entirely possible that Japanese supply deals may be made long before the restart thus making their effect on the market negligible.

All uranium companies keep talking in their market releases about the world’s growing nuclear power generation where the key player is China which plans to build 40 to 58 GW of nuclear generation before 2020. After the Fukushima disaster, Chinese authorities had stopped issuing power plant permits without adjusting the construction plans thus leading to the current acceleration in nuclear builds. China launched three reactors in 2014 adding 3 GW of nuclear capacity and commissioned another three reactors (+3GW) in March 2015. Since the beginning of the year, China launched four new reactors. The current nuclear capacity stands at about 23 GW and it is expected to increase by three 1 GW reactors by the end of the year. According to the World Nuclear Association (WNA) 26 reactors are under construction in China. As each reactor requires at least six years for construction, Chinese nuclear generation may reach 49 GW by 2020 – right between the announced 40 and 58 GW marks.

Russia also plans increasing its nuclear capacity but these plans are more modest. Only nine reactors (7968 MW) are currently under construction. Rosatom plans to launch 2 reactors at the Novovoronezhskaya and Beloyarskaya power plants this year. Rosatom’s representative in Kazakhstan Vitaliy Ryabov confirmed: “It will be the fourth reactor at the Novovoronezhskaya plant, and the Beloyarskaya power plant had been planned before. We have not made any announcements about commissioning new reactors. Next year, we shall commission a reactor at the Leningradskaya plant, another reactor at the Novovoronezhskaya plant and the fourth reactor of the Rostovskaya plant”. According to Rosatom’s website, The Academician Lomonosov (70 MW) floating nuclear NPP should completed this year.

The next largest player and growth factor is India. It operates 21 reactors for a total capacity of 5302 MW. WNA reports that 1579 t U will be required to fuel Indian reactors in 2015. Six reactors (4300 MW) are under construction. According to WNA, Indian domestic production in 2013 stood at 400 t U.

Will the uranium demand be met by 2020? Uranium companies hope the uranium price achieves the $60-65 mark which would sustain new mine development. Producers talk about a 3,000-5000 t U oversupply on the market. This quantity of uranium could fuel 10-12 1000 MW VVER reactors for a year.

Areva estimates (WNA, 2013) that the demand and supply will reach equilibrium by 2020 and remain so until 2035 with production from new mines balancing off the rising demand. The share of new projects is expected to grow from 20% in 2020 to 60% in 2035.

Supply side

China is the fastest-growing consumer and it’s important to understand what its current and future fuel sources are. China produced 1450 t U in 2013 (most current WNA data) having maintained its production at approximately the same level for the preceding two years. China will require 8161 t U to fuel its reactors in 2015. Industry experts believe that Chinese uranium deposits are rather small and low-grade which makes their development costly and production expensive. “China has declared more than 350 uranium deposits nationwide over the past 60 years. The country's uranium reserve has doubled in the recent 15 years with new uranium deposits, especially some large-scale ones, being discovered, said Du Yunbin, head of the China Nuclear Geology (CNG), at a forum marking the 60th anniversary of the founding of the administration and the start of the country's nuclear geological search”, reported Xinhua. Experts are skeptical: “They are yet to build sufficient production. There aren’t enough explored deposits and they will need to find them first”, – said one of the market participants.

China also has production overseas with the main project being Husab (Roessing South). CGNPC through its subsidiary purchased about 50% voting rights in Kalahari Minerals from Rio Tinto’s affiliates for US$2 billion. Kalahari Minerals plc owns 43% of Australia-based Extract Resources Ltd, which is owner of mineral rights of Husab with a 187700 t U resource. Another US$200 million CGNPC has invested in the project. The project’s capital cost is expected to be significant because “China was discussing the construction of a railway line between Tsumeb and the port harbour of Walvis Bay that was estimated to cost more than 500 million US dollars. It will transport cargo and passengers. "The issue was how to raise the funds. The Ministry had the budget, but it could not release the funds on time”, – said Chinese Ambassador to Namibia Xin Shunkang according to allafrica.com.

“We have been clearing the overburden of sand and we will start mining ore from May onwards,” Percy McCallum, spokesman for CGNPC’s Namibian unit, Swakop Uranium, said in an e-mailed response to questions on Friday. “We expect to have stockpiled 1 million tons of ore by December”, – Bloomberg reported.

The project’s design capacity is expected to be at 7000 t U per year.

Besides, CNNC purchased 25% of Paladin Energy for US$190 million in a bid to participate in Paladin’s flagship Langer Heinrich mine. Under the agreement, CNNC will be able to buy 25% of Paladin’s production at spot market prices. The operation has a current design capacity of 2016 t U (5.2 Mlb of uranium concentrate) per year and was targeting to reach 2209 (5.7 Mlb) in 2014 making the Chinese share some 500 t U.

Another Chinese asset is Semizbay-U in Kazakhstan. It is a JV between NAK Kazatomprom plus its wholly-owned subsidiary Gornorudnaya company LLC (51%) and Beijing Sino-Kaz Uranium Resources Investment Company Limited (49%). The 1200 t U annual capacity was achieved in 2012 from the Semizbay and Irkol mines.

Industry experts estimate that the Chinese nuclear capacity of 23 GW requires about 400 t fuel or 4000 t U3O8 per year. As WNA states Chinese consumption at 8161 t U (9346 t U3O8), it appears that over a half of its consumption is not fuelling power plants. “The Chinese are not using uranium for its energy needs only, they actively develop their nuclear weapons where, given the level of enrichment, they would need a great deal of uranium”, – suggested a source at a major uranium company.

If all Chinese construction plans come true in 2020, the fleet annual requirements will be about 870 t fuel (7450 t U). The 10150 t U aggregate of domestic production (1450 t U), Semizbay-U (1200 t U) (Semizbay-U), Langer Heinrich (500 t U), and Husab (7000 t U) means that China will more that cover its uranium requirements.

Russia. With the purchase of Uranium One, Russia’s AtomRedmetzoloto (ARMZ) has got probably the world’s cheapest, most environmentally-friendly, and longest lasting source of uranium. In its 2014 annual report, Uranium One reported production of 4032 t U (5117 t U in 2013) at a cash cost of $14/lb ($16/lb in 2013). The dramatic drop in production was attributed to a suspension of Uranium One’s mining rights at the Akdala, South Inkai, and Kharasan mines between 4 June and 17 October 2014 when all yellowcake production was accounted for as Kazatomprom’s. Without this re-attribution, Uranium One’s production were to stand at 4885 t U (5715 t U3O8).  According to WNA, Russian domestic production was 3135 t U in 2013. Areva reported in its annual report, that Russia produced 3000 t U in 2014. Rosatom reported about 8300 t U produced in 2013. According to Areva, ARMZ’s mines produced 8500 t U in 2014.

According to WNA, Russia will need 4206 t U in 2015 while, judging by its fleet size, some 7300 t U will be required besides the fuel rods needed for Russian-designed reactors in other countries that may demand as much as 2000 t U. If these estimates are correct, Russia may have an insignificant shortfall of uranium which may be covered by purchases or supplies from other sources.

India has signed a sales agreement with Cameco a short while ago. The company will provide the Department of Atomic Energy of India with 7.1 million pounds of uranium concentrate per year through 2020.

Recent reports suggest that India may be unable to increase its domestic production or acquire mines in other jurisdictions and its preference would be to buy uranium under long-term contracts. “At a time when India is trying to ramp up its uranium import, its own domestic production of the yellow cake has declined by 10-15 per cent after operations in the country's oldest and richest uranium mine in Jaduguda in Jharkhand has been stopped by the state government. Department of Atomic Energy sources said it has taken steps to increase the production from other mines to maintain the supply and demand, but the low quality of ore from other mines have led to increase in the production cost. The government has often cited "mismatch between demand and supply of domestic uranium" as the reason for under-functioning of the nuclear power reactors. Of the 20 reactors, 10 nuclear power stations use domestic fuel and generate 2840 MW of electricity”, – reported The Economic Times in December 2014.

Costly and unneeded

A common theme for the countries which need uranium the most seems to be their reluctance to develop their own deposits if cheaper sources of uranium can be secured overseas. Our usual sources say “the price of uranium is not a significant factor in power generation”. However, neither of China, Russia, or India are striving to build their own mines which seems to be too costly when it is so much cheaper to purchase uranium overseas or obtain from producers under control.

The market will be shaped up by least expensive production. For Uranium One, whose main production comes Kazakhstan, the total cash cost is at US$14/lb. Cameco’s main assets are located in Canada and its total cash cost is Cad$27.96/lb (27.83 in 2013). And Cameco expects the costs to rise: “As Cigar Lake ramps up to full production, the cash cost of material produced from the mine will initially be higher. If we make additional discretionary purchases in 2015 at a cost different than our other sources of supply, then we expect the overall unit cost of sales to be affected”, – the company reported in the recent MDA.

Do countries prefer to buy uranium on the market or to acquire and develop projects? Russia and China choose the latter while India prefers the former. It is possible that the key issue is whether the state has the will and wherewithal to acquire and develop new uranium deposits. “One should confuse the cost of nuclear fuel with the cost of acquiring and developing a new uranium mine. The logic could be similar to buying a house. While the cost of maintaining a house is not an issue for many of us, it’s irrelevant since we don’t have the money to buy one”, – said a uranium company executive.

Traditionally they say that production and total cash costs are not factors for state-owned uranium and/or nuclear companies. In practice, the state prefers to find cheapest uranium sources and does not hesitate to go to other jurisdictions. This strategy affects the uranium market as state-owned companies limit less-expensive supply by developing their less-expensive projects.

A virtual spot price

In their estimates, uranium companies refer to spot and contract prices. Spot price is used for long-term projections but its influence varies. Companies with contracts fare better, and it has been most obvious during the past four years. Paladin, which sells most of its production on the spot market, was hit financially and had to accept CNNC proposal.

It is not easy to see what affects the spot price. The spot market ignored the shutdown of Kayelekera in November 2013 and the two accidents at Rio Tinto’s Ranger Mine and Rossing in December 2013 after which Rio Tinto’s production halved from  3676 t U (8105M lb U3O8) to 1852 t U (4084M lb U3O8). In June 2014, the average price, according to Cameco, was $28.23/lb U3O8. Likewise, the spot market did not pay any heed to the commissioning of Chinese for new reactors (4 GW) during the first three months of 2015.

Areva cut production from 8567 t U in 2013 to 7307 t U in 2014.

Uranium One reduced production from 5126 t U (13,2M lb of U3O8) to 4035 t U (10,411M lb of U3O8).

BHP Billiton’s uranium production was quite stable: 3408 t U (3988 t U3O8) in 2014 compared to 3475 t U (4066 t U3O8) in 2013.

Cameco’s production was also steady, with a drop from 9148 t U (23,6M lb U3O8) in 2013 to 9032 t U (23,3M lb U3O8).

Only Kazakh state-owned company Kazatomprom increased its production to 13156 t U, 4.4% higher than 2013 year level.

Only two companies among largest uranium producers were able to improve their revenue. Kazatomprom improved it to $1.1 billion (non-consolidated) although it is impossible to say by how much. In its non-consolidated 2013 report, the company reported 166,255 billion Tenge while in the 2014 non-consolidated report, the 2013 revenue was reported as 166,302 billion Tenge. In the 2013 consolidated report, the sales revenue in the uranium segment (without earnings from JV and associated companies which were recognized separately) was 189,874 billion Tenge. We can’t explain these inconsistencies.

Cameco improved its revenue from $1633 million to $1777 million.

Areva and Uranium One reduced their revenues. Even operating earnings were negative (-73M euro for mining BG and -$16,5M consequently). Rio Tinto recognized a loss in its energy group (including coal mines).

The spot price drop will have the worst impact on junior companies. They are unable to protect themselves with long-term contracts and appeal to demand increase, because while demand rises it is already being covered.

Perhaps these companies need to prove intending purchasers that production from their projects will cheaper than others. But currently there is one-and-only purchaser at the market.

The uranium market already saw spot prices and long term prices dropping below $20. It seems this scenario is possible. But perhaps it's possible theoretically, because no uranium producer is able to match this price. Even state-owned companies. Even Kazatomprom.