Wednesday 7th December 2016

Resource Clips


The contradictory commodity

Toll Cross Securities analyst Tom Hope discusses uranium’s predicament and promise

by Greg Klein

Notwithstanding some of the lowest prices in seven years, uranium continues to inspire market optimism. Price forecasts remain bullish, while money pours into exploration and development. Much of the action takes place in northern Saskatchewan where, on the Athabasca Basin’s east side, Cameco Corp TSX:CCO prepares to add Cigar Lake to its producing portfolio. Further west lies a hive of activity for juniors conducting early-stage exploration. On August 6 Toll Cross Securities analyst Tom Hope spoke with ResourceClips.com about the outlook for this energy metal.

A Tokyo night scene shows the city ablaze with lights, currently powered by expensive, imported fossil fuels.

A Tokyo night scene shows the city ablaze with lights,
currently powered by expensive, imported fossil fuels.

What could account for such low prices coinciding with optimistic forecasts? Obviously Japan’s post-Fukushima shutdowns had an enormous effect on supply. The country removed over 50 nuclear reactors from service, out of a worldwide total of about 435.

As Hope suggested in a July 24 Toll Cross Uranium Update, the commodity’s record low might also be explained by a quiet sell-off. “It’s just a supposition,” he emphasizes. “But Japan’s inventory is about 90 million pounds now, which is in my estimate at least 30 million pounds in excess of what they might need if they restart 40 of their reactors. And they must have long-term supply agreements, close to 18 million to 20 million pounds, which must go at least another two to three years. I figure they’ll have at least 60 million pounds of excess inventory over the next three years, which would amount to about 20 million a year. So why wouldn’t they sell it?” he asks.

“They’re spending an extra $9 billion a month on fossil fuels. They’ve got to get cash from somewhere. These are private companies…. I think they’re cutting quiet deals. Who better to cut a quiet deal with than China?”

While uranium observers watch for Japan to spur prices by bringing reactors back into operation, Hope doesn’t anticipate a quick turnaround. So far the country has just one reactor tentatively planned to restart in July 2014. Apart from Japan, Hope sees no other likely near-term price-moving catalysts. But exactly when prices might pick up is hard to predict, he maintains. “In the long term I agree there’s going to be an imbalance, given that it takes eight to 10 years to get a new mine going.”

The actual cost of nuclear fuel is insignificant in the greater scheme of things. Even if it was $200 a pound, it would probably be one of the most economical forms of energy going.—Toll Cross Securities
analyst Tom Hope

But unlike natural gas, for example, the cost of the commodity has little effect on energy prices. “The actual cost of nuclear fuel is insignificant in the greater scheme of things,” Hope points out. “Even if it was $200 a pound, it would probably be one of the most economical forms of energy going.”

While Japan keeps the uranium world waiting, Russia’s state-owned company Rosatom aggressively sells its reactors and fuel to other countries. It’s also picking up Western assets like Uranium One TSX:UUU. That’s raised concerns that the former Soviet power has another agenda, to spread its power over a new group of dependent states. But Hope thinks Russia’s mainly motivated by security of supply. The country would have a long way to go before achieving a monopoly, he says.

Nevertheless, the country’s making its mark internationally. “Russia sells its technology with the guarantee of fuel supply,” Hope says. “They do a package deal. That’s their marketing strategy.” Russia also has long-term supply agreements for European reactors that aren’t of Russian design, he adds.

In the United States, meanwhile, the world’s largest uranium consumer has seen some reactors shut down due to regulatory concerns, while cheap natural gas has recently become popular with utilities. Hope advocates for diversification to guard against commodity shortages. “I think it makes sense for large industrial countries to ultimately have 30% or 40% of their power provided by nuclear,” he says. “The U.S. has about 20%. France has a high proportion of nuclear energy. Japan was around 30% to 35%.”

Looking at supply, “there’s going to be a problem by 2018 if things go as expected,” Hope says. “I think if Fukushima hadn’t happened, there’d be a problem right now or starting next year when the [Highly Enriched Uranium] downblending agreement finishes. I think the big overhang was Fukushima and shutting down 50-odd plants.”

As the world’s second-largest producer, Canada looms large over global supply thanks to the Athabasca Basin’s “huge” significance. “Nowhere else on the planet do you get concentrations of 30%, 40%…. Everywhere else it’s less than 1%. In the Athabasca it’s around 20% most of the time,” Hope says.


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