Paladin’s John Borshoff still predicts an approaching end to uranium’s persistent predicament
by Greg Klein
“Another bleak year,” as Paladin Energy TSX:PDN managing director/CEO John Borshoff put it. But far from dampening his usual predictions of sharp price increases, the slump reinforced his views—price hikes will come soon, he maintains. The forecast “broadly aligns with Cameco’s findings, and where we differ is in the timing of recovery. We say six to 12 months. They say 12 to 18 months. Not much difference, really.”
His prognosis, sometimes expressed as a wake-up call to utilities, came as Borshoff outlined his company’s fiscal 2014 in a conference call from Western Australia broadcast during the Western Hemisphere’s August 28. Paladin had indeed undergone a bleak year.
With all dollar amounts in U.S. currency, revenue sunk to $328.8 million, a 19% decline. Not including impairments, gross loss from operations came to $3.4 million. After-tax impairments hit $296.3 million.
Production reached 7.94 million pounds U3O8, near the year’s maximum guidance but one that was lowered from an original goal of 8.3 million to 8.7 million pounds. Next year’s guidance drops to the range of 5.4 million to 5.8 million pounds, to come entirely from Paladin’s Langer Heinrich mine in Namibia. The company suspended operations at its Kayelekera mine in Malawi last May, throwing over 700 employees and contractors out of work.
Paladin’s stake in Langer Heinrich has been reduced to 75% following its joint venture with China National Nuclear Corp.
But Borshoff suggested uranium might have already experienced signs of recovery. This month’s price bump, from a 52-week low of $28 up to $32.50 on August 28, “has been explained away due to political issues and the possible strike.”
Strike notice did prompt Cameco Corp TSX:CCO to shut down McArthur River, the world’s largest uranium producer, on August 27. That seemed to explain why uranium’s already-rising price grew 3.2% the following day, the biggest gain since November 2011 according to Bloomberg data reported by the Globe and Mail.
“Though this may be the case, I believe there are other underlying influences at play suggesting some supply fragility even at this stage,” said Borshoff.
Longer-term fundamentals remain strong, he insisted. “China recently gave us a glimpse of its nuclear electrification targets, going from 60 gigawatts by 2020, to 150 to 200 by 2030, and then rising significantly. These are staggering numbers by any score coming from just one country and an enormous amount of uranium is going to be required to feed that expansion alone, never mind for the Middle East, India and other growing nuclear economies.”
Japan has given preliminary approval for two reactors, which could start operation by winter and begin “what is expected to be a measured reactor restart program.” As many as two-thirds of the country’s fleet could resume commercial operation over the next few years, he suggested. “Elsewhere, 72 reactors are under construction today.”
But “on the flip side of this demand optimism, producers’ response to severely depressed prices has been predictable.” Kayelekera’s on care and maintenance, as is Uranium One’s Honeymoon mine in South Australia. Rio Tinto NYE:RIO has slashed production at its majority-held Rossing mine in Namibia.
U.S. operations “are on partial production only to deliver to the few term contracts they hold,” Borshoff said. “With only half the current production able to operate at some profit under the current spot price, it’s clear no one will invest in replacing existing capacity as it runs down, never mind investing in growth of supply.”
Paladin estimates that last year almost 11 million pounds “have either been cut from annual production or deflected into term markets. We expect the impact of this to be felt strongly by the spot market in the next 12 months.”
Meanwhile, longer-term contracting of uranium sales remains behind schedule, especially in the U.S. Paladin’s figures indicate the historic contracted average reached over 150 million pounds a year. But 2013 contracts for future delivery plunged to 20 million pounds. This year has seen improvement, with mid-2014 term volume up to 60 million pounds.
“The U.S. utilities now need to act fast to fill their term contract needs for their 2016-to-2021 period. This is normally done 18 to 24 months beforehand, meaning the price reacts well before a period of actual shortage and in this current situation we would expect a positive price reaction in the next six to 12 months.”
As it is, few utilities have contracts beyond 2018, Borshoff added. “Few producers are participating in the term market because they’re reluctant to participate below price of replacement and create severe legacy contracts going forward.”
Since its last annual study, Paladin has increased its forecasted supply-demand shortfall by 13%. The company predicts the supply gap widening in 2016, leading to a significant supply shortfall for 2020 and beyond.
“The true supply-demand situation is obscured by the current short-term market oversupply. The paradox is, the low uranium price that this current situation has created is resulting in a total lack of incentive to initiate supply growth for the 2017-to-2025 period. This is a highly volatile state of affairs.”
“There is simply no opportunity to increase supply beyond what is currently being constructed,” which he limited to Cameco’s delay-prone Cigar Lake and the Chinese-owned Husab mine in Namibia, which might also suffer setbacks. “So the price not only has to move to support current supply, but also to support the mid-term lack of sufficient supply, a true paradox.”
By 2020, Paladin’s research points to a shortfall of about 35 million pounds per year, creating a cumulative shortfall of about 190 million pounds. “And on this basis we expect the start of positive price reaction occurring in late 2014, early 2015, just to incentivize the much-needed supply growth,” Borshoff said. “Every miner wants $65 to $75 “to start to think about the large amount of capital needed to build new greenfield uranium mines.”
“Am I missing something here, or does someone think serious mining companies or developers are going to invest just to lock in long-term financial losses? I think not.”
Paladin’s executive general manager of production Mark Chalmers told the conference the company’s Manyingee project in Western Australia might begin in-situ recovery operations in 2018. A more significant potential producer, the Michelin deposit in Labrador could come online in 2020 or 2021. Both projects depend on uranium prices, he emphasized.