Re: PDN - Paladin Resources
article found on PDN, fairly lengthy had to split it up over three posts
Uranium, Paladin
By Charlie Aitken
Our focus is on long duration themes supported by strong industry fundamentals. We believe an investment strategy with a macro top-down view, which is complemented by a micro bottom-up analysis, highlights real investment opportunities and long-term outperformance. This strategy can be even more self-fulfilling if the theme is supported by Government policy and incentives. In this context we believe the resurgence of the global uranium price represents the emergence of new genuine long-term bull market.
Positive fundamentals
The long term fundamentals of the uranium market remain very strong, with a significant increase in global demand, against a backdrop of future supply shortages, supported by the first synchronised effort by world Governments to reduce global carbon emissions. There is no doubt that global warming is a very major issue for political parties worldwide, seeking to reduce the dependence on fossil fuels and promote the usage of clean energy alternatives.
The uranium supply
Interestingly, the uranium market is supported by precisely the same supply constraint characteristics as base metals. Decades of low uranium prices (U3 O8) previously discouraged any investment in future primary production. As a result, there are major production constraints and serious delays in the supply response to the increase in global demand.Since 1985 static mine production has resulted in up to 50% of reactor uranium requirements sourced from secondary supply.
The uranium supply side is unusual in commodity markets considering a large proportion is sourced from secondary sources and stockpiles. However, both these sources of supply are currently under serious threat.The two main sources of uranium supply have been Western inventories accumulated from the shutdown of reactors, and the Highly Enriched Uranium (HEU) supply form nuclear weapons. However, the security of this supply is problematic with the rundown in Western inventory supplies to critical levels of just 12 months reactor feed.
In addition, the future HEU supply from nuclear weapons is also in doubt with the Russian government recently announcing that it would not continue the “Megatons to Megawatts” programme when it expires in 2013.This program has been the major source of secondary supply and its imminent closure has serious ramifications for Western World supply. It is worth noting that in 2006, according to World Nuclear Association (WNA) figures, the deficit between mine supply of 39,655kt, and global demand was a massive 40%.In other words, last year secondary supply totalled 22,981kt.To put this in context, Cameco is the world’s largest producer with production of 8,039kt last year. There is a critical and structural uranium supply deficit, which is expected to deteriorate significantly unless new supply is commissioned.
No cigar thanks.
However, the mine supply response has recently suffered a huge blow with the flooding of the massive Cigar Lake project in Canada. The reserve estimate of 100kt was expected to support initial production of 2kt pa in 2008 before ramping up the full production of 8kt pa in 2010. The problems at Cigar Lake are expected to delay first production until 2009 at the earliest. Elsewhere there is some new supply expected to be commissioned before 2010 ex Cigar Lake, but the majority is expected to come form Kazakhstan. Yes, uranium is Kazakhstan’s second best export after Borat. However, Kazakhstan is suffering massive skilled labour and infrastructure shortages and new production is expected to suffer serious delays. We believe a meaningful uranium supply response will be delayed until at least 2011.
The implications of the unexpected delay in the Cigar Lake project cannot be underestimated. Considering there is a 4-5 year lead time to convert uranium to a reactor fuel source, utilities require long dated contracts of at least 5 years for security of supply. Consequently, the massive spike in the uranium spot price is reflecting a significant gap in the supply horizon. Despite the market scepticism, we think the current uranium spot price is very sustainable for at least the next 4-5 years.
Tight supply
The static nature of global uranium production is highlighted by production figures from the World Nuclear Association (WNA).Global production from 1998 averaged 34,665kt pa, for the 6 years to 2003.New supply resulted in a small increase in production in 2004 and 2005 before falling 5% to 39,655kt last year. This was entirely due to a 20% fall in mine production from ERA’s ranger mine. Importantly, the global uranium industry is an oligopoly, so even a small problem with one incumbent producer has a disproportionate impact on global production. We think the uranium market is another perfect commodity storm, with supply disruptions occurring against a backdrop of rising demand and chronically low inventory levels. Sound familiar? I think the playbook has already been written in the base metal markets.
Reactor requirements.
The major source of uranium demand is for base-load electricity generation. The International Energy Agency (IEA) projects a doubling of world electricity demand by 2030, creating the need for some 4700 GWe of new generating capacity in the next quarter of a century. According to the WNA figures, from 2010 to 2020, Asia comprising mostly China, Japan, India and South Korea, will account for about 36% of the world’s new electricity generating capacity, of which nearly 40% will be sourced from nuclear power. In East and South Asia there are currently over 109 nuclear power reactors in operation,18 under construction and plans to build a further 110.
BRIC demand
Already in some parts of Asia, nuclear power forms a large part of total electricity generation. Currently South Korea and Japan generate 45% and 30% respectively of electricity through nuclear power using roughly 18% of world uranium production. However in China, nuclear power produces just 1.4% of electricity generation, and only 4% in India. Historically China has generated the vast majority of electricity through its enormous coal reserves, however recently China has now become a net importer of coal for the first time. We believe there is potential for China and India to massively increase electricity generation through nuclear power. In a similar scenario to base metals, we believe the BRIC economies will drive a significant increase in nuclear power.
The WNA reported that in May this year there were 437 operable reactors worldwide supplying about 16% of the global energy requirements. However as we have noted, the current figure is set to change rapidly with the planned additions to nuclear powered electricity generation in Asia from 2010.
Europe renaissance
However, in Europe the tide appears to have turned full circle in favour of nuclear power in just a few years. Only two reactors had been built in Europe since the Chernobyl disaster. However, recently the UK Government admitted nuclear power was back as an alternative energy source, and in Germany, the Government admitted that closing nuclear plants was ill advised and the country needed a balanced energy mix.
The turnaround in Europe is for two reasons-the monopoly position of Gazprom as an energy provider to Europe, and the determination by governments world wide, to cut greenhouse gas emissions. The WNA estimates that the total fuel costs of a nuclear power in the OECD are typically about a third of those for a coal-fired plant and between a quarter and a fifth of those for a gas combined-cycle plant.
Finally it appears that the long held irrational fears of nuclear power are beginning to fade. It is amazing that despite the paranoia there are over 400 reactors currently operating worldwide.