Debating the Outlook on Uranium

By Jon A. Nones –
St. LOUIS (ResourceInvestor.com) — James Dines, Editor of the Dines Letter, says uranium stock is in a screaming uptrend and will continue due to increasing world demand. Analyst Paul van Eeden says the uranium market is burdened with instability because of the potential for enrichment and an outdated supply-demand curve. Welcome to the main event at the Gold & Precious Metals Conference at the Mirage in Las Vegas, Nevada. Round one.
First off, it costs billions of dollars to build a nuclear facility – one of the most expensive projects a company can undertake. Today, there are 441 nuclear power plants on the planet, with many more planned. Japan intends to add 11 more by the year 2010; China will add 24 to 30 by 2020; France is already using nuclear power for 80% of its energy. And, the fuel costs to power these nuclear plants is miniscule.


Current estimates of supply and demand show that there is already a shortage of uranium to meet the increasing demand. Annually, we produce 90,000 tonnes and consume roughly 180,000 tonnes – the rest is obtained from civilian and military stockpiles.
“We consume more uranium than what is available,” admitted van Eeden. Because uranium consumption is so much greater than mine production, and because inventories are finite, it can be argued that the uranium price has to increase until mine production more closely matches demand, he added.
However, van Eeden said the question is whether the uranium price will continue its rise from here or whether we could be due for a correction. Enrichment is the key to understanding the uranium price, he said.
Uranium hit $32 per pound last week, up from $7 per pound just four years ago, and Dines said it’s still climbing.
According to Dines, the world will consume nearly 200-million pounds of uranium in 2005, while uranium mines will produce only around 100-million pounds. He said the global demand is only going to increase and the uranium shortage will get worse before it gets better.
It’s already happened at least once thus far, Dines said. In 2003, a key Canadian nuclear power facility simply ran out of fuel and had to shut down, almost without notice.
With the Middle East in crisis and oil supplies in political jeopardy, more and more countries are turning to nuclear power to supply their almost insatiable energy needs, according to Dines.
Dines also argued that uranium is the next best substitute for carbon-based fuels in the fight against global warming, and the market reflects this.
“The sooner the world gets rid of carbon-based fuels, the better we will be. When the glaciers melt, we’ll be traveling to work using snorkels,” said Dines.
He also added that one uranium plant could reduce the carbon emissions of 2.5 million automobiles, making it the best choice for alternative energy.
However, this is not van Eeden’s argument. He argues that because uranium can be enriched with separate work units, or SWUs, less uranium will in turn produce more energy. Although this is an expensive process now, it might become an affordable expense if uranium prices get too high. This could in turn throw off the supply-demand curve, dropping the price.
Here’s some background. There are three natural isotopes of uranium: U(234), U(235) and U(238). The natural abundance of U(234) is so minute that we can leave it out for now. For our purposes natural uranium contains 99.29% U(238) and 0.71% U(235). Both uranium isotopes decay very slowly by emitting an alpha particle. However, if U(235) captures a neutron it rapidly splits in two, releasing a large amount of energy and more neutrons. This is called fission and it is the process that generates energy for nuclear power plants.
With the exception of CANDU reactors used in Canada and the smallish pressurized heavy water cooled reactors (PHWR) used in India, most nuclear reactors in the rest of the world are light water reactors (LWRs). LWRs cannot operate with natural uranium because the abundance of U(235) is too low. The natural uranium therefore has to be enriched in U(235) so that the fuel contains between 3% and 5% U(235) and this is where SWUs come into the picture – which currently cost about $113 per kilogram.
According to van Eeden, there is an optimal amount of enrichment a utility fuel buyer should use depending on the price of SWUs, and an optimal amount of uranium he or she should use depending on the price of uranium. If the price of uranium is low then a nuclear fuel buyer will typically use less SWUs and more uranium to make the fuel. But when the price of uranium is high, as it is now relative to two years ago, the buyer will use less uranium and more SWUs to make fuel, thus throwing off the supply-demand curve.
Uranium Participation Company (UPC) recently bought a large amount of uranium for the purpose of hording it until prices went up substantially. Van Eeden said this company single handedly raised the price of uranium from $22 to $29 per pound. But, he asked what would UPC do if the price of uranium does not go up in five years or so. If they sell it, the uranium spot price could easily collapse since it’s a thin market, he said.
Dines said the market has not yet fully picked up on uranium because energy analysts and traders have been so blinded by the ongoing oil price drama.
“Wall Street professionals simply do not follow uranium stocks. They just don’t see them,” he said.
According to Dines, more and more nuclear power plants are going to be bidding on less and less uranium. And that indicates uranium prices are going to soar, as will the stock prices of select uranium mining companies.
Dines said, there’s no precedent for projecting how high uranium prices might go because there is no effective force to keep the price down. Van Eeden disagrees.
“There is a systematic risk in the uranium market,” said van Eeden. “A lack of understanding of this has led to over-optimism in increasing uranium prices.”
So, in the end, it’s really just an argument over supply and demand. Will demand remain strong world-wide? Will SWUs cause a substantial shift in the supply demand curve if more are utilized?
Both van Eeden and Dines agreed one thing: there’s no way to predict where the uranium price will go, when it will ultimately peak and if or when it will correct.
Source: Resource Investor

One Response to Debating the Outlook on Uranium

  1. TrickyD September 15, 2005 at 10:52 am #

    McGuinty touts ‘new nuclear’
    With Ontario facing soaring energy needs, Premier hints reactors could be on the way – 8 NEW NUCLEAR REACTORS
    By KAREN HOWLETT
    Thursday, September 15, 2005 Page A11
    NIAGARA FALLS, ONT. — Ontario Premier Dalton McGuinty has given his strongest signal yet that his government is considering building new nuclear reactors to help address the province’s looming electricity crisis.
    The government has asked the Ontario Power Authority to prepare a 20-year plan to meet the province’s soaring electricity needs. The province faces a severe energy shortfall over the next decade if it does not urgently deal with the gap between supply and demand, warns another agency that manages Ontario’s electricity system. The OPA plans to submit its report on Dec. 1.
    “We are prepared to go ahead with economical, safe, new nuclear if that is recommended by the OPA,” Mr. McGuinty said yesterday in a luncheon address to the Ontario Energy Association in Niagara Falls.
    The Premier also attended the groundbreaking ceremony for a 10.4-kilometre tunnel that will increase electricity output at the Sir Adam Beck Generating Station in Niagara Falls.
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    He said the province needs to refurbish, rebuild or replace 25,000 megawatts of supply over the next 15 years. The province’s entire capacity is 30,000 megawatts. On a high-demand day, Ontario consumes 25,000 megawatts of electricity, while on moderate days it uses between 16,000 and 18,000 megawatts.
    Ontario is dealing with the legacy of successive governments’ failure to bring new sources of power on line, one that left it no choice but to import expensive power from the United States on many days to meet soaring demand during the province’s hottest and driest summer in 50 years, Mr. McGuinty told reporters.
    “It’s time for us to mature and in a sense grow up in Ontario when it comes to understanding what our energy needs are and making the decisions today that have been avoided yesterday to ensure that we have a reliable supply of affordable, clean, safe electricity,” he said.
    The Ontario government is considering spending billions of dollars on new reactors just as the nuclear power industry is going through a quiet rehabilitation in North America. Three things are driving the renewed interest in nuclear: the high cost of oil and gas, concerns about security of energy supplies, and the need to limit greenhouse gas emissions.
    In the United States, a broad energy bill was signed into law last month that is intended to make the nation’s electricity supply more reliable and encourage construction of nuclear power plants. The bill comes more than 26 years after a near meltdown at the Three Mile Island nuclear plant.
    In Ontario, the last time a new nuclear plant went on-line was 1992. In 1997, Ontario Power Generation, the government-owned electricity utility, took seven of its 19 reactors off line because they weren’t up to standard.
    In late 2003, the government fired the top three executives of OPG for botching the restoration of the Unit 4 nuclear reactor at the Pickering A station, which was years late and millions of dollars over budget.
    Then in July, OPG scrapped plans to restart two other mothballed reactors at the Pickering A station, saying it wasn’t economically viable to spend $2-billion refurbishing Units 2 and 3.
    OPG returned Unit 4 to service in 2003 and the refurbished Unit 1 is expected to come back on line in October at a projected cost of about $1-billion.
    Mr. McGuinty reiterated yesterday that he has no interest in “pouring billions of dollars into un-economical, old nuclear.”
    New Democratic Party Leader Howard Hampton said the government has been going down the nuclear road from Day 1, simply because it has not aggressively pursued other energy strategies. He said reactors are not only potentially unsafe and unreliable, but expensive to build. The province’s previous forays into nuclear energy saddled Ontarians with $20-billion in debts, he said.
    “I see no arguments that tell me we should go down the nuclear road again,” he told reporters. “Energy efficiency is our best bet.”
    Progressive Conservative MPP John Yakabuski criticized the government’s plan to shut down the province’s aging, coal-fired generating plants by 2009, before it has enough new sources of power.

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