A new dawn for uranium prices?

The uranium trade resembles the diamond market in some ways: it is rather opaque and mysterious, and also lends itself to “it can only go up” narratives. In the case of diamonds this narrative is, “Asians will earn more and more money and buy more and more engagement rings, and meanwhile no one is building new diamond mines.”

In uranium it boils down to, “Asians are building more and more nuclear power stations to solve their energy problems, and meanwhile no one is building new uranium mines.”

Once again, it is a new dawn for uranium prices and uranium miners, according to a report by RBC Capital Markets.

Factors cited by the report: A looming supply/demand shortfall, as a new generation of nuclear power plants – largely in Asia, but also in Western Europe – requires more uranium in a world that has not invested properly in new sources of supply. Another factor: Japanese and Korean utility companies’ direct buying of uranium companies, which signals “the start of utilities looking to secure long-term supplies where they see potential shortfalls.”

“We believe the uranium market is in the early stages of a bull market rally that could last three or four years,” the report says.

We might be at the start of a bull market, as both investors and customers of uranium producers inject real money in to this attractive theory. For now, however, the uranium price remains low, and there is little hard data to suggest it will rise higher than other industrial commodities. The nearest thing to a benchmark, the Ux Consulting price, places the latest price at $42 per pound, compared to $64 a year ago and prices above $100 in 2007.

As with so many commodities’ direction this year, much hangs on China and the vexing inscrutability of its intentions. Even before the stimulus bill China had budgeted $65bn to build a new fleet of nuclear power stations, increase uranium imports, and even explore for the mineral around the world. A pattern of Chinese companies acquiring uranium producers outright or partially, following Japanese and Korean example (and Areva’s acquisition of UraMin in 2007), would lend weight to the “it can only go up” theory.

Meanwhile the junior uranium sector, alive with a frontier cowboy spirit especially in Namibia, has been performing very well relative to junior base metals miners. A standout is Kalahari Minerals (tied to Extract Resources through significant shareholdings), whose drilling results at the large Rossing South uranium deposit in Namibia continue to impress. Shares have risen from 43p to 110p this year – largely in anticipation of neighbour Rio Tinto (owner of the Rossing mine) or a Chinese or other Asian buyer making a full offer. Also in anticipation of … demand rising as a new fleet of nuclear power plants is commissioned.

“We think consolidation in the uranium business will occur in the coming 12 months, but the number of quality names is limited and should help drive equity prices higher,” RBC’s bullish note says.

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