|
U.S. Utilities Uranium Supply in Danger
by James Finch24-10-2006 |
page 1 |
Article:
The announcement of water deluging the $12 billion ore body at the rate of
1,500 cubic meters an hour at the Cigar Lake uranium mine shocked the nuclear
industry on Monday. As anyone who closely follows uranium mining stocks now
knows, construction at Cameco Corp's half-owned mine in Canada's uranium-rich
Athabasca Basin will be delayed by at least one year, possibly much longer. The
whole mine was flooded after massive steel doors - reinforced with concrete -
could not hold back the water.
One wag joked Cigar Lake should instead be turned into a hydroelectric
project. This surprising development means Cigar Lake's heralded supply of 7
million pounds of uranium oxide relieving a very tight uranium market by 2008 is
gone. Future supply just got 30 percent tighter than was forecast.
"I wouldn't be surprised if the uranium price gets pushed much higher,"
Sprott Asset Management Market Strategist Kevin Bambrough told us in a
tape-recorded telephone interview. "It should definitely steepen the curve that
we've seen. I can't imagine there will be aggressive sellers." During our
interview, Bambrough calculated the net asset value of Uranium Participation
Corp (TSX: U). "As we speak, UPC is at C$10.90/share," he said. "For the net
asset value at that price, the uranium price would have to be about $75/pound.
That's where the stock market is telling you the price should be. That's where
investors think it is going."
U.S. utilities should panic. Less than one month ago, we challenged Rajiv
Kundalkar, Vice President of Nuclear Engineering for Florida Power and Light,
about Cigar Lake and other significant uranium supply sources at a Platts-sponsored
nuclear fuel conference. We asked him if he was aware of the risks at Cigar Lake
and else where. Calmly, he answered that he was.
Obviously, Mr. Kundalkar was not. (Hopefully, he is finally reading our new
book, "Investing in the Great Uranium Bull Market," which we gifted him.)
Neither were a majority of utility fuel managers who failed to honestly appraise
the risks involved with their supply sources. Those who neglected to lock up
uranium inventory for their reactors through 2011 are now the butt of jokes at
the Nuclear Energy Institute's (NEI) annual uranium conference presently in
session in Quebec City, Canada. Many fuel brokers and utility industry
consultants emailed or phoned us, over the past six months, announcing they were
convinced the uranium price was "too high." Each one sincerely believed Cigar
Lake, Kazakhstan and/or Olympic Dam would bring the uranium price back down to
earth.
"I still say the uranium price is going to test and exceed the
inflation-adjustment highs of the prior peak," Bambrough told us. "I think the
(peak of) $110 to $120 will get taken out in this market." Is this the super
spike we've been waiting for, and will it sustain at higher levels? "We'll have
to see how high the spike goes," Bambrough pondered. "I still think some
companies are going to be able to sign long-term deals around $100/pound. I
don't think that will be a problem for some to have that opportunity."
How Serious Is the Cigar Lake Supply Problem?
"This is probably going to set Cameco back much more than a year," Bambrough
predicted. Last spring, he had speculated in another interview about how the
uranium price might be affected if Cigar Lake were delayed more than was then
anticipated. "It was supposed to do 18 million pounds a year by 2010," he
explained. "We're losing seven million pounds out of 2008. We're probably going
to lose another 11 million pounds in 2009."
When will Cameco know they can mine Cigar Lake? "Maybe, it will just be
starting in 2010 if they figure it out," Bambrough said. "If they figure out the
whole new plan - the problem is you've got to deal with water permits." Because
Cameco may have to add a processing facility to be able to handle the increased
flow rate, the company may have to apply for new water permits.
"Right now, they're only permitted to process about 500 cubic meters of water
an hour," he pointed out. Cameco Chief Executive Jerry Grandey told analysts on
Monday the water was flowing at 1500 cubic meters an hour. "Basically, they've
got to go and apply for permitting to get processing in place to handle that
extra water flow," Bambrough said. "We don't know what the flow rate is
ultimately going to be. They don't even know how contaminated the water is going
to be and what processing needs to be done. They've got a big water problem to
deal with."
All of this will take longer than many expect. "They're going to have to come
up with a new plan and a new way to process it," Bambrough predicted. "It's not
just about going back and rehabilitating this one area and continuing business
as usual. They're going to keep trying to work it. But in order to work it,
they're going to have to de-water it, which means they have to get water permits
and put in a facility to process the water."
As uranium and other miners have explained to us, mining is a difficult
business. "In almost all metals, mining is being pushed to the limit," Bambrough
observed. "When you push things to the limit, when you push equipment to the
limit and you're going into uncharted frontiers, in terms of new depths in
mining and new techniques, you're going to run into problems."
Can Cigar Lake be mined at all? "I think it will be somewhat mineable at some
price, obviously at a higher cost," Bambrough told us. "There's no way to tell
how long things will be delayed and what the ultimate cost will be. As you push
things out a number of years, I wouldn't be surprised if the capital
expenditures double by the time this gets brought on, just because of the time
element. You've already that money sitting there costing you money by producing
later, for example the interest on the debt. Then, there are the new measures to
be put in place to handle the new mining method." Bambrough predicted the
capital expenditures per pound would definitely double.
And Other Supply Sources for U.S. Utilities?
Will this force U.S. utilities out of their complacency regarding having a
reliable source of uranium supply to power the country's 103 nuclear reactors?
"I think so," Bambrough speculated. "It's hard to say who's going to get the
forces majeures. A 'force majeure' is a clause in a commercial contract covering
natural disasters, such as a flood, excusing the party from performing its
obligations under the contract. "A lot of the forces majeures are probably going
to the U.S," he said. "The utilities were confident in the 18 million pounds to
be coming out of Cigar Lake. They aren't going to get this uranium. The question
is: 'Where are they going to get it?'"
We talked about Kazakhstan. "Russia locked up Kazakhstan's big orebody a
couple of weeks ago on the agreement to build processing facilities and nuclear
plants," Bambrough pointed out. "I think that is very significant. The Western
World was counting on getting a lot of that supply. I think we can clearly see
now that is going to be Russian-controlled supply I expect they will want to
pair with their new reactor orders for both domestic and abroad."
And Olympic Dam? "To put in the Olympic Dam expansion, they would have to put
in a desalination plant," Bambrough warned. "They already use all the local
water resources to begin with. I think they'll have to build more desalination
plants, which requires more power." He believes the Cigar Lake flooding may
drive the uranium price high enough to make the massive capital expenditures
required for Olympic Dam to move the expansion plans forward. "It may cost
between seven and ten billion dollars," Bambrough said.
Finding an immediate supply source will become a serious challenge for
American utilities. "The d elays are Cigar Lake will create a sense of urgency
for the next few years," Bambrough told us. "It's almost the equivalent of the
oil industry losing Saudi Arabia. The utilities lost what amounts to 10 percent
of consumption."
What about the emerging U.S. uranium mining industry? "It's tough to get
production up to 18 million pounds any time soon," he responded. But Bambrough
added, "Unless they start fast-tracking all the permitting, which is what I
think is going to have to happen."
For Cameco Corp, it was Black Monday, but for many uranium juniors it was
Green Monday. As Cameco shares tumbled by nearly 10 percent trading on the Big
Board, junior uranium companies such as SXR Uranium One, Energy Metals and
UR-Energy shares jumped between 14 and 19 percent on the Toronto stock exchange.
We asked Bambrough about the companies which would benefit the most by the
Cigar Lake delays. "I think that the ones which have been more criticized and
more marginal stand to gain the most. The most-cost producers won't gain as
much. The near-term producers stand to really gain. The closer you are to
production, you stand to gain more." This past Friday, one of our favorite stock
analysts, Bart Jaworski of Raymond James Canada, issued two strong buy
recommendations on junior uranium mining stocks: Strathmore Minerals and Energy
Metals Corporation. We've previously written about both and interviewed the
president of the former in yesterday's article.
Hopefully, U.S. utilities will heed our advice, and utility spokesmen, such
as Mr. Kundalkar of Florida Power and Light will take our questions seriously,
during our future chats. In the meantime, this weekend and next should be
interesting when TradeTech issues the spot uranium price.
COPYRIGHT © 2006 by
StockInterview.com
James Finch contributes to StockInterview.com and other publications. His
archived articles are posted at
http://www.stockinterview.com. His recent book, "Investing in the Great
Uranium Bull Market," can be found at:
http://bookstore.stockinterview.com/productcart/pc/home.asp)
|
