| Summary: In the face of Asian competition | | | | think that's when supply will be the |
| and possible supply shocks to the uranium | | | | tightest. In our uranium market report, we |
| market, UxC president Jeff Combs urges U.S. | | | | develop three price scenarios - a base case, |
| utilities to "support the expansion of | | | | a high-price case, and a low-price case. |
| production in the United States." He believes | | | | Price spikes or overshoots its long-run |
| there's a good chance for $50/pound uranium | | | | equilibrium in all three scenarios. In the |
| this year. "Any shock to supply could send | | | | high case, which would be the most dramatic |
| prices much, much higher." | | | | spike, I would say it would be somewhere in |
| | | | the $60 - $70 range. Price certainly could be |
| StockInterview: How would you sum up the | | | | higher than this if the wheels come off the |
| uranium market right now? | | | | wagon. I think you're definitely looking at |
| | | | price going into the $50s. It's not too |
| Jeff Combs: There's a very tight supply | | | | difficult to see a scenario where price goes |
| demand situation that exists now for | | | | into the $60s. And then it would come down |
| deliveries over the next several years. If | | | | from there. |
| you were going out today to buy uranium for | | | | |
| 2007, 2008, and 2009, there's not that much | | | | StockInterview: What goes up must come down? |
| available supply. The supply/demand balance | | | | |
| is very tight, and I think that's going to be | | | | Jeff Combs: I don't think these higher prices |
| reflected in prices continuing to rise for a | | | | are sustainable in the long term. You also |
| while as utilities seek to fill demand for | | | | have the situation now where utilities are |
| those delivery years. Since most contracting | | | | going out to buy uranium, and they're not |
| in uranium is done on a term basis, you're | | | | finding what they want over the 2007-2009 |
| always looking out several years. By the time | | | | period. It might be the case that some of |
| you reach 2009, for example, you're looking | | | | these newer producers, or producers in the |
| to fill needs in 2012 and beyond. By that | | | | process of expanding production, really |
| time, supply might have responded | | | | aren't in a position to offer the supplies in |
| sufficiently, or even "over-responded." Of | | | | those years. Ultimately, they will have the |
| course, whether or not the supply/demand | | | | supply to offer in maybe 2009 or 2010. Since |
| balance is tighter then depends on how | | | | they're not offering it right now, price can |
| nuclear power expansion is progressing at | | | | be pushed up a fair amount, setting up the |
| that point and what happens with respect to | | | | possibility for a correction in a few years |
| the HEU deal. But, in the meantime, | | | | when more of these supplies become available |
| production will have had more time to react | | | | to the market. In the short term, uranium |
| to higher prices, and this could alleviate | | | | supply and demand are very inelastic. This |
| some of the supply/demand pressures. | | | | sets up the potential for an explosive |
| | | | response in price, as witnessed by the recent |
| StockInterview: How are escalating | | | | behavior in price. I have to admit we've had |
| market-related contracts impacting the | | | | to adjust our price projections upwards on |
| uranium price? | | | | more than one occasion. |
| | | | |
| Jeff Combs: It's pretty much a sellers' | | | | StockInterview: What would be on your |
| market right now. You have escalating floor | | | | checklist of "shocks to the market" or the |
| prices that are maybe not too much lower than | | | | "wheels coming off the wagon"? |
| the current spot price. If you have ceiling | | | | |
| prices, they'll be much higher than the | | | | Jeff Combs: What we've pointed out for a |
| current price, and those will also escalate. | | | | while is that you have the vast bulk of |
| In some cases, you don't even have ceiling | | | | supply coming from a few major production |
| prices. In rare cases, you don't have either | | | | centers and blended-down HEU. If you have a |
| ceiling or floor prices. Most producers are | | | | problem with any one of those, it can have a |
| looking to sign market-related contracts and | | | | large impact on the market. Obviously, we've |
| not fix the price even on an escalated basis | | | | already had problems at Olympic Dam and |
| in the future, although they would want floor | | | | McArthur River, and now Cigar Lake, even |
| protection. To a large extent, the utilities | | | | before it gets into production. If you have |
| don't have too much choice in the matter | | | | problems at any of these in the future, or at |
| except to wait and hope that the competitive | | | | Rossing or Ranger, it's going to impact the |
| landscape changes in the future. However, in | | | | market. If you had some problem with the HEU |
| many cases they need to procure uranium now | | | | deal between U.S. and Russia, it could have a |
| and can't afford to wait. Thus, they must | | | | devastating impact on the market. In the |
| accept what is being offered. | | | | past, these problems have been caused by fire |
| | | | and floods, but other factors such as trade |
| StockInterview: Do you continue to see a | | | | policies or the shortage of equipment could |
| speculative frenzy in the market? | | | | negatively impact supplies going forward. |
| | | | |
| Jeff Combs: There's still some speculative | | | | StockInterview: But then why did the Cigar |
| activity in the market, but I wouldn't call | | | | Lake delay seem to pass by unnoticed? |
| it so much a frenzy. The importance of this | | | | |
| speculative buying has been somewhat | | | | Jeff Combs: It hasn't seemed to have gotten |
| over-blown. Total hedge fund/investor volume | | | | a lot reaction in the market. I think it |
| to date is about 11 million pounds. This | | | | depends on how people look at it. I've heard |
| buying started towards the end of 2004. The | | | | somebody say, "Well, it just means that it |
| bulk of it was during 2005, and it has | | | | just takes 2.5 million pounds of production |
| continued into this year. It will be much | | | | out of the market because it gets delayed 6 |
| less over the first part of this year versus | | | | months." Unless Cameco increases the rate at |
| the first part of 2005; about a half a | | | | which it ramps up Cigar Lake, then it's going |
| million pounds so far this year versus 5.5 | | | | to take more than 2.5 million pounds out of |
| million pounds through May of 2005. There is | | | | the market, because it's not going to get to |
| probably too much emphasis put on the role of | | | | its desired production level until half a |
| hedge funds or investment funds in the | | | | year later. Production will be lower in the |
| market. If you look at the market, the price | | | | intervening years, as well. The problem is |
| - especially the long term contract prices - | | | | that this delay in production is coming at a |
| has been leading the spot price up. The | | | | time when supplies are very tight in the |
| speculators really aren't involved in that | | | | market, the 2007-2009 timeframe. I think it |
| part of the market. Over the same time the | | | | could also impact the market by increasing |
| hedge funds/investor funds were buying, | | | | the levels of inventories held because you |
| you've probably had a third of a billion | | | | really don't know when the next flood or next |
| pounds transacted under long-term contracts. | | | | problem is going to occur. Until production |
| If you go forward several years from now, you | | | | expands more, any shock to supply could send |
| see a very tight supply/demand situation in | | | | prices much, much higher. |
| the market. If you wanted a pure | | | | |
| base-escalated contract, the base price for | | | | StockInterview: What should U.S. utilities do |
| this might be close to $50 today, a good bit | | | | to protect their supply channels in the face |
| higher than the spot price and about a third | | | | of possible market shocks and especially in |
| or so higher than the long-term price at the | | | | light of the aggressive Asian appetite for |
| beginning of the year. | | | | uranium? |
| | | | |
| StockInterview: We've been led to believe the | | | | Jeff Combs: That's a good question. I think |
| HEU deal with Russia will not be renewed. | | | | that U.S. utilities should support the |
| What is your feeling? | | | | expansion of production in the United States, |
| | | | in addition to maintaining their supply |
| Jeff Combs: You need to consider how much | | | | channels to major uranium producing |
| things have changed from when the current HEU | | | | countries, or perhaps developing them in the |
| deal was signed. At that time, the Russian | | | | case of Kazakhstan. I think it's more of a |
| economy was struggling, as was Russia's | | | | case that U.S. utilities should look at what |
| nuclear power program. Now Russia's economy | | | | all their options are, try to stimulate |
| is much more robust, thanks to energy | | | | additional supply options, and in the process |
| exports. Russia is experiencing a nuclear | | | | promote domestic production. Right now the |
| power renaissance of its own. From this | | | | market is fairly concentrated. There are not |
| perspective, I think it's quite unlikely that | | | | a lot of suppliers. While foreign utilities |
| the HEU deal will be renewed. When I say | | | | haven't been, to date, looking at the U.S. as |
| that, I'm referring to the deal between an | | | | a supply source, they also have a desire to |
| agent acting for the Russian Government and | | | | promote supply diversity, and could look to |
| an agent acting for the U.S. Government. I | | | | the U.S. for supply in the future. |
| don't think that necessarily means that there | | | | |
| will not be any HEU blended down after the | | | | StockInterview: To be blunt, are U.S. |
| current deal is over, but that could be done | | | | utilities going to get caught "with their |
| for internal consumption in Russia or be used | | | | pants down," at some point during this |
| as supply for countries where Russia is | | | | decade? |
| exporting fuel for Russian-supplied reactors. | | | | |
| | | | Jeff Combs: If you had some kind of supply |
| StockInterview: The trading volume on the | | | | interruption or shock as we were talking |
| spot uranium market has fallen off after what | | | | about before, certainly that would create |
| transpired in 2005. | | | | problems, not just for U.S. utilities, but |
| | | | for any utilities that were uncovered or have |
| Jeff Combs: The volume now is certainly less | | | | contract payment terms that relate to the |
| than what it was last year. Volume so far for | | | | market price with no real ceiling price |
| the year is 6.3 million pounds on the spot | | | | protection. If you have really aggressive |
| market. If this rate were maintained, it | | | | nuclear expansion in China, if India is |
| would put volume close to 20 million pounds | | | | allowed to play in the market, and if Russia |
| for the year. This would make it more of a | | | | goes ahead with its reactor expansion |
| typical market in terms of volume from the | | | | program, this makes the chances of price |
| standpoint of recent history before 2005. | | | | getting out of control somewhat greater down |
| Whether or not volume is higher than this | | | | the road. We've been warning of these issues |
| depends a lot on the extent to which | | | | for a while. I clearly don't think we're out |
| utilities that are out in the long term | | | | of the woods yet. When I say that we're not |
| market, right now, are able to get offers to | | | | out of the woods yet, I still believe that |
| cover requirements in 2007, 2008, and 2009. | | | | some utilities may be putting too much faith |
| If they're not successful, they might come | | | | in current prices in that they believe that |
| back into the spot market. That could boost | | | | the now higher prices will take care of the |
| spot buying somewhat later in the year. Also, | | | | problem of future supplies. While higher |
| some producers have been buying on the spot | | | | prices will certainly stimulate more |
| market. If this buying picks up, it could add | | | | production, I think that you must ask the |
| to volume as well | | | | question whether these prices are the |
| | | | antidote for the supply problem, or whether |
| StockInterview: Do you believe we're going to | | | | they are more a symptom of a severe deficit |
| see $50/pound uranium in the near term? | | | | of supply that the market is facing. The |
| | | | answer to this probably determines how |
| Jeff Combs: Oh yes, I think there's a good | | | | proactive utilities will be in securing |
| chance that we'll see $50 per pound uranium | | | | future supplies. We wrote an editorial in |
| this year, more likely in terms of long term | | | | 2003 that I think pretty well captured the |
| contracts. I think the highest prices may be | | | | state of the market at that time and the |
| reached within the next couple of years. I | | | | market environment we have seen since. |