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