Will Uranium Companies Sign $100/Pound Long-Term Contracts with U.S. Utilities?

Willard Rich

The announcement of h2o deluging the $12 billion ore physique at the price of 1,500 cubic meters an hour at the Cigar Lake uranium mine shocked the nuclear industry on Monday. As anybody who closely follows uranium mining shares now knows, building at Cameco Corp’s fifty percent-owned mine in Canada’s uranium-wealthy Athabasca Basin will be delayed by at the very least one year, perhaps considerably extended. The full mine was flooded right after huge steel doorways – reinforced with concrete – could not hold back again the h2o.

One wag joked Cigar Lake should really alternatively be turned into a hydroelectric task. This shocking improvement signifies Cigar Lake’s heralded source of 7 million lbs . of uranium oxide relieving a extremely tight uranium marketplace by 2008 is long gone. Future offer just received 30 p.c tighter than was forecast.

“I would not be stunned if the uranium price receives pushed much better,” Sprott Asset Administration Current market Strategist Kevin Bambrough told us in a tape-recorded telephone job interview. “It ought to surely steepen the curve that we’ve found. I can not visualize there will be intense sellers.” In the course of our job interview, Bambrough calculated the net asset price of Uranium Participation Corp (TSX: U). “As we converse, UPC is at C$10.90/share,” he explained. “For the web asset price at that price tag, the uranium selling price would have to be about $75/pound. Which is exactly where the inventory marketplace is telling you the cost should be. That is wherever traders imagine it is heading.”

U.S. utilities need to stress. Fewer than one month ago, we challenged Rajiv Kundalkar, Vice President of Nuclear Engineering for Florida Energy and Mild, about Cigar Lake and other major uranium provide resources at a Platts-sponsored nuclear gas convention. We questioned him if he was informed of the pitfalls at Cigar Lake and elsewhere. Calmly, he answered that he was.

Of course, Mr. Kundalkar was not. (With any luck ,, he is ultimately reading our new e-book, “Investing in the Fantastic Uranium Bull Current market,” which we gifted him.) Neither were a the vast majority of utility gas supervisors who failed to honestly appraise the threats included with their source resources. People who neglected to lock up uranium stock for their reactors via 2011 are now the butt of jokes at the Nuclear Power Institute’s (NEI) annual uranium conference presently in session in Quebec Metropolis, Canada. Many fuel brokers and utility market consultants emailed or phoned us, more than the past six months, asserting they were being confident the uranium value was “too superior.” Each and every one particular sincerely thought Cigar Lake, Kazakhstan and/or Olympic Dam would deliver the uranium rate again down to earth.

“I nonetheless say the uranium value is likely to examination and exceed the inflation-adjustment highs of the prior peak,” Bambrough informed us. “I believe the (peak of) $110 to $120 will get taken out in this marketplace.” Is this the tremendous spike we have been waiting around for, and will it sustain at greater degrees? “We will have to see how substantial the spike goes,” Bambrough pondered. “I nonetheless consider some firms are likely to be capable to sign lengthy-expression offers all over $100/pound. I will not assume that will be a issue for some to have that chance.”

How Major Is the Cigar Lake Source Difficulty?

“This is probably going to set Cameco back much additional than a calendar year,” Bambrough predicted. Last spring, he had speculated in an additional interview about how the uranium price tag may possibly be influenced if Cigar Lake had been delayed far more than was then anticipated. “It was meant to do 18 million kilos a 12 months by 2010,” he discussed. “We’re shedding 7 million lbs . out of 2008. We are almost certainly likely to get rid of a different 11 million pounds in 2009.”

When will Cameco know they can mine Cigar Lake? “Perhaps, it will just be starting in 2010 if they determine it out,” Bambrough stated. “If they determine out the whole new system – the issue is you’ve got acquired to deal with h2o permits.” Due to the fact Cameco might have to insert a processing facility to be ready to tackle the greater flow amount, the firm might have to utilize for new h2o permits.

“Correct now, they’re only permitted to process about 500 cubic meters of drinking water an hour,” he pointed out. Cameco Chief Government Jerry Grandey informed analysts on Monday the h2o was flowing at 1500 cubic meters an hour. “Generally, they’ve obtained to go and implement for allowing to get processing in position to handle that extra h2o circulation,” Bambrough claimed. “We do not know what the move amount is eventually heading to be. They will not even know how contaminated the water is likely to be and what processing desires to be done. They’ve obtained a large h2o trouble to offer with.”

All of this will choose for a longer period than a lot of anticipate. “They’re heading to have to appear up with a new approach and a new way to procedure it,” Bambrough predicted. “It is really not just about heading back again and rehabilitating this a person area and continuing enterprise as usual. They’re going to maintain striving to perform it. But in get to do the job it, they’re likely to have to de-water it, which signifies they have to get water permits and place in a facility to method the water.”

As uranium and other miners have spelled out to us, mining is a tough company. “In pretty much all metals, mining is staying pushed to the limit,” Bambrough noticed. “When you force points to the limit, when you force tools to the restrict and you are going into uncharted frontiers, in terms of new depths in mining and new strategies, you happen to be likely to operate into difficulties.”

Can Cigar Lake be mined at all? “I imagine it will be somewhat mineable at some value, certainly at a better price,” Bambrough advised us. “You can find no way to notify how extensive things will be delayed and what the best cost will be. As you drive issues out a variety of yrs, I wouldn’t be surprised if the capital expenditures double by the time this receives brought on, just since of the time aspect. You have currently that revenue sitting down there costing you funds by making later on, for case in point the interest on the credit card debt. Then, there are the new actions to be set in place to deal with the new mining method.” Bambrough predicted the cash expenses for each pound would certainly double.

And Other Source Sources for U.S. Utilities?

Will this drive U.S. utilities out of their complacency pertaining to acquiring a trusted resource of uranium supply to power the country’s 103 nuclear reactors? “I think so,” Bambrough speculated. “It’s tricky to say who’s going to get the forces majeures. A ‘force majeure’ is a clause in a professional deal covering natural disasters, these kinds of as a flood, excusing the party from accomplishing its obligations beneath the deal. “A large amount of the forces majeures are likely likely to the U.S,” he explained. “The utilities had been confident in the 18 million kilos to be coming out of Cigar Lake. They are not heading to get this uranium. The issue is: ‘Where are they heading to get it?'”

We talked about Kazakhstan. “Russia locked up Kazakhstan’s large orebody a few of months ago on the settlement to establish processing amenities and nuclear plants,” Bambrough pointed out. “I believe that is quite substantial. The Western Earth was counting on getting a whole lot of that source. I consider we can obviously see now that is going to be Russian-controlled provide I be expecting they will want to pair with their new reactor orders for the two domestic and abroad.”

And Olympic Dam? “To put in the Olympic Dam growth, they would have to put in a desalination plant,” Bambrough warned. “They already use all the regional h2o means to start off with. I think they’ll have to develop additional desalination plants, which needs additional energy.” He believes the Cigar Lake flooding could push the uranium rate superior sufficient to make the massive cash expenses required for Olympic Dam to shift the enlargement designs ahead. “It may well expense among 7 and 10 billion pounds,” Bambrough stated.

Finding an immediate source source will turn into a really serious challenge for American utilities. “The delays are Cigar Lake will build a sense of urgency for the following couple years,” Bambrough told us. “It really is virtually the equal of the oil field shedding Saudi Arabia. The utilities missing what amounts to 10 % of consumption.”

What about the emerging U.S. uranium mining market? “It really is rough to get generation up to 18 million lbs . any time shortly,” he responded. But Bambrough additional, “Unless they commence speedy-tracking all the allowing, which is what I think is likely to have to occur.”

For Cameco Corp, it was Black Monday, but for lots of uranium juniors it was Eco-friendly Monday. As Cameco shares tumbled by almost 10 % trading on the Large Board, junior uranium companies these as SXR Uranium Just one, Power Metals and UR-Strength shares jumped concerning 14 and 19 % on the Toronto inventory exchange.

We questioned Bambrough about the providers which would profit the most by the Cigar Lake delays. “I imagine that the types which have been extra criticized and extra marginal stand to obtain the most. The most-value producers will not likely gain as significantly. The in the vicinity of-time period producers stand to actually acquire. The closer you are to output, you stand to obtain more.” This previous Friday, 1 of our preferred inventory analysts, Bart Jaworski of Raymond James Canada, issued two strong buy tips on junior uranium mining shares: Strathmore Minerals and Electricity Metals Corporation. We’ve earlier prepared about both of those and interviewed the president of the former in yesterday’s write-up.

With any luck ,, U.S. utilities will heed our suggestions, and utility spokesmen, such as Mr. Kundalkar of Florida Power and Mild will acquire our inquiries critically, for the duration of our foreseeable future chats. In the meantime, this weekend and subsequent must be interesting when TradeTech difficulties the place uranium price tag.

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