When Uranium Outshines Gold

EARLIER this month, Global X Funds of New York announced plans for two exchange-traded funds — one for gold stocks, the other, uranium. Initially, Bruno del Ama, its chief executive, figured he knew which would capture the market’s attention. After all, gold prices have surged in recent months.



As it transpired, he guessed wrong. Global X’s Uranium E.T.F. — with holdings in companies like the Cameco Corporation, Paladin Energy and Uranium One — was a hit as soon as it went on sale Nov. 9, with early trading volume outpacing Global X’s gold E.T.F. by five to one. “I’m in shock, to be honest,” he said.



Mr. del Ama is hardly alone. Uranium industry insiders were caught off guard by a deep run-up in spot market prices, which are now about $58 a pound, up sharply from the low $40s in the summer. “We all knew it was going to happen,” says Ron F. Hochstein, the president and chief executive of the Denison Mines Corporation. “We just didn’t anticipate it would happen this year.”



As Adam Schatzker, an analyst with the Canadian investment bank RBC Capital Markets, said in an equities research report published last week: “It appears that the character of the spot market has changed markedly over the past few months from one that was heavily oversupplied with weak demand to one that has high levels of demand with very little supply.”



The price surge hints at a confluence of significant changes — a “perfect storm,” in Mr. Hochstein’s words — now sweeping through the global nuclear power industry, especially in Asia. With China recently moving to accelerate sharply its nuclear building program by 2020 — the showpiece is the 3,300-megawatt Taishan plant in Guangdong Province, due to come online in 2013 — the country’s nuclear utilities are now trying to secure fuel supplies for years to come.



On Nov. 1, China’s long-term planning agency announced that by 2020 it intended to raise nuclear power’s share of the country’s total energy production to 112 gigawatts, or 7 percent, up from the previous target of 70 gigawatts. That translates into an additional 82 million pounds of uranium, according to RBC.



Just as Global X’s uranium E.T.F. went on sale, the French nuclear giant Areva signed a 10-year, $3.5 billion deal to supply 20,000 tons of uranium fuel to the China Guangdong Nuclear Power Corporation. Areva is a minority partner in the Taishan plant, described as the largest civil nuclear project ever. Cameco signed a similar deal earlier this year. “The Chinese are really showing their cards,” Mr. Schatzker said.



Russia, South Korea and Pakistan are also developing reactors and preparing to stockpile long-term inventories. The activity isn’t just domestic: China is reported to be helping Pakistan build five reactors, according to a report in The Financial Times, while South Korea recently won a large reactor project in the United Arab Emirates.



Pointing to a 17 percent year-over-year increase in production for 2010, Cameco’s chief, Jerry Grandey, said during an analysts’ conference call last week that the company was also anticipating increased demand from India, which has signed nuclear cooperation agreements with the United States and Canada in recent years.



These moves contrast sharply with the situation in North America, where many nuclear projects are stalled because of economic uncertainty and a lack of government financing. Still, many analysts anticipate the Asian nuclear program will drive uranium prices to $70 to $80 a pound in the next several years — a level that will set off a new wave of exploration and mine development.



Lacking domestic uranium sources, China and companies like Paladin are also beginning to develop uranium mines in African countries including Namibia and Niger. Mr. Hochstein’s firm, whose largest shareholder is the South Korean nuclear utility, is working on a facility in Mongolia.



These latest developments are welcome news for uranium producers, some of which struggled in recent years after a mid-2000s boom was followed by a price collapse that created what Mr. Schatzker describes as a “liquidation” market.



Over the last decade, Kazakhstan rapidly became the world’s largest uranium producer, overtaking Canada with vast increases in production. According to World Nuclear Association figures, Kazakh production jumped 62 percent from 2008 to 2009. Overall global demand remained steady, however, because the long-promised nuclear renaissance was always just over the horizon.



In the meantime, Cameco and Energy Resources of Australia both had large mine projects stalled because of floods. After a complicated remediation process, Cameco’s Cigar Lake mine in Saskatchewan, the largest in the world, will come online in 2013.



Further complicating the picture was the fact that many nuclear utilities were acquiring fuel on the so-called secondary market — reprocessed uranium from decommissioned warheads, uranium tailings and spent reactor fuel.



Robert Vance, an analyst for the Nuclear Energy Agency in Paris, said a third of the world’s uranium had come from such sources, including 9,000 tons a year from Russia. He said the Russian secondary supply stream would end in three years.



Indeed, as 2010 draws to a tumultuous close, many uranium industry insiders are thinking ahead to the state of the market circa 2014 and beyond. As Mr. Grandey, of Cameco, said last week, “There’s a lot of uncovered need.”



Mr. Vance said uranium was not especially rare, but the licensing and mine development process could take years, especially in politically volatile countries like Niger, and required prices to be in the high $50s.



Some industry watchers say that North American utility fuel buyers have not yet absorbed the implication of these price trends on their own operations. “There’s no real sense of crisis, yet,” says Lawrence Smith, a uranium analyst for Scotia Capital, the investment banking and capital markets division of the Scotiabank Group. “Western utilities are pretty well covered in 2011 and 2012. Further out, it becomes an issue.”



A version of this article appeared in print on November 17, 2010, on page F2 of the New York edition.

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