The uranium bounce

The short-term price of uranium is rising and speculators are asking if better times are ahead.

Summary: The short-term uranium price is rising, sparking some interest in uranium exploration and production stocks. The price rise suggests the metal has hit the bottom and alerted speculators to the possibility that better times could be on the way. Japan is set to restart the first of its nuclear reactors and miner Toro Energy has found support. But prices are low for nuclear power’s competitors and there is no shortage of uranium for sale under long-term contracts.

Key take-out: Observers will be keen to see whether the rise in the short-term uranium price will flow into the more important long-term price, which is still too low to encourage the development of new mines.

Key beneficiaries: General investors. Category: Commodities.

After five years in the freezer uranium began to de-frost last week. But whether a 16% jump in the short-term price is the start of a permanent improvement is uncertain, if not unlikely.

The rise of $US5.75 a pound to $US42/lb caused a modest flurry of interest in uranium production and exploration stocks but the fact that the long-term price failed to move was not a good sign for a continuation of the rally.

Never an easy commodity to value because of the layers of security which shroud every aspect of production and end use, whether in power generation or in weapons, uranium effectively has three prices covering the short, medium and long-term.

Long-term is the critical measure because that’s the price generally paid by power-station operators and at its current level of $US45/lb it is too low to encourage the development of new mines. They need a price of around $US70/lb.

What last week’s short-term price bounce did do is alert speculators to the possibility that better times could be on the way even if the negative indications continue to outweigh the positives.

In effect, the uranium price rise was a signal that the metal had hit the bottom and was starting the process of recovery, a common reaction after a prolonged price slide and one that might be seen in the gold price in the next few months (see Gold gets closer to its turning point).

The factors supporting a belief that uranium might be staging a recovery include:

  • Government approval in Japan to restart the first of 48 nuclear reactors which were closed after the 2011 Fukushima meltdown.

  • Continued expansion of the worldwide reactor fleet, especially in China which is looking for ways to limit pollution from coal-burning power stations.

  • Support for the emerging uranium miner, Toro Energy, from the Sentient investment group which invested $10 million in the WA-based stock and provided $10 million for continued work at its proposed Wiluna mine.

  • Limited development of new sources of uranium with no new mining projects underway and most decommissioned weapons-grade material already reprocessed into fuel.

  • Talk of a new cold war between Russia and the US, which has the potential to restart the arms race.

All of those factors, to a varying degree, went into last week’s short-term uranium price rise though the most important factors were the Japanese decision to restart the Sendai nuclear power plant early next year, and the warning from retired Russian politician, Mikhail Gorbachev, about a return of the cold war.

Offsetting the positives was a list of negatives that included:

  • No indication of a shortage of uranium available for sale under long-term contracts.

  • Low prices for oil, gas and coal which all compete with nuclear power.

  • Limited volumes of uranium traded last week to produce the bounce in the short-term price.

  • Reports that the buying was led by Japan which needs to replace uranium sold after the Fukushima meltdown.

  • A very modest 0.2c rise in the price of Toro shares after the Sentient deal was announced.

  • A long list of mothballed and delayed uranium mine developments waiting for an opportunity to enter the market, including the possible expansion of BHP Billiton’s giant Olympic Dam copper and uranium mine.

Sharp movements in the short-term price have always been a feature of the uranium market, together with long periods of relative price stability.

Until the year 2003 when China started to expand its fleet of nuclear reactors the price had been stuck below $US20/lb, sometimes trading below $US10/lb, a result of oversupply and two earlier reactor meltdowns, Three Mile Island in the US in 1979 and Chernobyl in Ukraine in 1986.

After peaking at $US135/lb in 2007, the short-term uranium price has only briefly risen above $US60/lb.

Whether the latest rise to around $US42/lb can continue, or whether it will flow into the more important long-term price, will be closely watched over the next 12 months as Japan restarts its reactors.

But, weighing on the uranium price is the challenge of rival power sources, especially oil, gas and coal, and an increasingly competitive range of renewable sources of energy such as wind and solar.