Uranium's sickly price problem

The spot uranium price fell to $US34.50/lb U3O8 in late July, a price not seen since December 2005 during the upswing of a spectacular price bubble which peaked in June 2007 at $US138. The 12 per cent price slump in July was the biggest monthly loss since March 2011.

Since July, the spot price has fallen further still, to $US34, before surging to $US35 where it sits now. Recent prices are just over half the spot price of $US66.50 on March 11, 2011, the first day of the triple-disaster in northeast Japan.

The long-term contract price has been reasonably stable in recent months at $US57/lb. (At that price, the value of annual global uranium requirements for power reactors is around $US10 billion.)

FNArena wrote on September 17:

Raymond James analyst David Sadowski expects an average spot price of $40 per pound this year, $52 in 2014, and $70 in both 2015 and 2016. Michael Angwin from the Australian Uranium Association expects low prices until about 2017/18, and a nasdaq.com article states that "the road to recovery for this battered commodity will be a long haul". Rob Atkinson, outgoing CEO of Energy Resources of Australia, says the uranium spot price is woeful, making it extremely difficult to make the case for developing a new mine, and the market will remain difficult for at least another two years.

The industry hopes that reactor restarts in Japan will improve the situation − but restarts will be slow and in many cases strongly contested. FNArena reported on October 1: "Macquarie now believe the uranium market will remain in surplus throughout their five-year forecast period, Japanese restarts or no Japanese restarts. The industry hopes that new build in China will improve the situation − but pre-Fukushima nuclear growth projections have been sharply reduced and China now plans to approve a "small number" of new reactors projects each year.

The industry hopes that the end of the US-Russian 'Megatons to Megawatts' program − downblending highly enriched uranium (HEU) from weapons programs for use in power reactors − will improve the situation. But mine production has met an increasing proportion of demand in recent years − 78 per cent in 2009 and 2010, 85 per cent in 2011 and 86 per cent in 2012 (the shortfall was around 10,000 tonnes of uranium in 2011 and 2012). This suggests that the end of the Megatons to Megawatts program will have a moderate impact. There is scope for weapons material to continue to supply the civil market regardless of future bilateral US-Russian agreements.

Ux Consulting noted last year that reduction in demand stemming from the Fukushima accident "essentially negates much of the reduction in supply resulting from the end of the US-Russia HEU deal". Utilities have built up uranium stockpiles in recent years as a result of low uranium prices (the World Nuclear Association estimated commercial inventories totalling 145,000 tonnes of uranium in 2010 − enough to supply global demand for two years).

On the Megatons to Megawatts program, FNArena states that "the hole left will only prove incremental, say the analysts, given supply of alternative Russian secondary material and growing supplies from global reprocessing."

Jeb Handwerger, described by Uranium Investing News as a "uranium bull and stock guru", says that "Smart money recognizes the bottom." But smart money is heading for the door. At the Paydirt Uranium Conference in February 2012 in Australia, it was clear many companies were looking elsewhere, prompting an industry veteran to quip that copper and gold had never before enjoyed so much airtime at a uranium conference. A year later, attendance was so poor that the conference was reduced from two days to one day and shifted from the Hilton Hotel to a less opulent venue.

Smart money also recognises that utilities have huge stockpiles. FNArena notes that uranium inventories across all major consumers sit at record highs. Japan has stockpiles of around 7500 tonnes, while US inventories would satisfy two years of consumption − the highest level in decades. And the nuclear power industry in the US is being battered from pillar to post with the cancellations of plans for new reactors and the closure of operable reactors.

Uranium gloom and doom is also being felt in the enrichment sector. Enrichment consortium Urenco posted a 45 per cent drop in revenue for the first half of 2013 and a 31 per cent fall in earnings (compared to the first half of 2012). Revenue fell to €384 million and earnings dropped to €319 million. Urenco said it expects a "substantial rebalance" during the second half of the year due to continued capacity expansion in its US facility and the construction of a new unit in the UK. The UK government owns one third of Urenco, as does the Dutch government, with the final third held by German utilities E.On and RWE. All the owners have been looking to sell their stakes but have so far failed to secure a deal.

Paladin Energy

Australian-based Paladin Energy operates two uranium mines in Africa − Langer Heinrich in Namibia and Kayelekera in Malawi. Chief executive John Borshoff told a mining conference in Western Australia in July that the uranium industry faces a number of "major problems" such as the lack of greenfields development, dwindling investment capital and the sickly uranium price.

Borshoff said: "[T]he uranium industry is definitely in crisis, I believe, and is showing all the symptoms of a mid-term paralysis if this situation does not demonstrably change. How can there not be a problem when you have an effective moratorium with nearly all major companies making no commitment to greenfields development until the price gets about $US70 and it is believed it can stay above that level. And how can there not be a problem when you have a strong chance that some of the more expensive, smaller operations will be mothballed − putting more pressure on current production. ... Only at this price level [$US70/ lb] − and above − can sufficient capital for new products be raised and returns on investment be justified to finally give some risk reward to the shareholder. And this appears to be a long way away."

Borshoff said much of the blame lies with the uranium industry's customers, who he said had focused on the expediency of current cheap prices rather than the supply-demand gap forecast to open in coming years.

Shares in Paladin plummeted on August 5 after the company announced a heavily discounted $88 million raising through the issuing of 125.6 million shares. The company's cash position dropped to $78.1 million at June 30, down from $112.9 million at the end of the previous quarter.

The news followed a decision by the company to scrap negotiations for the sale of its interest in Langer Heinrich. Langer Heinrich produced 5.3 million pounds out of the company's total output of 8.26 million pounds of U3O8 in the year to June 30. Borshoff said: "The current depressed uranium price has meant that it is unlikely that a price that appropriately reflects the strategic value of the asset will be achieved and accordingly proceeding at this time would be detrimental to long-term shareholder value."

Andrew Shearer, an analyst at PhillipCapital Ltd, said: "The decision to terminate the asset sale is contrary to the company's guidance that the process was continuing well and heading toward a conclusion."

Stockbroker RFC Ambrian said: "From a technical perspective, Paladin can be satisfied that it has achieved record sales but the fact remains that it has not had a profitable annual result since commencing operations. Our modelling forecasts continued negative cash flow and the company running out of cash in early 2014 and consequently [being] unable to service its substantial debt position. This was expected to be covered through the strategic sale of a minority interest in Langer Heinrich for cash."

The share offering bought the company some breathing space if nothing else. Paladin had about $US670 million of debt at the end of March 2013 according to data compiled by Bloomberg.

On August 30, Paladin Energy had more bad news, reporting a net loss of $US420.9 million for the 2013 financial year, more than double the previous year's loss of $US172.8 million and not far short of the company's record net loss of $US480.2 million in financial year 2009.[17,18] Borshoff launched into another spray about the low uranium price, labelling it ''diabolical'', ''extremely depressed'' and ''of great concern''.

Borshoff would not rule out closing one of Paladin's two mines (most likely the Kayelekera mine in Malawi) as part of the company's efforts to cut costs. Analyst Andrew Shearer said the Kayelekera mine was unlikely to be profitable at present prices, but the decision was complex: ''They would have to weigh up the cost associated with putting it on care and maintenance and whether they have any contractual agreements in terms of uranium sales.''

As Paladin does not make enough profit at current uranium prices to meet its debt repayments, the company will once again try to sell down its stake in its Namibian mine. Extra funding is needed to repay $US300 million in convertible notes that mature in 2015.

As of late August, Paladin's share price was $0.56, barely one-tenth the figure of $5 the day before the Fukushima disaster.

According to Fairfax journalist Peter Ker, Paladin's "parlous state has some whispering about executive renewal".

Paladin said on last Wednesday that it would cut more jobs and reduce spending. Executive pay was reduced in 2012/13, with Borshoff's remuneration slashed to $2.5 million per annum − less than half the amount he received in the previous year. Costs at the Kayelekera mine will be cut by 22 per cent over the next two financial years and costs at Langer Heinrich will be reduced by 15 per cent.

Dr Jim Green is the national nuclear campaigner with Friends of the Earth, Australia.