Much was said about uranium's atomic price rise to US$135/lb in June 2007, after having dwindled in the $20/lb range for decades. Sure, that was only the spot price, which makes up a minute part of the market, but the frenzy it created launched producers' share prices like missiles.
Take homegrown Uranium One, for example. The company had headed the merger-and-acquisition mania in the sector that heightened as the spot price for the fuel peaked. Then everything fell apart - both for the company, which had to take impairment charges of billions of rand for its failed Dominion mine in SA; and for the uranium market when the spot price tumbled below $50/lb.
But the TSX- and JSE-listed miner wasn't alone in its rapid descent. Another SA producer First Uranium also tumbled from lofty heights of around R80/ share. This week it was trading around R16,15. Producers elsewhere couldn't escape the cancer either.
Now, some calm seems to have returned to uranium markets, with both the spot price and the contract price showing considerably less volatility. Still, miners of the metal haven't enjoyed nearly the same recoveries as other commodities. Platinum and copper, for example, have doubled in price from last year's lows.
The uranium spot price is now chugging along at about $50/lb, with contract prices at $60/lb. Why has the price not responded to the improved market sentiment? Speaking at the international Mining Indaba in Cape Town this week, Gene Clarke, CEO of US-based uranium consultants TradeTech, said the main factor has been so-called secondary supplies. This refers to uranium stored in nuclear warheads being reprocessed for use in nuclear power generation.
Clarke quips: "Making nuclear warheads just turned out to be a storage mechanism." Russia, for example, has been dismantling its nuclear arsenal, blending the uranium fuel and sending it to the US for commercial use. In fact, half of the uranium powering US nuclear plants now comes from this source.
"Since nuclear is 20% of the US's electricity, Russian nuclear warheads are supplying 10% of America's electricity," Clarke says.
This programme is set to expire in 2013, however, when Russia will have dismantled about half of its nuclear warheads. The US has also built up stockpiles of uranium over the past 40 years, but these supplies have been run down as operational problems have curtailed mine production. An example here is the flooding at Canada's big Cigar Lake mine.
A lot is happening on the demand side and the China factor will have a significant effect on the uranium industry. According to the World Nuclear Association, there are 437 nuclear power plants operating globally. An additional 56 are under construction, while 100 are planned and 270 or more have been proposed.
If all of these were to come to fruition, the number of nuclear reactors will double over the next two decades.
China produces about 2% of its power from nuclear sources, which is set to rise to about 5%. Clarke says this means that by 2025 China will be consuming half of global uranium production.
The Asian powerhouse has been rushing to bring new generation capacity to meet the demands of rapidly increasing urbanisation. Much of this has been fuelled by coal, but climate change concerns mean nuclear will have to play a more meaningful role, as it will in India.
According to Clarke, the political winds have also been shifting with regard to nuclear energy in Germany and the UK. Both countries had over the past couple of decades been moving away from nuclear power, decommissioning plants.
"Rather than shutting down their nuclear plants, at least they will maintain the currently operating plants in Germany and probably expand with new ones," says Clarke.
SA was supposed to have announced the preferred bidder to build a nuclear plant in the Western Cape early last year, but government called off the process because of funding problems that emerged after the global financial collapse.
France's Areva and Japan's Westinghouse were on the short list. Government says it still intends building more nuclear power plants (the first and only one was built at Koeberg in the 1980s), but it has not indicated when.
On the supply side, the rapid emergence of Kazakhstan as a major producer has prevented a significant shortfall. Last year the country became the world's biggest uranium producer. Seven companies produce about 80% of the world's uranium, including Areva, Cameco, and Kazatomprom.
"We have a situation where secondary supply will be decreasing and primary demand will be increasing. We need new uranium production, quite a lot of it in fact. What once looked like a huge oversupply situation, actually looks fairly tight," says Clarke.
"Since nuclear is 20% of the US's electricity, Russian nuclear warheads are supplying 10% of America's electricity" - GENE CLARKE
Steve Galloway, the chairman of Australian uranium explorer Extract Resources, says a supply shortage is likely by 2014-2015. His company is looking to bring its Namibian Rossing South Project on stream in 2013. It is expected to produce 15m lb/year, making it the second-biggest uranium mine in the world, after Canada's McArthur River.
So, what does the looming supply shortage mean for producers? Higher prices are likely to come as the shortage becomes a reality.
Clarke predicts the spot prices will stay around $40-60/lb for the next two years. Any significant disruptions to supplies could push it up to $80/lb, he says, calling for a long-term contract price of $55-65/lb.
WHAT IT MEANS
 Uranium supply shortage looming
Some miners to benefit more
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Uranium miners will benefit from this. But there are big differences between SA's uranium counters. Uranium One, for example, has no producing assets in the country, with the bulk of its production coming out of Kazakhstan. CEO Jean Nortier this week announced a 400% increase in its reserves in that country. First Uranium, on the other hand, only has SA assets (though it has said it plans on buying North American projects).
Both companies have risks that come with the geographies in which they operate. Kazakhstan, though it has proved to be relatively stable, is still perceived to carry the risks that plague many of the so-called "stans", or former Soviet states, some of which mirror those in SA. SA's risks include looming power price hikes, above-inflation wage increases, and, as First Uranium learnt last month, regulatory risks. The government of North West province last week withdrew its environmental authorisation for a tailings project.
Uranium One's share price has more than doubled from last year's lows to R24,19, while First Uranium's has dwindled to about R16. There is still room for upside at Uranium One as its Khazak production ramps up. Its assets in the US also offer geographical diversity, something First Uranium lacks for now.
