U Sector Synopsis: Looking Forward to 2010

Uranium Weekly (01/07/2010)
"Uranium is an unusual commodity mined similarly to base and precious metals, but linked to a tightly controlled energy-generation sector, which is juvenile compared with oil and gas industries and the industrial metals.

The sector, broadly speaking, has witnessed three former stages of commodity pricing:
  1. Inventory building;
  2. Inventory offloading;
  3. HEU reprocessing and inventory whittling.
We are currently experiencing a paradigm shift in the uranium market with a continued reliance on secondary supplies with an uncertain future, the advent of Tier II producers and growth and diversification of the reactor unit base, particularly across non-OECD countries that require infrastructure development to foster continued GDP growth.

The nuclear cycle is a high CAPEX, stratified industry whereby the frontend (primary production) is an important but tiny component of the electricity-generation business. Commodity prices, whilst only a small proportion of a reactor's OPEX, are moderated on pure supply-demand fundamentals that capture the production cost curve, as well as enrichment facility spare capacity (flexibility to underfeed) and geopolitical machinations on inventory handling, reprocessing and highly enriched uranium down blending.

The uranium spot market has behaved counter cyclically to the group of commodities as a whole over the last year, despite the fact that uranium has a solid demand growth profile that is highly reliant on secondary sources and a highly concentrated production supply base, making it prone to inelasticity.

Whilst the uranium equities have predominately delivered positive returns in 2009, their performances are largely correlated closes to spot price, as well as other event-driven stimuli (e.g., Olympic Dam and DOE inventory transfer). We believe that much of the downward pressure on the commodity price (spot: US$44.50 lb.-1 U308) correlated to both the exchange of significant material from funds and other non-producing parties into the largely discretionary spot market (>50 Mlb U308 traded in 2009), negative sentiment surrounding the uncertainty of the U.S. Department of Energy's (DOE) surprise exchange from its inventory for D&D cleanup at the Portsmouth Diffusion Plant in Ohio.

For early 2010, we believe that uncertainty surrounding DOE's action will still could the market in the short term, but we consider that given our expectations for moderate growth in uranium production and continued growth in demand, mainly from non-OECD countries, as well as renewed discretionary budgets for utilities and continued inventory building from China, that uranium prices are likely to recover."

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