Economics of Uranium boom - Aussie Stock Forums

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  1. #1
    Pommiegranite's Avatar
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    Apr 2007

    Default Economics of Uranium boom

    I'm latecomer to investing in this Uranium boom. I've jumped on the bandwagon and thrown in a few $k to help keep your portfolios in triple digit % increases. How nice of me!!!

    In turn it would be appreciated if you guys could brainstorm with me about this boom please, so I can learn a thing or two. Please excuse my lack of expertise :

    These days it seems as though every man with a shovel and a bit of dirt is exploring for Uranium. Okay! It's an unashamed exaggeration, but I hope you get what I mean.

    Fast forward 2,3,4 years into the future when many of these companies have carried out their exploration/drilling, and are now constructing mines, started production. Surely the situation now will be that there is so much Uranium being produced that even China and India will be well fed.

    Doesn't this mean that the price of Uranium will be substantially lower than it is today?

    Well not according the the bullish nature of many posters on some forums.I don't understand why people are measuring the future profitability of a Uranium miner on how much resource they have buried under the ground. Surely the economic factors of supply/demand is just as, if not more important than the buried resource factor.

    A lot of these feasability studies are coming back with mining costs of 20-30$ per lb. Can somebody point me in the direction of realistic P&L forecasts of any of these companies taking into account economic factors?

    I get the impression that this boom is a case of super growth for the next couple of years, then serious correction once supply meets demand, followed by steady sensible growth afterwards.

    Or am I missing something?


  2. #2

    Default Re: Economics of Uranium boom

    Quote Originally Posted by Pommiegranite View Post
    I don't understand why people are measuring the future profitability of a Uranium miner on how much resource they have buried under the ground. Surely the economic factors of supply/demand is just as, if not more important than the buried resource factor.
    I'm not into U stocks although I will try to answer this question very simply, as for a U exploration company the supply / demand is very important as with any material. Do some research on this, from what I have read demand exceeds supply for some time yet (an old link but a good read http://www.kitco.com/ind/GoldReport/jun082005.html).

    If you don't measure a exploration company with what it has in the ground, all you have is the Book Value, which can have very little reflection by its self, on Future Value and the potential of the company.

    Many companies would have similar book value and make it very hard to determine a bad stock from a good stock, or a good stock from a great stock.

    Also crunch some numbers on $20 - $30 per pound mining costs at say 2600ppm of U
    2600ppm x $115 per pound = $299 000 per meter
    minus $30pp = $221 000 per meter after costs
    Adds up quickly even know its seems like a lot of money to mine.

  3. #3
    explod explod's Avatar
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    Mar 2007
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    Default Re: Economics of Uranium boom

    Till you get on your feet so to speak it may pay to stay clear of the specs at this stage. BHP have the largest known U resource in Australia at this time. Pay a good dividend and the way things should continue with the expansion in China, India, South Africa to Europe as well there will be nice capital gains also. Dont' quote me I am not an advisor but some so called are sayin BHP will hit $38 to $40 by the end of 07.

    JMHO (Just my humble opinion) and any resemblance to the real facts may be pure coincidence
    Last edited by explod; 15th-May-2007 at 10:50 PM. Reason: spelling

  4. #4

    Default Re: Economics of Uranium boom

    I can certainly see where you are coming from Pommie. It's common sense economics that the high prices we are currently experienced will encourage new entrants which will increase supply and reduce the price.

    But I think the best explanation for the massive boom in uranium company valuations and the U-price itself is the uncertainty surrounding the timing and strength of the supply-side effect you mentioned. After many years of under investment due to low U-prices, there is limited ability for existing producers to ramp up production (the Olympic Dam upgrade won't increase supply until 2013!!) and don't forget the lack of skills, equipment, electricity, water and transport/access at the site (plus regulatory/political risk). Building (and getting the approval, indigenous title clearance and infrastructure in place) a uranium mine taken close to a decade so it is unlikely that significant supply (at least from newly discovered deposits anyway) will hit the market. I know this is the case for Australia (where most of the world's reserves live) but there could be similar circumstances in uranium producing industries abroad as well.

    I don't have the precise numbers/facts, but the demand-side projections are also amazingly in favour of sustained high U-prices. No doubt someone could come up with some figures of the number of planned nuclear reactors in Chindia approved or awaiting approval. Plus U appears to be out in front as the 'answer' to global warming, all things considered. Not to say that it is the 'best' 'answer'/solution but it seems to have to most comfortable foothole and broad-based support of economists, politicians and policy makers. If not in Australia so much but certainly in Asia and it has for a long time in the US and Europe.

    I don't even foresee demand conditions changing - and even with the higher prices I can't see demand pulling back in price-response. Why?

    1) long-term nature of electricity supply contracts mean if U gets too pricey you can't just "turn off" a nuclear reactor and in many countries where nuclear power is very well established (eg. Europe) it could cost more to decommission a N-plant than keep it running.

    2) a carbon-tax / carbon-trading / Kyoto (all distinct possibilities indeed) would make U-power relatively cheaper because it produces 0 carbon emissions (since there is no 'tax' on depleted U, then the emergence of any "price" if you will, on carbon emissions, would make even high-priced U-power seem less expensive than it is today = more U demand.

    These are just my opinions and on disclosure - I do have +10% of invested funds in U-exposed assets. But as an economist I can see your point and yes, long-run equillibrium will eventually occur through the substitution effect and price-signalling mechanism.

    But the point I have tried to make is the [B]time[B] dimension that a supply-demand analysis has the inability to cope with. Remember a supply demand analysis is static - one its biggest weaknesses. The supply side effect of high prices, for structural reasons, will be slow to adjust (I think 10 years minimum before S-side will even start to affect the U-price) and I also worked through a few more reaons (other than the huge number of planned/in-construction N-plants expected in the next 10+ years we have to wait for significantly more supply to come on stream) why the demand situation is price inelastic itself, as well as likely to shift continually right/up.

  5. #5

    Default Re: Economics of Uranium boom

    Mining Weekly - Uranium market to stay tight until 2012, maybe beyond - Rio Tinto By: Matthew Hill published: 22 May 07 - 10:50

    The global uranium market was expected to remain tight for at least another five years, and maybe more, diversified mining giant Rio Tinto said on Monday. “The market is likely to be tight to 2012, and potentially beyond,” Rio Tinto energy CE Preston Chiaro said in a presentation posted to the company’s website, citing the World Nuclear Association.

    This was as companies scrambled to find uranium resources and bring them into production, in order to take advantage of the record spot prices that the nuclear fuel was fetching. The uranium spot price reached $120/lb in May, many times higher than the average spot price in 2004 of less than $20/lb.

    Gold majors in South Africa were eyeing opportunities in their yellowcake-containing slimes dams and mine dumps, with AngloGold Ashanti, Gold Fields and Harmony all discussing their uranium plans in the March quarter results announcements.

    Meanwhile, on Monday, Canada-based Uranium One said that it was moving closer to yellowcake production at its Dominion mine in South Africa.

    Chiaro said that Rio Tinto was busy with a project to extend the life-of-mine at its Rossing uranium mine, in Namibia, which began production in 1976. The extension cost a total of $112-million, and further extension potential was also being investigated. Rossing currently produces some 3 500 t of U3O8.
    DYOR, I win, I lose - "Any sufficiently advanced technology is indistinguishable from magic." A C Clarke

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