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Market Analyses

TradeTech President Speaks at Australia Uranium Conference
On July 22, TradeTech President Treva Klingbiel spoke at the Australian Uranium Conference. Her presentation, entitled The Outlook for Uranium, focused on market developments affecting price, including the impact of a very active Asian market for uranium, as well as the supply and demand outlook, and the near-term uranium price forecast. [top]

Nomura Anchor Report: Nuclear Power/Asia Pacific
Dr. Gene Clark, CEO of TradeTech provides an overview of the current state of the uranium industry, including an analysis of the historical and future price outlook for uranium, in Nomura International (HK) Limited's recent Anchor Report: Nuclear Power/Asia Pacific. Clark also provides a regional analysis of China's growing nuclear power industry, including the country's search for uranium to fuel reactors currently under construction and planned for the future. To read Dr. Clark's portion of this report, click here. [top]

Spot Price Impact of DOE Uranium Disposition Program
The following is the In Focus piece of the November 13, 2009, edition of the Nuclear Market Review.

US Secretary of Energy Steven Chu announced his Department’s determination that there would be no material impact on the US domestic uranium industries of its planned program to dispose of excess uranium stocks in order to provide funds for accelerated decontamination and decommissioning (“D&D”) of the Portsmouth enrichment facility. TradeTech has conducted its own internal study of the impact on the uranium market of this disposition plan. For this study, TradeTech relied on its standard short-term uranium price model (used in its published market studies) to project spot prices with and without the D&D transfer program. This model is based on the historical relationship that spot price has to TradeTech’s reported Active Supply and Active Demand, published monthly in our Nuclear Market Review.

As shown in Figure 1, when Active Demand (yellow bars) rises, the price also rises in general. For example, the demand spike in early 2005 was accompanied by a moderate price rise (red line). Conversely, when Active Supply (blue line) falls, there is generally an accompanying price rise. The long sustained rise in demand over the January 2005 to January 2007 period, coupled with the sustained drop in Active Supply was accompanied by the historic price rise to its record level in June 2007. Analysis of these data shows that price is more sensitive to variations in Active Supply than to the same level of variation in Active Demand.

TradeTech assumes for this study that USEC or any other D&D contractor sells the transferred uranium in one spot market action per quarter, and that this uranium is added to the projected values of our active supply for the last month in each quarter, beginning in December 2009. The resulting impact, shown in Figure 2, is a drop of about $4 per pound U3O8 in the average spot price for 2010 and about $7 per pound U3O8 for 2011, compared to prices projected in the absence of this program. In percentage terms, these correspond to drops of 8% and 14% for the respective years.

TradeTech’s analysis considers only the uranium disposition for the D&D program, as the other parts of DOE’s disposition program (TVA off-spec, NNSA funds, etc.) were already included in our base analysis.

A copy of the Secretarial Determination is available at: http://nuclear.gov/pdfFiles/Secretarial_Determination111009.pdf.
The market impact analysis, on which the DOE’s determination is based, is available at:
http://nuclear.gov/pdfFiles/PotentialMarketImpactAnalysisforTransferDOEUranium.pdf.[top]

Uranium seen at $80 per lb by year-end-TradeTech
Editor's Note: The uranium price record high was $138 in June 2007.

TradeTech CEO Gene Clark was a speaker at the Mining Indaba conference in Cape Town, South Africa on February 9, 2009. His presentation will be available on TradeTech's Web site in a few weeks.

In the meantime, Reuters Africa's coverage of Clark's presentation can be found at: http://af.reuters.com/article/metalsNews/idAFL951034820090209.
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Suspense in the Suspension Agreement!
The following is the In Focus piece of the January 25, 2008, edition of the Nuclear Market Review.

This week’s news that the signing of the US-Russian Suspension Agreement amendment has been postponed is yet another chapter in the continuing saga of trade restrictions in nuclear fuel. And probably not the last chapter. The industry has a wide range of views about the significance of this event, depending on the perspective of the party expressing the opinion. On one end of the spectrum is the opinion that this is just a minor delay, for administrative reasons. At the other end of the spectrum is the view expressed that “The deal has blown up!”

It is widely believed that the US Department of Commerce (DOC) initiated the postponement in the signing, originally scheduled for this coming Tuesday. The reason for the delay seems to be related to DOC’s inability to address in a timely manner some issues raised during the public comment process in the USA. The extent to which these issues have been articulated to the Russian side and the extent to which the Russian side objects to DOC’s resolution of the issues (if there has been any resolution) is a bit murky.

Some in the industry have raised the specter that Russia may be holding hostage the year 2008 deliveries of enriched uranium under the Megatons-to-Megawatts Program “Russian HEU Deal”), until the Suspension Agreement amendment is finalized to their satisfaction. The prevalent rumor in this regard is that these deliveries have not yet been scheduled by the Russian side. Although Russia is certainly in a position to use these deliveries as leverage (and has done so, for example, in the case of natural gas), it is unclear whether the constraint is related to the Suspension Agreement situation or the ongoing negotiations with USEC and the western uranium group on the price for SWU and feed under the HEU deal. Or even whether the issue is really related to a reported new Russian government administrative requirement for approval of the schedule.

So, what does all this mean for the nuclear fuel markets? Consider first the suspension agreement situation. Even if the pending amendment “blows up,” the maximum annual quantities of uranium and SWU in the proposed quotas would have been minor in the early years, discounting any amount covered by the special provision for initial core material. Starting in 2014, the amounts would be much larger but still only half the current annual amount under the Russian HEU Deal. But, where would this uranium come from, given Russia’s ambitious plans for its own nuclear power program and decreasing supply from Russian stockpiles? Thus, the uranium side seems to be a secondary issue.

Enrichment could be another matter entirely. But the Suspension Agreement amendment per se could have little impact on the enrichment market, given the current US court findings that “SWU is a service, not a product” and, thus, not covered by US antidumping and subsidy law. A legislative fix to overturn the courts’ finding under existing US law would be required to change this situation, but it is not clear if there is a good prospect for such a legislative outcome.

Next, consider the current commercial discussions about future SWU and feed pricing under the HEU Deal. There is first the question of how strong the Russian position is under the provisions of the existing contracts. Secondly, the last time the commercial aspects of the HEU Deal were in question, shipments of enriched uranium were indeed deferred until resolution of the commercial terms, but the production facilities in Russia kept in operation in anticipation of commercial resolution, with the result that there was no cumulative shortage of supply over the course of the year.

Of course, the past is not prologue, so every new situation must be judged in light of its own circumstances. It seems clear that Russia has the means to impact the supply situation through its implementation of the HEU Deal. The real question is whether there is enough incentive for them to do so.
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In Suspense Over the Suspension Agreement
The following is the In Focus piece of the November 30, 2007, edition of the Nuclear Market Review.

Earlier this week, the US and Russian sides initialed an amendment to their Suspension Agreement, which was put into place in October 1992. Under the current terms of the Agreement, Russia has been effectively barred from direct sales of its uranium products to US utilities, with the exception of a portion of the feed component of the Russian HEU Deal. The initialed amendment attempts to address some of the major issues that have been festering for years, and some issues anticipated to arise in the future.

One of the issues looming on the horizon has been Russian access to the US market, upon expiration of the HEU Deal at the end of 2013. Under the current structure of the Agreement, Russia would have been barred completely from this market. The HEU Deal has been providing Russia access indirectly to the US market, by sales of about 5.5 million SWU annually to USEC (for redelivery to its customers) and up to 16 million pounds U3O8 equivalent (for 2007) of the natural feed component to the Cameco/AREVA/Nukem group. The amendment would allow Russia to provide up to 20% of US utility requirements for enriched uranium from 2014 through 2020, at which oint the Suspension Agreement would be terminated along with the underlying dumping investigation, and Russia would then have unfettered access to the US market. This 2014-2020 level represents about half of the annual quantities being delivered under the HEU Deal.

In addition, Russia would be permitted to contract, immediately upon finalizing the amendment, for the sale of enriched uranium directly to US utilities for delivery in the 2011-2013 period, prior to the expiration of the HEU Deal. These sales would be equivalent to about 500,000 SWU and almost 2.2 million pounds of U3O8 (or 825 tU as UF6), as shown in the figure.

There are some exceptions provided for in the initialed amendment. A potentially very important one is that Russia would be allowed to sell enriched uranium for initial cores of US reactors, and these sales would not be part of the limit specified above. A further additional quantity, imported earlier to guarantee performance under certain enrichment contracts grandfathered in the original 1992 Suspension Agreement, could be sold without counting against the above quotas, as long as such sales occurred prior to January 1, 2014.

Several other provisions are important to point out. Firstly, any multi-year contracts approved by the US Department of Commerce (DOC) under the quota or for exempted sales would be themselves grandfathered, in that such contracts would be honored no matter what later changes to the Suspension Agreement were made, including termination of the Agreement. Secondly, the amendment would remove the quantitative limits on Russian uranium imported into the USA for processing and re-export; thus, unlimited amounts could be imported for such purpose.

There are some important factors “glossed over” by the general language of the amendment. For example, the quotas cited above and shown in the Figure are expressed in terms of annual kilograms of enriched uranium at a product assay (enrichment level) of 4.4% U-235 and a tails assay of 0.30%. It is not at all clear that US utilities would be able to accommodate that product assay for the whole quota amount, or that 0.30% tails would be a commercially applicable value over the life of the Agreement. Thus, it may be a case of “The devil is in the details.”

Finally, perhaps the most important parts of the Amendment deal with ongoing legal issues. On one issue, the DOC agrees to the terms of the September 26, 2007 remand of the US Court of International Trade in TENEX’s lawsuit against DOC. Furthermore, DOC agrees not to appeal the decision. We believe this means that DOC will revisit its last “sunset review” of the Suspension Agreement, excluding enrichment services from consideration, since the courts have ruled in a Eurodif lawsuit that enrichment is a service, not a product, and thus not subject to US antidumping laws.

On a related issue, one section of the amendment states that the Suspension Agreement will be applied consistent with any applicable decision of the US Courts, including the Eurodif decision (“SWU is a service”). This section seems to say, as interpreted by several affected parties, that Russian sales of purely enrichment processing services (as opposed to enriched uranium or “SWU plus feed” deals) are not subject to the Suspension Agreement. As such, it would seem to give Russia unfettered access to the US market for enrichment services, as long as the commercial terms of the contracts can be demonstrated as for the service of enrichment only. As stated at the beginning, this amendment is an “initialed agreement”—not an approved and signed one. Thus, it is likely subject to change before finalizing. To this end, DOC has indicated that the proposed amendment will soon be published in the Federal Register for public comment, and presumably the initialed agreement still faces the review of higher authorities in Russia. Thus, the situation should probably be considered at least somewhat fluid, but maybe with the broad principles of the amendment reasonably stable.
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Uranium In the Shadow of the Iron Maidens
The following is the In Focus piece of the November 16, 2007, edition of the Nuclear Market Review.

Although uranium doesn’t show up in most press reports about the current corporate takeover battle between BHP Billiton and Rio Tinto, the outcome of this “battle of the behemoths” certainly will impact the nuclear fuel industry. BHP Billiton’s unsolicited takeover offer, reported at a value of US$139 billion, is touted as being the biggest in history and would create a company that, according to a report in Australia’s Herald Sun, would be “in charge of more than a third of the world’s iron ore and coal; it would be the world’s biggest producer of copper and aluminium as well as controlling great swathes of nickel, zinc, lead, uranium, oil and diamonds.”

In the uranium arena, the mega-company from such a merger, if it occurs, would cumulate ownership of the second, third and fifth largest uranium operations in the world, based on 2006 output. These two companies combined were responsible for over 25 percent of world uranium production during 2006 (Figure 1).

While this is the short-term effect on the uranium industry, a larger question is to what extent the aftermath of the merger battle will impact the Rössing extension and the proposed expansion of Olympic Dam (Figure 2). If nothing else, the follow-up process of rationalizing the merged operations of these companies would likely delay the timing of these projects. More importantly, any protracted takeover battle might have the effect of weakening the ability to finance the projects. The Olympic Dam expansion is particularly important, because of its enormous size—comprising 13-14 percent of world production capacity in the WNA’s Reference Case.
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Transparency Maintains Historical Relevance in Nuclear Fuel Market
The following is the In Focus piece of the October 5, 2007, edition of the Nuclear Market Review.

Transparency, or the ability to readily understand a market because pricing and contract terms are open, has never been a hallmark of the nuclear fuel industry. The steady price decline over the past year has made this characteristic even more pronounced.

In times of declining prices, traditional and non-traditional sellers seek to place material by motivating inactive buyers with aggressive offers. And buyers, anxious not to miss the bottom of the market, hold out until they perceive (rightly or wrongly) that the market is about to enter an upswing, often purchasing large blocks of material off-market in a “buy-and-hold” strategy. As a result, information about current transactions often becomes obscured and/or delayed behind this “off-market” curtain. Certainly, this has been the case for the past few months, with a number of off-market transactions concluded, and likely will remain so until the price turns upward and sellers become more open about their marketing successes.

While this is certainly the case in the current market, what's most interesting about the paragraph above it that is that it first appeared in the July 1997 issue of the Nuclear Market Review describing the market events at the time. Clearly, while much has changed in the uranium market since then, some things—such as the purported desire for transparency—have not.

Yet, ten years later are we focusing on the symptom rather than the real issue? Is the real problem transparency or liquidity? Today, most uranium continues to be sold as it was 10 years ago—in the long-term market and supplied from primary production (see chart). As Laura Holgate, VP for Russia/New Independent States Programs at the Nuclear Threat Initiative, stated at last week’s Platts Nuclear Fuel Strategies conference “there is nothing sadder than a nuclear reactor without fuel.” Although utility fuel buyers are generally more prominent in their management’s focus now than they would like, this level of attention is nothing compared to the wrath that they would incur by not having the uranium to fuel a nuclear power plant.

The real issue seems to be the fundamental structure of the industry itself—the long lead times inherent in the fuel cycle, the cost of maintaining inventory, and the need for producers to have bankable contracts to finance project development and expansion. These characteristics of the uranium industry make the application of contracting and pricing structures used in other fuels and commodities to provide liquidity and transparency problematic.

Two market instruments have often been cited as missing from the uranium market: futures and options. These features are used to allow some participants to hedge prices while others speculate on prices. Although there have very recently been attempts to add these explicitly to the arsenal of market participants, the market has been slow to adopt them. Perhaps its because the nuclear fuel market has already had its own adaptation of these concepts for the past 30 years.

Nearly every long-term uranium contract has some provision for annual quantity flexibility on the buyer’s part. This flexibility is, in effect, a series of options—with the price of the options embedded in the pricing terms of the minimum quantity under the contract. Likewise, a base-escalated long-term contract is a physical futures contract, by virtue of the deterministic nature of the price mechanism.

As crude as these widely used features of long-term contracts are, most market participants seem to have found them adequate for their needs—perhaps explaining the reluctance to move to the more formal offerings of these features. Could it be that most producers, utilities, and traditional traders don’t realize the market is broken? Or, that it’s not broken enough?
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Springing Forward and Falling Back—Uranium Market Experience
The following is the In Focus piece of the August 10, 2007, edition of the Nuclear Market Review.

In its newly released report Uranium 2007, TradeTech points out that the spot uranium market has been through a tumultuous period for the last three and a half years, characterized by a series of upward price jumps, as shown in Figure 1. The largest jump in one week was $18 per pound U3O8, which occurred within two weeks after Rio Tinto’s announcement of the Ranger mine flooding in late February 2007. The combination of robust demand and sellers’ expectations of future price increases continued to exert upward pressure on the spot uranium price, until June of 2007. As shown in the figure, in the fourth quarter of 2006, active supply of spot uranium was at its lowest level on record, and lower values of active supply, especially when preceded by rapid changes in supply, are nearly always accompanied by increasing prices.

After reaching its all-time low of 1.3 million pounds U3O8 in October-December 2006, the active supply of uranium started to recover—to a level of about 2.7 million pounds U3O8 by the end of July 2007. Simultaneously, active demand dropped precipitously, from a peak of 6.3 million pounds U3O8 in November of 2006, to below the level of one million pounds U3O8. With this very low demand level and reasonably high active demand, the spot price turned over, dropping from $138 per pound U3O8 to $105 in 6 weeks.

As for the future, it seems to be a popular notion that demand seasonally picks up in the Fall each year, and thus the price may recover this coming Fall. As shown in Figure 2, there is no empirical evidence of a cyclical pattern in the spot demand for uranium. At best, the historical data show a lower (or for 2003 an average) demand for the summer months of June and July. The phenomenon of higher than average demand for the Fall has really only occurred recently for the year 2006, and that increase is mostly attributable to the actions of the speculator segment of the buying market, in the aftermath of Cameco’s announcement of flooding problems at Cigar Lake.
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Apples and Oranges or The light is better over here...
The following is the In Focus piece of the June 15, 2007, edition of the Nuclear Market Review.

Some in our industry erroneously confuse the mechanics of the spot market with the fundamentals of the long-term market. Their arguments allege that the spot market is inefficient because its price does not reflect market “fundamentals”—by which is typically meant the long-term supply-demand balance. Such allegations run the risk of comparing apples to oranges.

Let’s examine the allegation that the spot market price should signal the fundamentals of future supply and demand balance. First, why should the spot price ever reflect the supply-demand balance in the long-term? It doesn’t in any other market, so why should uranium be so special?

The fact is that the spot price does reflect fundamentals—the fundamentals of the spot market. In this sense, it is no different than most other commodities. For example, Figure 1 shows the London Metal Exchange (LME) cash (“spot”) price for nickel, along with the stocks of nickel in LME-approved warehouses. Note the striking inverse correlation between the two. When LME stocks dropped, in recent months to below one day’s worth of global nickel consumption, the spot price reflected this fundamental supply shortfall by rising 300 percent since the stock decline started a year ago.

Lest you believe that nickel is anomalous, let’s consider lead. Figure 2 shows that, in the first half of 2006, LME stocks of lead rose by a factor of three. Guess what happened to the LME cash price of lead: it fell from a high of US$0.67 per pound down to a low of $0.42 over that period. Then, from the peak level in June 2006, lead stocks dropped by three-fourths over the next eight months. And, it should be no surprise that the LME spot price of lead rose from its low of $0.42 per pound up to almost $0.95 per pound over that period.

Copper, aluminum, zinc… The list goes on with similar behavior. Uranium is no different than these highly traded metals. Figure 3 shows TradeTech’s data on spot volume (“demand”), active supply (our survey results of the amount of uranium available to be offered for sale over the upcoming period) and the average spot price for the corresponding quarter. The active supply series is, by our reckoning, analogous to the LME stock for a commodity, and the spot price is analogous to the LME cash price. Note that significant drops in active uranium supply are nearly always accompanied by increases in the spot price.

The second quarter of 2004 was, up to that point, the lowest level of active supply on record, and occurred at the onset of the current price run-up. The second half of 2006 exhibited even lower levels of active supply, occurring during the run-up to unprecedented high prices.

You would not find your reading glasses helpful for driving, any more than you would expect short-term uranium market dynamics to have any significant relevance to the long-term supply-demand picture. Let’s not adopt the attitude of looking for our lost glasses under the street-light, because the light is better there. Rather, let us apply short-term market fundamentals to the short-term market, not long-term fundamentals.
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TradeTech President Discusses Uranium Prices at U2007 Conference
In the next two years, demand for uranium is expected to continue outpacing uranium production, TradeTech President Treva Klingbiel told attendees of the SME U2007 conference in Corpus Christi, Texas, on May 21, 2007.

Klingbiel, whose presentation was entitled “Uranium Price Formation,” outlined a history of uranium prices from the inception of price reporting in 1968, by TradeTech predecessor NUEXCO, to today’s spot price of more than $120 per pound U3O8. “The market situation could, however, stabilize or even go into surplus, especially if speculators, who control an estimated 20 million pounds U3O8, start to sell their stockpiles,” Klingbiel said.

In an interview with Sean Brodrick of The Market Oracle, Klingbiel explained that a shortfall at any big project could quickly send prices much higher, such as the price spikes that followed recent flooding incidents at Canada’s Cigar Lake mine and at the Ranger mine in Australia’s Northern Territory. Another turning point will occur when the “Megatons to Megawatts” program, which converts Russian nuclear warheads into commercial nuclear fuel, comes to an end in 2013. “That could be a long-term problem,” Klingbiel added.

Note: U2007, sponsored by the Society for Mining, Metallurgy and Exploration, was held in Corpus Christi, Texas on May 21-24. The conference theme was “Taking U into the Future.”
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The Long-Term SWU Price Indicator—Caveat Lector!
The following is the In Focus piece of the March 23, 2007, edition of the Nuclear Market Review.

In spite of the never-ending quest for simplicity, complexity is always a force to be reckoned with. This is especially true in the evolving nuclear fuel markets. Uranium, conversion, and enrichment have shifted markedly over the past three to four years from buyers’ markets to sellers’ markets. With those shifts in market power have come shifts in the nature of long-term contracting as well. For example, buyers’ optional flexibility in annual delivery quantities for new offers has long gone from the marketplace, after the prolonged period in which buyers could obtain as much as ±40% annual flexibility.

Pricing terms also change with shifts in market power—with the prevalence (or even existence) of floor prices in market-price contracts, ceiling prices, discounts from market price and other such factors shifting as the market shifts. One area we believe important to point out is the set of factors used to escalate enrichment base prices, to obtain the delivered price.

In the past period of the simple buyers’ market, the escalation factor was typically a general measure of monetary inflation, such as one of the US Implicit Price Deflators. Although designed to reflect the producer’s increases in cost of production over the long term—due to such factors as fuel prices, labor wage rates, and the cost of chemicals—lurking beneath this simplistic approach was a sea of complexity being internalized by the producer in its price offers.

For example, most international enrichment contracts have traditionally been denominated in US Dollars. However, AREVA’s production costs are incurred for the most part in Euros, and Urenco’s in British Pounds and Euros. This pricing structure has left European enrichers open to currency exchange risk. In the interest of prudence, these risks must be hedged, at an internalized cost to the enricher.

Although USEC is not typically open to this currency-exchange risk, it has other cost factors that do not always track general inflation factors. Of recent interest is USEC’s electric power costs, which escalated by 50% overnight last year, with the end of special pricing terms in its power contract with the Tennessee Valley Authority.

With the shift to the current sellers’ market, enrichers have been able to off-load many of these risks to buyers in their new contracts, by using escalation factors that reflect (among other things) currency exchange rates and power costs rather than indicators of general monetary inflation.

What is the implication of this shift on the Long-Term Price Indicator for SWU? Caveat lector (let the reader beware): because the same base price (as specified in new offers) is still being reflected in the Indicator, its definition and derivation have remained unchanged over time; however, the evaluation of delivered prices to be expected has evolved with the shift in the market. An evaluated price in a new enrichment offer would be likely be significantly higher that of an identical base price from an earlier period, because of the expectation that these new escalation factors will be higher than the general rate of inflation and because the buyer must now incur the cost of hedging these factors.
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Uranium Price Reaches All-Time High—The Outlook for Nuclear Power and Uranium Demand
The following is an excerpt of a speech presented by TradeTech President Treva Klingbiel on February 27, 2007, during the SME Annual Meeting & Exhibit and the 109th National Western Mining Conference in Denver, Colorado.
 
Today’s uranium spot market price of US$85 per pound uranium oxide (U3O8) is the highest since prices were first published in 1968. The spot price for uranium has increased dramatically over the past two years in this demand-driven market. The fundamental requirements for uranium are not determined by price, but rather by the operational needs of the power plants using uranium fuel. Presently, there are 435 nuclear power plants operating in 30 countries that require uranium to generate electricity. And, there exists strong growth potential for nuclear capacity worldwide. Outstanding performance and concerns about greenhouse gases are primary factors supporting the growth of nuclear power, according to The Outlook for Nuclear Power and Uranium Demand, by TradeTech President Treva Klingbiel.

Performance of commercial reactors has improved significantly over the past two decades. The fleet average capacity factor has improved from less than 60 percent to near 90 percent, which is equivalent to adding 50 percent more nuclear-generating capacity (Figure 1).

Nuclear capacity is also on the rise due to new reactor construction and license renewals for reactors that are currently operating. Twenty-nine new nuclear plants are under construction 12 countries. And, in the USA, 48 nuclear plants have received license renewals, with 34 more expected. In the Far East, China’s emergence as a market economy over the past decade has led that country to seek new electricity generation capacity to fuel growing demand. Given China’s ambitious plans for new nuclear capacity, it is seeking a stable and secure source of uranium for its reactors (Figure 2).
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2006: Year of the Uranium Auction
The following is the In Focus piece of the December 31, 2006, edition of the Nuclear Market Review.

The year 2006 was undeniably the most extraordinary in the history of the uranium market. The spot price rose from $36.50 per pound U3O8 at the beginning of the year to $72.00 at the end of the year. About three-fourths of this price rise occurred in the last half of the year, and about 44 percent of the price rise occurred in the two month period after the October 22 flooding at Cameco’s Cigar Lake mine, then in the development stage.

With continuous upward price pressure, due to active supply at its historical low throughout most of the year and demand fueled by the private investor segment, a major issue in the market was price transparency. Although there is no open exchange for uranium (in contrast to most other commodities), a new market mechanism evolved with the secondary benefit of providing such transparency: the uranium auction.

During the year, at least 13 such auctions were held (see figure)—with nearly all resulting in large spot market price increases. The figure shows the quantity auctioned in a given week as the blue bar, and the price increase over the previous week shown in red. The end-of-week price is shown as the black stair-step.The auctions of the three largest quantities were conducted by the US Department of Energy (or USEC onbehalf of USDOE). Two of these were early in the year, with the third in August. The August auction was for 700 tU of UF6 (over 1.8 million pounds U3O8 equivalence), and resulted in a price rise of $4.50.

By far most of the auctions were conducted by ZB Marketing on behalf of a start-up US uranium producer, Mestena Uranium, LLC, based in Corpus Christi, Texas. Nearly all its production from the Alta Mesa in-situ recovery production facility was sold using this auction mechanism, and its auctions were spaced out over the course of the year. Its last auction, held in mid-December, produced the largest period-to-period price rise in the history of the market—a whopping $7.00 (10%).

It is clear that these public auctions helped establish a level of market price transparency throughout the year. In fact, the auction results became the definitive word on the price level, especially in the period after the Cigar Lake flooding, which created rampant speculation about the impact of the event on the market.
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Long-Term Uranium Contracting At Record High
The following is the In Focus piece of the October 20, 2006, edition of the Nuclear Market Review.

Last year, world long-term contracting volume rose to its highest level ever, easily overtaking the previous historical peak in 1996 (see figure). After four years of very low volume in 1998-2002, during which utilities and producers coasted on large inventories and contracting from the previous four-year period, European utilities rushed to the long-term market with very large volumes purchased in the 2003-2005 period. So far in 2006, long-term contracting seems to be matching or even exceeding last year’s record level, as activity has picked up in the US and Asian markets.

Especially significant are the much longer delivery periods in new contracts and the virtual disappearance of annual delivery flexibility, reflecting the shift to a sellers’ market. And, the high base/floor prices in these new contracts will help the production industry “weather the storm” should there be a downturn in the market in the intermediate term.

One result of these high prices, and the expectation of continued high price levels, is the rapid materializing of potential production. In what was once considered a laughable level, uranium resources in the US$80/kgU production cost category—or even US$130/kgU—are now being touted as economic. While it is yet too early to render a firm judgment of “how much” and when” supply will respond to this new price era, the required investment seems to be flowing into the industry at a sufficient rate to assure a major increase in world production capability.
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“Speculating” On the $50 Uranium Barrier
The following is excerpted from a recent commentary made for StockInterview, expressing TradeTech's view on investment in the uranium industry. The full commentary is http://www.stockinterview.com/News/09072006/gene-clark.html.

On August 31, 2006, the NUEXCO Exchange Value soared through the $50 level for the first time in its history, reaching $52 per pound U3O8. The last era in which the spot price was anywhere near this level was in the 1970s, when the Exchange Value peaked at $43.40—over $100 in today's dollars.

The 1970s were characterized by spurious demand, minuscule secondary supply, and a huge world-wide excess uranium production capacity—left over from the U.S. military production-incentive program. But perhaps the most important factor was the total embargo on importation of uranium for use in the United States. In contrast, today's market has firm and predictable primary demand, very large secondary supply, large secondary demand, and marginally adequate uranium production capacity.

What is "secondary demand" in the uranium market? It is uranium purchased from the market for purposes other than immediate use as nuclear power plant fuel. The real question, from the standpoint of trying to understand price formation and movement, is whether "secondary demand" is merely a minor perturbation at any given time in the market, or whether it is a major determinant of spot prices. And, if the latter, what impact does secondary demand have on long-term prices?

In uranium, we have a commodity for which there is no underlying substitute use. Uranium is used for fueling nuclear power plants—plain and simple. Given that we know the entire roster of nuclear power plants likely to be in operation over the next ten years, we have a good chance of being able to project the world "primary demand" for natural uranium, to within a ±15% variation, at the extreme.

But, there is a "secondary demand" just as there is a "secondary supply" in this market. In the long run, the market's trend is driven by primary demand, balanced against the supply from both primary uranium production and secondary sources. But, in the short run, we may have a situation like the classic quip about the statistician who drowned in a river with an average depth of three feet. Knowing the average doesn't necessarily help in survival! Likewise, knowing the trend that uranium prices should seem to take does not necessarily result in sound market decisions.

Secondary demand can be thought of as including the following, in increasing order of current influence on spot market prices:

  1. Over-purchasing (by utilities) from "take-or-pay" long-term contracts during periods of unexpectedly low nuclear plant performance;
  2. Purchases by uranium producers during periods in which market prices are below their cost of production;
  3. Over-purchasing from optional upward flexibility in long-term contracts, during periods when market prices exceed the embedded prices in these long-term contracts ("buy and hold");
  4. Large primary producers making strategic purchases that act to prop up market prices for new sales or to leverage sale prices in their existing long-term market-price-related contracts; and
  5. Purchases by self-designated "hedge funds" to buy and hold for gains under anticipated future sales at higher market prices.

While uranium has no substitute market in a primary sense, in the secondary demand market, money for uranium speculation is substitutable for money to be invested in other commodities markets. That is, when the price of uranium is accelerating at a rate competitive with the rate of return being experienced (or expected) for other investment opportunities, the purchase of uranium or uranium company equities becomes a viable investment option—as we have seen from the actions of speculators over the past few years.

In a transparent, competitive market, you can "pay now, or pay later"—meaning that any action that affects the market in one direction will cause an eventual reaction, and this reaction will tend to offset the impact of the original action. The advent of large secondary supplies in the 1990s has certainly helped to maintain low and predictable prices over a long period. The reaction has been that long-term uranium base prices were too low to support development of new uranium production facilities. Since new production is now needed, what price is needed to justify investment in new production? The answer depends, of course, on how much primary uranium production is needed. There is, after all, a supply curve for uranium, due to differing ore grades and other production cost factors.

When the uranium price reached the $20 per pound U3O8 level, there was heightened interest by several of the large producers in bringing new projects online and, since those projects seemed to be the lowest cost, we can safely assume that roughly this level of price is the minimum required to add major segments of new capacity. At the mid-$20s to $30 price level, numerous "junior" producers were advertising healthy anticipated rates of return on their prospective projects. At a sustainable price of $40 or above, even many of the older marginal production centers look good for restart.

What does all this mean for market participants? One risk factor to consider is that the uranium speculator market segment is currently quite active, and that its purchase activities are effectively diverting uranium from the supply chain, even though that uranium is currently needed in the market. That situation has been a major determinant of rapidly increasing price levels, after a period in which the market price was adjusting to meet the need for new production capacity. For a time, the speculators' goals and actions are self-perpetuating. They want (and need) rising prices, and their market volume is creating much of the upward pressure on the spot price and, by historical linkage, on the long-term base price.

But, there is one simple rule to keep in mind:

Secondary Demand + Time = Secondary Supply

 Since the speculators do not "consume" uranium, eventually those pounds of uranium will have to be sold to realize any market gain. And, the more active the speculators have been in buying up material, the more active they are likely to be in selling the same material, with obvious implications on price pressure. How these pounds will be sold will determine the impact on the market. A rush to the market would have the largest impact, but the speculators' accumulated stocks might be absorbed in off-market deals by primary producers. For those junior uranium producers who have pre-sold significant future production, the price mechanisms in their sales contracts will let them "weather the storm" of any short-lived drop in the market price. Those juniors in the exploration phase will be more vulnerable to any market downturn.

In conclusion, one should be careful to recognize how much the uranium market is being driven by fundamentals (primary demand) versus non-fundamental factors (like secondary demand) and make one's long-term decisions accordingly. A major portion of spot market purchasing is currently coming from secondary demand. Although the fundamentals appear to have justified the transition to some new level of higher price, the problem may be how "we get there from here." We may be in for a roller coaster ride before the market is able to sort things out. It remains to be seen whether it turns out to be like Holiday World's "The Voyage" with its three drops of over 100 feet and 24.2 seconds of weightlessness or like your neighborhood park's kiddy roller coaster.
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VTAO—Where Did You Go?
The following is the In Focus piece of the May 31, 2006, edition of the Nuclear Market Review.

One of the enrichment market features rapidly disappearing is the variable tails assay option (VTAO). This should not be surprising, given the transition to a sellers' market over the past few years. The option has been a key element in allowing utility fuel managers to optimize the cost of their enriched uranium. Until the uranium price started its upward climb in 2003, the optimal tails assay (producing the least-cost enriched uranium) was over 0.30% U-235. While not typically a problem for the gaseous diffusion enrichers (with their excess capacity at those tails assays), it has been more of a problem for Urenco with its practice of trying to fully commit its production capacity (see figure).

However, with the run-up in uranium and conversion prices, the theoretical optimal tails assay is much lower now. With the higher uranium prices, enrichment customers have been selecting ever lower tails assays with their enrichment suppliers. This has put a strain on enrichers' operational flexibility and capacity. The lower tails assays have also affected USEC’s Russian HEU Deal—about half of their supply source—since the tails assay at which that deal is conducted is much higher than the current optimal tails. This means that USEC, to the extent their customers are moving to lower tails assays, is receiving less feed from those customers than it needs to deliver to the Russian side. Although USEC's customers are paying for more SWU than USEC buys from TENEX, USEC must still deliver the larger amount of feed required under the deal. So, USEC must either produce the extra feed (by underfeeding), use its own stocks of natural uranium, or buy the extra feed from the market.

Given this new issue in the enrichment market, how much is the VTAO worth? If the components of EUP (feed and SWU) are priced near today's spot market values, the optimal tails assay is 0.23% and having a fixed tails assay for example of 0.30% in an enrichment transaction incurs a 2.5% cost penalty compared to the optimal. At the intermediate value of 0.27% fixed tails assay, the EUP cost penalty is about 0.9%. Although seemingly moderate in percentage terms, in absolute terms these correspond to $0.5-1.5 million per reload.
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Secondary Supplies—"A Cookbook Approach"
The following is an excerpt from TradeTech CEO R. Gene Clark's speech presented at the World Nuclear Fuel Cycle 2006 Conference recently held in Hong Kong.

Secondary supply is a term used in the nuclear fuel industry relating to all materials other than primary production sourced to satisfy reactor requirements. Secondary supply sources include inventories, stockpiles, and recycled materials of various types. There are four primary reasons why secondary supply exists: 1) historical overproduction, 2) reclassification of "consumption", 3) reclassification of strategic inventory, and 4) at some price, waste becomes fuel (Figure 1). Since these reclassifications are dynamic, the amount of secondary supply is always changing. The causes of this dynamic situation are geopolitical, financial, and economic.

Since 1990, the primary production of natural uranium has been outstripped by world requirements with the shortfall or "gap" being filled by secondary supplies. The availability of this secondary supply led to consolidation and tight financial conditions in the uranium production sector. However, since the availability of secondary supplies has shrunk (primarily due to the drawdown of inventories), the nuclear fuel industry is looking to the production sector to fill the gap. Since there is a time lag before the uranium production sector will be able to ramp up, supply from sources such as additional inventory
drawdown, the Russian HEU feed deal and the use of tails or other military stocks will be necessary to fill the gap.

The sources of secondary supply can be compared to the ingredients stored in a kitchen cupboard that the cook uses in a variety of ways and quantities to make a dish. The ingredients that the nuclear industry has in its "cupboard" are:

Pu: Plutonium
HEU: Highly Enriched Uranium (~40-93% U235)
LEU: Low Enriched Uranium (~2.0-5.0% U235)
repU: Reprocessed Uranium (~0.7-1.0%U235)
natU: Natural Uranium (0.711% U235)
depU: Depleted Uranium (<0.711% U235)

There are quite a few "recipes" for secondary supply, and like food recipes, some are tastier or more appealing than others. Some are from the use of excess stocks. Others depend on the continued operation of power plants for generating "ingredients". One recipe which most nuclear fuel market participants are familiar with is the "Russian HEU Deal" (Figure 2) which is the main source of secondary supply in the market. Feed from the Russian HEU deal contributes 14 percent of totalrequirements.

One secondary supply source or "ingredient" has been mostly in storage in the US DOE cupboard. In February 2006 the US Department of Energy transferred 200,000 kgU as UF6 to USEC, Inc. for auction. Proceeds from the sale were used to pay for contamination cleanup at the Portsmouth enrichment facility. In April 2006, the US DOE directly auctioned another 200,000 kgU as UF6. The US DOE is expected to auction additional amounts later this year. Figure 3 shows the source and origin of the US DOE inventory.

Given the supply gap, the availability of secondary supply sources to fill the shortfall becomes paramount. Secondary supply is now about 40 percent of world requirements with many categories and sub-categories. Russian HEU feed will remain the largest source of secondary supply through 2013 when the current agreement is scheduled to expire. Even without a continuation of the program to dismantle and blend down nuclear weapons, secondary supply is expected to fill 15-25 percent of world requirements (Figure 4).
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