Uranium May Reach $200 in Two Years

By Angela Macdonald-Smith

June 5 (Bloomberg) -- Uranium spot prices may reach $200 a pound within the next two years, buoyed by a shortfall in supply and increasing investment in the nuclear fuel by speculators, said Macquarie Bank Ltd., Australia's biggest securities firm.

The price, which reached $125 a pound in mid-May, will probably average $125 a pound this year, rising to $135 next year, Macquarie said in a June 1 report. RBC Capital Markets, UBS AG and producers Rio Tinto Group and SXR Uranium One Inc. are among those also forecasting further gains.

Uranium prices have jumped 12-fold since early 2003, underpinned by a shortage, concerns over future production and a lack of investment in new mines, Macquarie said. Efforts to limit emissions of carbon dioxide from burning fossil fuels have bolstered demand for uranium for power generation.

``In the near term, with the market expected to remain in significant deficit in 2007-08, risk on the supply side and growing speculative interest, it is hard to see what could prevent spot prices going higher,'' Macquarie analysts Max Layton and John Moorhead said. ``We would not be surprised to see prices move up to around $200 a pound over the next two years.''

Layton, based in London, is an economist who joined Macquarie in January from the Reserve Bank of Australia, the nation's central bank. Moorhead, based in Sydney, has been at Macquarie for a year and earlier held roles at ABN Amro Morgans and BHP Billiton Ltd., owner of Olympic Dam, the world's biggest known uranium deposit.

Global uranium supply fell last year as a gain in secondary supplies from dismantled nuclear weapons failed to offset a fall in mine production.

Ux, TradeTech

There is no formal exchange for spot uranium, and the two principal companies quoting spot prices are Ux Consulting Co. and TradeTech. Ux quoted the spot price at $125 a pound as at May 28, while TradeTech put the price at $133 as at May 31, according to the companies' Web sites.

The New York Mercantile Exchange started a market for uranium futures last month. The price of the June contract closed yesterday at $137 a pound.

The start of the uranium futures market, where settlement is by cash only, not physical delivery, may add to price swings in the spot market through 2008, Macquarie said.

``We note the massive drop-off in spot volumes in mid-late April and early may, prior to the beginning of the commencement of futures contracts on Nymex, suggesting that one short-term risk is that the financial settlement-only futures take demand away from the spot market,'' the analysts said.

SXR Forecast

Macquarie's price forecast is less bullish than that of Neal Froneman, chief executive officer of Toronto-based SXR Uranium One, who said the spot price may more than double to $250 a pound next year as demand outpaces production. SXR yesterday agreed to buy Vancouver-based Energy Metals Corp. for C$1.59 billion ($1.5 billion) in shares, after in February agreeing to buy UrAsia Energy Ltd. for $3.1 billion in stock.

RBC Capital Markets last week raised its forecast for uranium spot prices. Its 2007 average forecast is now $120 a pound, up from an earlier estimate of $100, the bank said in a May 28 report. That's still lower than Macquarie's estimate. RBC raised its 2008 forecast to $145, from $85, which is higher than Macquarie's estimate for next year.

UBS also expects further gains, the bank said in a May 16 report.

`Environmental Pressures'

``Despite sharp growth in the spot prices we remain confident that the uranium spot market will continue to strengthen over the next several years,'' UBS said. ``Strong long-term global energy values and mounting environmental pressures will continue to drive the market forward.''

Rio Tinto, the world's second-biggest producer of uranium, sees ``plenty of upside'' to uranium prices, Preston Chiaro, energy group chief executive officer, said last month. Rio is examining expanding output at mines in Namibia and Australia as it seeks to benefit from higher prices.

One of the risks to the forecast for higher prices in 2007 and 2008 is any positive news from Cameco Corp., the world's biggest uranium producer, about the start-up of the Cigar Lake mine in Canada, Macquarie said. Saskatoon, Saskatchewan-based Cameco said last month that a flood in October at the mine, the world's largest untapped deposit of high-grade uranium, will delay start-up for three years until 2010 and help double construction costs.

Hedge Funds

Any turn in sentiment by traders, speculators and hedge funds, which have helped drive up prices in recent months, would also quickly push prices lower, Macquarie said. About 8,000 tons of uranium or almost 20 percent of mine supply, may be in the hands of speculators and hedge funds, it said. Any move by Rio Tinto to accelerate expansions at the Rossing mine in Namibia and the Ranger mine in northern Australia pose a further risk to the higher forecast, the bank said.

The uranium market supply deficit, which was 10,572 metric tons last year, should halve this year and narrow further next year to 3,945 tons, as supplies increase from new mines in Kazakhstan, Africa and North America, Macquarie estimates. Beyond 2008 the market will probably move into surplus as supply responds to higher prices, it said.

Total supply is forecast to increase by about 46 percent to 90,500 tons by 2013 from 62,192 tons in 2006. Mine supply is set to surge by 85 percent to 72,821 tons by 2013, while secondary supplies are set to fall 23 percent over the period, the bank said.

Macquarie forecasts the average uranium spot price will fall to $100 a pound in 2009, $80 in 2010 and $65 in 2011, then to a longer-term average forecast of $40.