Tuesday, June 24, 2008

1000 new reactor builds by 2050

Deutsche Bank Uranium Sector: Using IEA's 2050 IEA calls for 1000 new reactor builds by 2050 - Thanks to a subscriber for this enlightening report by Paul Young, Joel Crane and Brendan Fitzpatrick which focuses on Australian uranium companies. The full report is posted in the Subscriber's Area but here is a section:

Energy mix targets we estimate that uranium demand could increase by 215% under the ACT Scenario, and by 290% under the BLUE scenario, to 243kt and 300kt of U3O8 per annum respectively (see Figures 3 and 4). Even if either scenario is achieved, which is heavily reliant on international legislation and government willingness to adopt and embrace change, we believe that world is on the verge of a uranium renaissance. In our opinion, the financial markets continue to underestimate the potential for a rapid increase in uranium demand going forward. Saying that, we do acknowledge that the increase in demand may be slow, and we forecast just a 2% demand increase between 2008 and 2010, but a 17% increase between 2010 and 2015.

In our opinion, the biggest impediment to achieving the IEA's ACT and BLUE targets is not global legislation change but the potential inability of uranium supply to respond to a likely spike in demand from 2015 onwards. To put it into context, the world's largest uranium development project is the well documented expansion of the Olympic Dam mine, located in South Australia, with a total uranium resource (measured, indicated, inferred) of ~2,240kt of uranium. We believe that the proposed expansion of Olympic Dam involving a large open cut mine and expanded processing facilities could deliver an additional 15ktpa of uranium from 2016 onwards. However, the world would need to find and develop an additional ten Olympic Dam sized mines by 2050 to supply sufficient uranium to the world's nuclear reactors under the ACT scenario and an additional 15 Olympic Dam sized mines under the BLUE scenario. Severe under investment in the uranium sector has resulted in few if any significant new uranium discoveries since 1980. Therefore we believe that supply could struggle to respond to the potential increase in uranium demand between 2010 and 2050.

We note that uranium is significantly underperforming other energy commodities in 2008 (shown in Figure 6). In our opinion, the current spot price of US$59/lb may not be high enough to encourage new uranium supply, from both greenfields and brownfields projects, particularly from projects in high cost construction countries such as Canada, Australia and the US.

Over the past week Ux Consulting has reported that two utilities are seeking uranium in the spot market (one for 100,000 pounds and the other for 300,000 pounds), and that they may have found suppliers only willing to offer at or above the $60 level. We believe that continual supply issues and the likelihood of increased demand from utilities should drive the spot price higher in 3Q 2008.

My view - The speculative excesses that fuelled the massive run up in uranium-related companies ended when the commodity price had its first downtick, following a spectacular advance which climaxed in 2007. We have long said that uranium is the best of the long-term energy plays; however it remains in a predictable medium-term correction which has yet to bottom conclusively. A large number of speculative stocks were IPOed on the back of the initial run-up, and those that had much less uranium than they claimed have disappeared during this correction. Stocks with no earnings remain considerably higher risk than those with a steady income, in this, or any other sector.

Since mid-2007 uranium has more than halved and remains in a medium-term downtrend which is losing momentum. An upward dynamic would indicate that at least a short-term floor has been reached; while a sustained move above $95 is needed to break the progression of lower highs and suggest that the bulls are regaining the upper hand.

All of the companies mentioned in this report can be found in the Chart Library. While most uranium related equities are unlikely to outperform other commodity related stocks, before the uranium price shows signs that it is recovering, a number have weathered the current drawdown better than others.

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