Tenex

The international uranium market has undergone major changes during the past decade, but is it finally maturing? By Julian Steyn

There have been no uranium supply-interrupting events during the past year - unlike in the past several years. There are no longer large stocks of commercial already mined uranium (AMU) - inventories in many forms - overhanging the market, though there may be large quantities of government material around for another 10-15 years. Primary production has increased significantly in recent years and is projected to continue increasing in accord with growing requirements. The outlook for the expanded growth of nuclear power has brightened in many sectors, particularly in East Asia, and finally in the USA with the passage on 8 August of the Energy Policy Act of 2005.

The uranium market price has risen to the level necessary to fund exploration and development to expand the world's resource base to meet future demand. However, it will be some years before such investments will result in major uranium finds. While there are still trade constraints and anti-nuclear development threats in some market sectors, there are prospects that they will diminish to some degree in the future. There are concerns regarding the issue of whether or not the US-Russian highly enriched uranium (HEU) purchase agreement will be extended beyond 2013, at what rate and for how long, and whether it will include uranium and not just enrichment.

The market continues to be concerned about the possible loss of important supply sources during the next ten years. Some of these concerns have been alleviated to a degree by the increase in market prices. The owner of the large Rössing mine in Namibia had plans to shutdown the mine in 2007 but has changed the shutdown date to 2009, and possibly 2017. In Australia, the same owner has agreed to put the large Jabiluka uranium deposit under an indefinite long-term care and maintenance agreement and only develop it at some future appropriate time with the approval of the traditional native people of the region. However, the increasing value of that project's reserves could serve to result in the regions Aborigine people allowing development under tightly controlled environmental conditions. While the underground workings and access decline were backfilled in 2003, access could be reopened in about three to six months time and at reasonable cost. It is desirable that this be decided before the nearby Ranger mill is shutdown, possibly by 2014.

By the end of diis decade an expanding resource base of new uranium deposits will have to be identified as a result of renewed exploration investments and related activities during the next few years. As the substantial stocks of AMU decline in this decade, production will have to be expanded at existing mines and new mines will have to be developed. The major AMU inventories are government stockpiles, the most significant components of which are weapons uranium and plutonium, particularly the former, and enrichment tails stripping to lower assays.

While world supply may be sufficient to meet future demand, there will be increasing consumer competition to obtain it at reasonable cost. Countries with large commitments to the civilian nuclear option are likely to tie-up supply sooner rather than later, as for example seems to be case with China. There is expected to be increasing upward pressure on market prices in the mid to longer term because of this competition and as investments in expanded mine capacity are required, and more intensive exploration and development activities are mounted. While some uncertainty continues to hang over the industry, the outlook is that the tight supply situation that has been the case during the past few years will ease up for several years before resuming again at the end of this decade. The market will tighten around 2010 as the end of Russian HEU supply looms closer on the horizon and as several mine shutdowns occur. Industry requirements forecasts indicate that capacity will have to be increased as we enter the next decade. Further, if the industry finds itself on a high nuclear power growth course, meeting uranium requirements could be a challenge.

REQUIREMENTS

With the exception of nuclear power programme plans in East Asia the recent resurgence of interest in the nuclear option has not yet resulted in a significant increase in the projected long-term demand for uranium. While the continuing high capacity factors and power up-ratings being experienced in many nuclear programmes have been positive, their impact on demand has been offset to some extent by the decline in enrichment tails assays resulting from the high uranium market prices of the past two years.

The Figure below shows the 2005 World Nuclear Association (WNA) reference case world uranium requirements forecast presented at the World Nuclear Fuel Cycle joint conference in San Antonio in April 2005 organised by the WNA and Nuclear Energy Institute; the supply is discussed later in this article. World requirements are projected to rise from their current level of 175 million pounds to 257 million pounds by 2025. East Asian requirements are projected to rise from 35 million pounds in 2005 to 66 million pounds by 2025. North American requirements are forecast to remain at about 60 million pounds per year through 2015 and then begin to increase gradually to 69 million pounds by about 2025. Western and Central European requirements are projected to remain relatively flat at about 60 million pounds annually through about 2025. The Commonwealth of Independent States (CIS) requirements are projected to almost double from their present level of 16 million pounds to 30 million pounds by 2025.

The WNA has projected an upper scenario, a high case forecast, that would call for requirements of 329 million pounds to be met by 2025, a formidable task. This would require the deployment by then of a world-class production centre annually, a centre the size that Cigar Lake will be.

THE MARKET

The spot market price of uranium, which was $10.20 per pound U^sub 3^O^sub 8^ (Ux U^sub 3^O^sub 8^ price) at the beginning of 2003, rose to $29.50 by the end of July 2005. This approximate tripling of price can be attributed to a number of factors, chief among which were the slow recovery of the Olympic Dam copper-uranium production centre from the fire damage that occurred in October 2001 and the need to reline its associated copper smelter. Additional key factors were the shutdown of the Rössing centre during the first quarter of 2003 to replace ageing equipment; mining problems at the Rabbit Lake centre during 2003; the McArthur River mine flood in April 2003; the more than six-month shutdown of the Metropolis conversion plant that began in September 2003; and the GNSS-Tenex contract dispute that began on 3 November 2003. The industry realisation that the demand for primary uranium supply sources would strain capacity in the future was also apparent.

At the end ofjuly 2005 the longterm market price was $31.00 per pound U^sub 3^O^sub 8^, $1.50 more than the spot price. The difference between spot and long-term prices has averaged less than one dollar per pound during the past nine years, except for the August 2004 to April 2005 time period, when the term price was several dollars higher, for example $5.25 in February 2005. As might be expected, the spot market price has historically been more volatile than the long-term price.

Spot market volume was approximately 18 million pounds during the first six months of 2005, equal to the 18 million pounds transacted in all of 2004. Approximately half of the spot market volume in 2004 was sold in the form of uranium concentrates and half as UF^sub 6^. Approximately 90% of the volume was off-market. Almost 50% of the purchases were by utilities, most of which were US, and the remaining purchases were about equally divided between producers and traders. Not unexpectedly, utilities sold very little material.

Spot market volume was particularly high during the first four months of 2005. 15 million pounds in 45 deals, which helps explain the $5.00 price jump during the 25 April to 9 May two-week period. The high transaction volume was stimulated by discretionary buying and by inventory building, trends that may continue during the coming months. More than two-thirds of the recent volume has been discretionary purchasing, significantly more than in all of 2004. It is clear that some utilities took advantage of the significantly lower prices in the spot market and, as a result, may have displaced some otherwise scheduled future longterm contracting demand.

Long-term contract volume in 2004 was up from the 2003 volume of slightly less than 60 million pounds to about 73 million pounds. The volume was about equally divided between US and non-US utilities. More than four-fifths of the transactions were off-market. The preferred forms were UF^sub 6^ (50%), U^sub 3^O^sub 8^ (45%) and enriched uranium product (EUP,

ALREADY MINED URANIUM

The Figure indicates that AMU may be categorised as follows:

* Russian HEU

* Enrichment tails upgraded in Russia

* Other AMU consisting of US government HEU, low enriched uranium (LEU), natural uranium, and enrichment tails; inventory held by USEC; USEC underfeeding; and plutonium and uranium recycle.

While most of the excess commercial stocks of AMU held by utilities have now been largely consumed, AMU held by governments and some private sector suppliers will continue to enter the market during the next 15-20 years. The future supply of AMU will be from government stockpiles, the most significant components of which will be Russian and US HEU, plutonium and uranium recycle in Europe and East Asia, and uranium enrichment tails upgraded in Russia and the USA. Even though AMU will continue to provide about 30% of supply during this and much of the next decade, an expanding resource base of new uranium deposits will have to be brought into production after the end of this decade.

The 1993 HEU purchase agreement concluded between Russia and the USA has resulted in the delivery to the USA since 1995 of 7225 metric tons (t) of low enriched uranium (LEU) derived from 245t HEU, as at 30 June 2005. This equates to approximately 195 million pounds of equivalent (U^sub 3^O^sub 8^) having already been made available to the world market. Another 203 million pounds is scheduled to be made available between now and the end of 2013, at the rate of approximately 24 million pounds per year. Also important is the fact that 9839 nuclear weapons have been eliminated. It is noted that approximately 28% of the uranium in the derived LEU is obtained from the blend-stock. The blend-stock is produced from 0.30% tails enriched to about 1.5%. USEC purchases the enrichment component of the LEU and transfers approximately half of the uranium feed component to Russia's uranium marketing agents and returns the remainder to Russia. The Western marketing agents are Gameco Corporation of Canada, Cogema Resources Inc of Canada, a division of Areva of France, and RWE Nukem Inc, the US subsidiary of RWE Nukem of Germany.

Russia has been upgrading Urenco and Areva tails since about 1997, and of course, Russian tails. Rosatom strips Urenco and Areva tails from 0.30% to 0.20% to produce about 6.5 million pounds of uranium equivalent material annually for those two companies under contract. Russia disposes of the upgrading tails and returns the produced uranium to Urenco and Areva. Russian upgrading of its own tails results in the production of uranium equivalent material that is projected to increase from about 3 million pounds in 2004 to 8 million pounds in 2010. Russian enrichment transactions with Western utilities at a tails assay of 0.30% allow it to generate an additional approximately 3 million pounds annually because it actually operates at about 0.10%. This overall mode of operating results in Russia being able to generate uranium at a level of about 13 million pounds today, a level that is projected to increase to as much as 17 million pounds by 2010 and thereafter. However, there could be some variances from these tails upgrading uranium generation quantities in the coming years because of the decline in Western tails assays resulting from uranium price increase, and because of possible changes in Russian enrichment strategy in the future.

The Other AMU' category includes US government stocks, USEC owned uranium, and recycle. While the US government is also blending down HEU to equivalent uranium feed and enrichment services, the quantities are not yet very significant compared to the Russian HEU down blending quantities. However, it is likely that the USA may declare significant quantities of HEU excess to the governments needs in the next decade. For example, the US Department of Energy (DoE) has already indicated that it plans to down blend approximately 48t of HEU between now and 2016. This is in addition to the 39t that it has committed to the Tennessee Valley Authority through 2016. In May 2004, the DoE indicated that it might declare up to 100t of additional HEU excess to government needs. The DoE has also initiated a pilot programme to enrich high assay tails to produce about 5 million pounds of 0.71 % uranium for the Bonneville Power Authority, a government corporation. This uranium will be used to fuel the Energy Northwest Columbia reactor between 2009 and 2017.

The Other AMU' includes uranium owned by USEC. At the time of the United States Enrichment Corporation's (USEC's) privatisation in July 1998, the DoE transferred an inventory of about 75 million pounds of uranium in various forms to the new company. Since privatisation, USEC has delivered approximately 60% of that amount to customers. Of the remaining material, approximately 23 million pounds still have to be disposed. In addition to having inventory, USEC has been generating uranium at the estimated rate of about 2 million pounds per year to its own account by underfeeding customer uranium. However, the underfeeding may not continue for much longer because of the decline in customer transaction tails assays.

The 'other AMU' category also includes equivalent uranium supply resulting from plutonium recycle in Japan and four Western European countries: France, Germany, Belgium, and Switzerland. The AMU also includes the recycle of reprocessed uranium (RepU) in two French reactors and possibly three reactors in the future. The projections assume that equivalent uranium supply will also result from the loading of government (nuclear weapons and other programmes) MOX fuel in several US (Duke Energy) and Russian civilian reactors beginning in 2010. The total uranium-equivalent world supply from these sources is projected to increase from 6.5 million pounds U^sub 3^O^sub 8^ in 2005 to 11 million pounds by 2015, that is, from approximately 4% today to 6% by 2015.

Taken altogether, the AMU in the Figure is projected to provide an equivalent uranium supply of approximately 59 million pounds per year through 2017 and then decline to 33 million pounds by 2025. Russian HEU blend down is projected to end by 2025. Since the tails upgrading is dependent on future economics of enrichment, uranium, and enrichment capacity, it could decline sooner than projected.

MINE PRODUCTION

Four countries are expected to provide about two-thirds of Western world mine production through the midterm: Canada, Australia, Namibia, and Niger. These four countries along with Russia, Kazakhstan, and Uzbekistan are projected to provide about three-quarters of world mine production through 2010.

Canada was the world's largest mine producer of uranium in 2004, producing approximately 30 million pounds U^sub 3^O^sub 8^. It is expected to remain the dominant producer through the coming decades. Production is projected to rise to 44 million pounds per year by 2010. The Rabbit Lake and McClean Lake centres will be depleted in 2006. However, two new centres, Cigar Lake and Midwest Lake, are expected to go into production during the next few years, The large McArthur River mine in Canada's Athabasca Basin, is currently being expanded by about 18%, to 22 million pounds per year. The Midwest Lake mine will begin operation in 2006 and operate at about 6 million pounds per year through 2012. The Cigar Lake centre is scheduled to start up early in 2007 and rise to full production of 18 million pounds per year by about 2011.

Australia, the world's second largest uranium producing country, produced about 23 million pounds in 2004. It has two large production centres in operation, Ranger and Olympic Dam, and a small solution-mining centre in operation, the Beverly in situ leach (ISL) centre. Another small solution mining operation, Honeymoon, may go into production during the next few years. The Ranger mine is likely to be exhausted by 2008, though milling operations may continue to produce 13.2 million pounds per year through at least 2011. However, there are indications that the delineation of additional reserves might allow Ranger production to continue through about 2014, though possibly at a diminishing rate. If the nearby Jabiluka deposit is not developed, and it might not be for decades, then the Ranger operations will cease between 2011 and 2014. The large Olympic Dam centre, which currently is licensed to produce up to 17 million pounds per year, is expected to increase its capacity to 33 million pounds per year by about 2012. It has been publicly stated that the Olympic Dam mine has the potential to produce as much as 40 million pounds per year, possibly by the middle of the next decade, and become the world's largest producer. The Beverly centre is expected to produce about 2.4 million pounds per year through about 2012, or longer if additional reserves are found by recently funded exploration in the region.

While economic difficulties could keep South African production at relatively low levels for the foreseeable future, there are indications that production could be increased from the current level of 2 million pounds per year to about 6 million pounds per year by 2010. The increase in output would be obtained, in large part, from the planned Klerksdorp plant of Aflease Gold & Uranium Resources that is about to go into construction. Production in Niger is expected to remain relatively constant at about 8 million pounds per year through about 2010 and thereafter as the Arlit centre's output is replaced by bringing the nearby lmouraren centre into operation. While production at Namibia's Rössing centre was scheduled to end in 2009, if the recent market price increase is sustained, production could continue at about 10 million pounds per year through 2017 and, possibly, beyond.

For the foreseeable future, China will be expanding production to at least partially meet the needs of its rapidly growing nuclear power program. China is expected to be a net importer of increasing supply from other countries in the coming decades as its planned aggressive nuclear power growth programme materialises. It is understood to be currently negotiating long-term supply arrangements in a number of countries, including Australia. It is believed that the current production level of about 2 million pounds per year will be doubled during the next several years.

Kazakhstan's production is expected to increase from its current level of about 8.9 million pounds per year to about 17 million pounds by 2010. Kazatomprom, the national atomic company, directs the operations of three government-owned ISL centres: Chiili, Stepnoye, and Central at Taukent. A fourth centre at Zarechnoye in Kazakhstan will ship feed to Kara Balta in Kyrgystan for milling; the ownership of this three-way joint venture includes Russia. The combined output of these centres was believed to have been approximately 7.5 million pounds in 2004 and is projected to remain at about that level. There are also two ISL centres in the start-up phase, the Inkai centre operated by Cameco and the Muyumkum centre operated by Areva. These two projects should each reach a design output of 5.2 million pounds per year by about 2009. Additional Kazatomprom centres are being planned.

Production in Russia is projected to remain relatively constant at about 8.5 million pounds per year throughout this decade and begin expanding in the next decade as conventional production declines and ISL production expands. Ukrainian production is expected to remain at about 2 million pounds per year for the next several years and then possibly be phased out by the end of the decade because of high production costs. Uzbekistan is projected to increase production from 5.3 million pounds in 2004 to about 7.5 million pounds per year by 2010. However, recent political unrest in this and other Central Asian republic highlights the risks of relying on supply from the Central Asian republics.

There are two existing ISL production centres in the USA that have been in operation for a number of years, the Crow Butte and Highland/Smith Ranch centres. In addition, the recent price rise has resulted in a number of old' mines being 'dusted off' and being 'rushed' into production. Two of these mines began operation late in 2004, the Canon City/Western Slopes project and the Vasquez project. These and several other projects could result in US production rising from its 2.3 million pound level in 2004 to about 7 million pounds by 2009.

There are small production facilities in a number of other countries, notably Brazil, the Czech Republic, Germany, India, and Romania, that may have a combined production level of about 3 million pounds in 2004. The German production of about 400 million pounds annually is obtained from the decommissioning of the Wismut centre in former East Germany.

SUPPLY VULNERABILITY

The nuclear fuel cycle in the U.S. and in the rest of the world is vulnerable to potential supply interruptions. Potential supply interruptions could, for example, be the result of: a major industrial accident or terrorist action at a supply facility, significant political differences between consumer and supplier countries, and insufficient strategic inventories of either uranium concentrates, natural UF^sub 6^, or EUP to counter potential delivery delays. security of nuclear fuel supply for countries such as Japan, South Korea, and Taiwan, to name just one geopolitical region, is highly dependent upon imports of uranium, conversion services and enrichment from other countries.

US requirements for uranium are largely supplied from non-US sources, for example, uranium from Canada and Australia, and HEU-derived uranium feed from Russia. The European Union is also highly dependent on uranium imports from Canada, Australia, Africa, Russia, Kazakhstan, and Uzbekistan.

US electric utility companies are dependent upon imports to meet about 90% of their collective uranium requirements. US uranium production is projected to meet less than 10% of domestic requirements through 2015. The DoE holds substantial uranium inventories that have the potential to be a source of supply to backstop the domestic utility industry, subject to a favourable market impact determination by the energy secretary. Because of discretionary procurement during the past year as a hedge against supply problems, US electric utility companies collectively increased their uranium inventories to a level that is equivalent to more than fourteen months of requirements. In addition, the country's single enricher holds about 23 million pounds in disposable inventory that is probably only available to its own customers and will, in any case, be drawn down in about two years and no longer be available to counter consumer supply problems.

SUPPLY-DEMAND BALANCE

The Figure presents the projected world supply and demand balance through 2025. It clearly shows that while supply is tight in 2005, the margin increases after that time. While supply is projected to be adequate from 2008 through 2016, a shortfall is projected to occur after that time because the amount of other AMU is reduced. The reduction is also a result of the projected end of DoE material disposition. However, as mentioned earlier, the US government may make more excess HEU available to the market at that time, if not before.

The production shown is projected to come from the currently identifiable mine production around the world. It can be seen that world mine production from currently identified operations is projected to increase from 111 million pounds in 2005 to about 150 million pound by 2011, and then to decline to about 138 million pounds by 2018, and continue at that level for some years thereafter. Additional expanded and new mine capacity must be developed and expanded beginning in 2015, ten years from now.

Some of the decline in production after 2013 is the result of Ranger production ending in 2014 and Rössing ending after 2017. However, Rössing could continue in production for another decade or two if the market price at that time and favorable Rand exchange rates can sustain its operation. Finally, there are strong indications that output levels in Kazakhstan and at Olympic Dam can be increased. In addition, there is ten years in which to develop already identified uranium resources. During this time period, there may also be changes in the opposition to uranium mine development in Australia's Northern Territory and the state of Western Australia that would allow development of deposits such as Koongarra, Yeelirrie, and others. There are recent indications of promising prospective projects in Canada's Athabasca Basin in Saskatchewan. The additional HEU noted by the DoE in 2004 could be increased in the future over the amount mentioned earlier. Finally there is an inventory of reprocessed uranium in France and the UK that could become an economically viable source of supply in the next decade, and there is some indication that Electricité de France is currently reviewing this option.

While the uranium supply and demand balance is projected to be positive through the mid-term, the supply margin is subject to uncertainty for a number of reasons, for example, if mining industry capacity factors turn out to be less than 100% then the positive margin could become thinner. Again, the Russian HEU and tails upgrading and the other AMU are also subject to uncertainty. Nonetheless, the mid-term prospects must be considered as being good.

IS THE MARKETMATURE?

Since maturity means 'fully developed', it can be concluded that the international uranium market is not mature yet. The influence of governments is going to be felt until AMU is no longer a factor, say by about 2025. Parental control will diminish with time, but slowly. However, it can be said that the market continues to move in the right direction. For example, current market prices more than cover production costs and the costs of exploration for future resource expansion and development. However, price sustainability will be needed to keep investors supporting the necessary developments that are projected to lie ahead.

Julian Steyn, Energy Resources International Inc., 1015 18th Street, NW, Suite 650, Washington, DC 20036, USA

Copyright Wilmington Publishing Ltd. Sep 2005
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