Let’s discuss uranium. The spot price is ridiculously low and set to rebound. I had a long discussion with a couple of serious uranium scholars earlier this week. They’ve been doing uranium in both government and private industry since the 1970s. They’ve seen all the different rodeo acts.
These gents laid out a strong case for strengthening yellowcake prices this year – 2013 – and well into the future. ‘Yellowcake,’ said one, ‘is comparable to where gold was 10 years ago. We’re looking at prices four-six times higher in the out years.’
That’s quite a claim – US$150-250 per pound – and if it works out, it makes great news for uranium producers. You know, the guys that are already producing the stuff.
Begin with the eye-popping cost of acquiring ‘new’ uranium supplies. When you add up all the exploration and development costs, a new uranium mine scopes out in the range of US$100-120 per pound.
This is nearly triple the current spot price. And it’s before you factor in the vagaries of future tax changes and higher interest rates. After all, it pays to build a mine only if there’s a decent return on investment.
Expanding existing mines, on the other hand, is problematic. Everyone who’s trying to expand a mine confronts serious sticker shock. Look, for example, at how BHP Billiton deferred expansion at the gigantic site at Olympic Dam, Australia, as costs topped $20 billion.
A 10-figure level of capex approaches the limit of private enterprise in any respect. That’s big, even for the oil industry, let alone miners – and I mean even the biggest of the big.
We’re talking about a major defense program or space program level of capex, plus comparable difficulties in recruiting personnel, developing technology and scheduling the whole thing to work over a decade or more.
Look at it another way. Who can afford to make those kinds of energy investments? Governments, perhaps. Or more likely, government-industry partnerships.
In the future, look for business forms in which the mining consortium becomes sort of a public utility, with all the legalistic bells and whistles something like that entails. But without government help? Big energy projects likely won’t happen. And then there goes the supply curve.
On the demand side, the China story is ‘real and getting more real’, according to my sources. The Chinese need electric power, and they’re currently burning coal because they have it, not because they want to. Chinese air pollution is now a national problem.
Inside China, large future power projects all have to show an environmental angle to receive state approval. So says the Communist Party.
Across the sea from China, the stories you hear about Japan eliminating its nuclear power plants are ‘fairy tales’, according my sources. After the Fukushima disaster, two years ago, initial sentiment in Japan was to move away from nuclear power. It was all emotion. ‘And then came reality,’ the man said.
Basically, Japan looked at the bill for importing liquefied natural gas (LNG), now in the $20 per mcf range. Plus, Japan is watching China build up its navy, which threatens Japan’s sea lines of commerce and communication, pertinent to oil and coal imports.
The bottom line is that rebuilding its nuclear power base gives Japan another reason to pour more concrete, which is as much a Japanese national pastime as baseball.
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