More uranium: when and from where?

The world uranium market continues to fascinate. Prices on the spot market have now exceeded $40 per pound after spending many years rooted at around the $10 level. Although many other metals and minerals are also experiencing rapid price escalation, the uranium situation has attracted an enormous amount of attention from people who previously had no interest whatsoever in either uranium or nuclear. This is very welcome for the industry, but may be relatively short term. Speculators, who will likely disappear as quickly as they came, have undoubtedly led some of the price escalation. The ranks of junior uranium companies (now numbering over 300 on some estimates) will thin through consolidation over time, particularly if prices fall back. Yet it is commonly agreed that the world now needs a significantly higher level of primary uranium production to make up for the diminution in secondary supplies (which have kept the market in balance for 20 years now) and rising demand for uranium from the nuclear power programmes of China, India, Russia and (hopefully too) the USA and UK.

There are, however, few obvious signs that more uranium is on its way, in the short term at least. World production of uranium was around 40,000 tonnes in both 2004 and 2005 and is likely to be little changed in 2006. One would surely expect, a priori, that higher prices should induce much more production. Supply curves in our economics text books normally slope upwards – at higher prices, producers should be willing to offer more goods, on the basis that this should be highly profitable for them. Mines previously ‘out of the money’ (that is, with production costs above the depressed $10 per pound price level) should suddenly become active and their owners make good profits, assuming they can obtain contracts at the new, higher spot price level. Existing producers, with costs assumedly below the $10 marker (or they would surely not have produced before, unless they had long-term contracts at above this level) have every incentive to stretch production to the maximum, as each pound of uranium must be earning a fantastic profit. So what is wrong?

The answer is important as anti-nuclear people have begun to pick up on escalating uranium prices and some predictions of shortages to claim that there isn’t enough uranium to sustain an upsurge in nuclear power and/or that it will be necessary to exploit increasingly poor grades in future, implying higher costs and carbon emissions from the fuel cycle. To them, uranium is really no different to oil, where the ‘peak oil’ proponents are now rubbing their hands that it is, at last, apparently beginning to run out.

The first point to make is that there is no shortage of uranium resources in the world. As my article in the November 2005 edition of NEI ("Will there be enough uranium to fuel nuclear growth?" – see link below) makes clear, uranium is abundant geologically and there is now a significant upturn in exploration underway, following the price hike. In any case, proven reserves are more than sufficient to fuel a significant expansion in nuclear power – beyond that, further economic resources will undoubtedly be discovered, while new reactor types are almost certain to economise significantly on the quantity of uranium required.

What is at issue, therefore, is turning these known resources of uranium into production. For those associated with existing operating mines, it is difficult to develop them more quickly. Operating mines have been running at high capacity utilisation factors for many years now, in an attempt to minimise production costs, so it is unrealistic to expect major increments to production from here. The limitation, as often as not, is milling capacity. Where this can be expanded, such as at the McArthur River mine in Saskatchewan, Canada, this is happening, but must await both full regulatory approvals and new investment. The message is that uranium production from these mines cannot expand very much, in the short term at least.

One must also consider the position of the mine owners and operators. Battered by years of low prices, they would not be human if they didn’t take the opportunity to bask in the current higher prices and simply take more profit from the existing quantity of production. Profits are now indeed growing significantly, as lower-priced long-term contracts gradually unwind, but these companies are unlikely to rest on their laurels. They will try to expand production and will undoubtedly succeed in doing so wherever they can. Having already put huge investment into such mines, incremental production may be achievable at modest capital cost.

One exceptional example is provided by the Olympic Dam mine in South Australia. This produces large quantities of both copper and uranium, with less significant quantities of gold and silver too. Current production capacity is around 4000 tonnes of uranium per annum, but its new owner (BHP Billiton) is looking at a major mine expansion, possibly increasing annual uranium production to 12,000 tonnes per annum and beyond. This is much more than the incremental expansions being considered elsewhere, but can only happen in the period beyond 2010, such is the scale of investment required.

It is, however, new mines that should bring the majority of the new production required to meet market demand. Yet these take time both to win the necessary approvals and also to be developed. Some constraints have appeared, such as the shortage of qualified mining engineers with uranium experience and the pressure from other mining ventures on key capital equipment such as large trucks and drilling equipment. These will be overcome in time, but it is clear that new uranium mines take a significant time to develop. The current generation of mines have reserves discovered 20 years and earlier ago and new discoveries made today are likely to take similar timescales. So new mines coming into operation in the next few years are still likely to be based on well-known deposits, lying unexploited for many years.

Among the major national producers, Canada’s output is likely to rise only slowly over the next five years. The Cigar Lake mine will come into operation sometime in 2007, but much of its production will not be incremental as it will make use of existing milling facilities, already taking material from other orebodies which are becoming exhausted. Current operating mines can only expand slowly as milling capacities and regulatory limits are reached. Further new mines are someway in the distance, possibly resulting from the current surge in exploration activity.

In Australia, the most important development is likely to be the expansion at Olympic Dam already mentioned, but this will not happen for several years. In the shorter term, the Honeymoon in situ leaching (ISL) operation could start up, but there is nothing else on the immediate horizon. The easing of the anti-uranium mining sentiment which has occurred in official circles and the opening up of the possibility of uranium exports to China will take several years to have an impact on production, but are very positive features for the period beyond 2010. A possible cloud on the horizon is the difficulty of developing the Jabiluka deposit as a replacement for the Ranger mine as it runs out of reserves during this period. High prices are certainly an incentive, but approval of the local aboriginal landowners is required.

It is in Kazakhstan that the best prospect of substantial near-term production expansion exists. The Kazakhs have plans to expand uranium production from around 4000 tonnes per annum at present to 15,000 tonnes by 2010. This will be achieved by a mixture of joint venture operations with overseas partners (including Cameco, Areva, the Russians, Koreans, Japanese and Chinese) plus expanded production in mines wholly owned by the state producer KazAtomprom. All will be ISL mines and it is clear that the scale of this expansion will be very challenging but not impossible. As the new mines are likely to be low-cost (estimates of full costs – including capital – are around the $15 per pound level) the profit potential is substantial and uranium will become a major revenue earner and employment generator in the country.

The potential for near-term production expansion in the USA from ISL operations is also present, but will be of much lesser scale. Annual US production is likely to rise steadily over the next few years from its current level of only 1000 tonnes, but it is unlikely to exceed 4000 to 5000 tonnes by 2010. Longer term, the potential is more substantial, assuming prices remain at something like the current level.

Elsewhere, the best prospects for higher production by 2010 are in Africa, in both Namibia (the Langer Heinrich mine) and South Africa (Dominion). These should come into operation in the next couple of years and could be followed by further new mines by 2010. Elsewhere, the future of the Rössing mine in Namibia has been secured for some years to come, while the operations in Niger could potentially be expanded if required.

Uranium production will therefore expand substantially by 2010, but the scale of the expansion may continue to lag behind what may be expected by the scale of the price increase. This may not, in any case, be sustained and new operations will be planned on the basis of survival at substantially lower prices. The upward trend in production should go some way towards satisfying those critics who predict continuous uranium shortages but the really big increases are likely to come only after 2010.

The essential message is that it simply takes time to develop new mines. The uranium market has not worked well in the recent past as the necessary price incentive for increased production was continuously delayed by the appearance of more and more secondary supplies. Now there is the potential for it to function much better in the future.

Steve Kidd is Head of Strategy & Research at the World Nuclear Association, where he has worked since 1995 (when it was the Uranium Institute). Any views expressed are not necessarily those of the World Nuclear Association and/or its members

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