The demand for uranium is building in intensity like a heap of hot coals. There are already 436 reactors up and running today. And there is a surge in demand coming in the next decade from the hundred or so new reactors expected to come online. Yet the industry is about 400 million pounds short of meeting that demand, as shown in the chart below.
The market has been in deficit for years, as it burns off Cold War stockpiles, which are finite and dwindling. Another way to look at it: Uranium demand is on its way to hitting 226 million pounds per year. Yet last year, the top dogs – which make up 90% of the market – produced only about 110 million pounds of uranium.
So essentially, the industry needs to produce almost four times that to meet the estimated new demand through 2018. On an annual basis, the industry will need to about double in size.
A sidelight to this is the fact that 63% of all uranium comes from just 10 mines. This means that the global supply of uranium is susceptible to supply shocks. If one big mine floods or goes down for whatever reason, it’ll make a big wave in the uranium market.
It gets even more interesting…
Most of the best mines are already in production. As with everything else in the resource world these days, the low-hanging fruit is all gone. Future grades will be lower, meaning we’ll have to mine a lot more ore to get a given amount of uranium. Furthermore, the new mines are in more geologically and politically challenging locales.
All of this means that costs will go up, which bodes well for a higher uranium price in the future. The current spot price is around $45 a pound. Only around 10–30% of the uranium traded in any year is sold on the spot market. Most uranium is sold to utilities via long-term contracts. The longer-term price of uranium is north of $60.
For some perspective on uranium pricing, consider that when uranium got hot in the summer of 2007, the spot price hit $136 a pound. It’s done nothing but go down since then. If you are a contrarian thinker, that fact will attract you. I can tell you with great certainty that the uranium price won’t go to zero. That downward trend will reverse, and based on all the data I presented above, it looks like a higher uranium price over the next few years is as close to a sure thing as you can get in markets.
Specialty Metals – Thompson Creek Metals (NYSE:TC) is our molybdenum miner. Molybdenum, or moly (pronounced “molly”), is an important metal for strengthening steel and for all kinds of energy applications. It is sometimes known as “the energy metal.” The recession took a big bite out of moly pricing, but it is on the rebound.
Thompson Creek is the best way to play the rebound in moly. It is a financial Sherman Tank, for one thing. It finished the year with $511 million in cash against debt of about $13 million. The market cap is about $2 billion. At present moly prices (about $17/lb.), Thompson Creek should generate over $240 million in operating cash flows this year. At today’s price, the stock goes for only 8 times cash flow. Maintenance capex – just to keep things going – is only about $60 million. So Thompson Creek should do $180 million in free cash flow at current prices. The stock goes for less than 10 times free cash flow, which is a cheap multiple.
Of course, you get all the upside should moly prices continue to climb. At a moly price of $30/lb. – which is what it was for most of 2004 to 2008 – Thompson Creek’s cash flow explodes.
There are good reasons to see moly prices rise. First, there is the long-term demand curve, which TC showed during its latest presentation:
That’s roughly a 75% increase in a decade. And that assumes historical demand is the best guide. But there are good reasons why moly demand might rise more. This demand is mainly from energy uses and infrastructure investment. Nuclear reactors need moly. Deep-water wells need moly. Tar sands and heavy oils use moly in their pipelines.
So these are strong new sources of demand that did not impact demand as much in the past. And then you look at where the moly will come from. The financial crisis halted or delayed the development of new mines. China is a potential source for new supply, but its mines are on the higher-cost side of the scale. They will need higher moly prices to encourage investment and bring the new supply online.
In the meantime, Thompson Creek has a window to make a lot of money.
for The Daily Reckoning