Nuclear industry faces looming uranium shortage

TORONTO Wed Mar 9, 2011 5:42pm EST

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TORONTO (Reuters) - An expected surge in demand for uranium to fuel new reactors may go unfilled if new supply does not soon come on stream, meaning a setback for China, the United States and other countries that are increasingly relying on nuclear energy to power their economies.

While a host of uranium explorers promise to bring projects into production before a major supply crunch develops, most are overestimating their ability to deliver on schedule, industry experts say.

That could leave a vacuum for major uranium producers searching for acquisitions as the most efficient way to ramp up shipments to power utilities that use the radioactive metal to fuel reactors.

"There are juniors out there with projects that are definitely viable," said BMO Capital Markets analyst Edward Sterck. "But I think it'd be fair to say there's an awful lot of juniors who might be challenged to deliver projects on schedule."

At the Prospectors and Developers Conference (PDAC) in Toronto this week, UR-Energy (URE.TO), U308 Corp UWE.V and Toro Resources TRK.CD were part of a crowd of juniors touting "near production" projects.

Toro is in the permitting stage and will need about A$265 million ($268 million) to build its Wiluna project in Australia. Managing Director Greg Hall admits the Australian company faces a rough road in getting the mine into production by 2013.

"These things are not fast," said Hall. "Out of those who say they're going to be in production by 2014 -- let's say there's 40 -- I reckon seven will make it."

That could leave a supply shortage that would have a ripple effect on the global economy should China, India and other Asian powerhouses fail to secure the uranium they need to meet their targets for electricity generation.

China's nuclear generation is set to triple by 2020, while India is looking to double its nuclear output.

In addition, a deal under which the United States buys downgraded weapons uranium from Russia is slated to end after 2013. Uranium from the so-called "megatonnes for megawatts" pact fuels 50 percent of the reactors in the United States.

That makes it critical to get new uranium mines online within a couple of years. But permitting problems, financing issues and a lack of management experience is hindering many projects.

In fact, BMO's Sterck said only one company is looking very attractive as a takeout or joint venture partner right now.

"The big one is Extract Resources," said Sterck. "Huge in-situ resource, grades that are appealing and in a stable country with a well defined mining code."

Extract EXT.AX owns the Husab project, a 257 million pound resource that borders Rio Tinto's (RIO.L) Rossing mine in the southern African nation of Namibia.

Indeed, Extract may already be in play, as a unit of China Guangdong Nuclear Power Holding Corp (CGNPC) is lining up a $1.23 billion offer for Extract's top shareholder Kalahari Minerals. Because Kalahari owns a 43 percent stake in Extract, the bid may automatically trigger a buyout of Extract under Australian takeover rules.

That may put pressure on Rio Tinto, the Anglo-Australian mining giant, and leading uranium producers Areva CEPFi.PA and Cameco (CCO.TO), to make counter-bids to take over Extract and its planned output of 15 million pounds a year.

Last year, Uranium One UUU.TO bid A$1.2 billion to gain control of Mantra Resources MRU.AX, which plans to produce about 8 million pounds a year at its Mkuju River project in Tanzania.

Comparatively, UR-Energy will produce only 1 million pounds a year when it starts up in 2012.

LITTLE TO BUY

Spot uranium prices have risen from $45 a pound in mid-2010 to over $70 earlier this year, and analysts say the time is right for big uranium companies to make acquisitions. The problem is, there's little of substance left to buy.

"I do not expect a frenzy of M&A activity with uranium juniors any time soon, given the shortage of sufficiently developed projects in this space that might pique the interest of the majors," said Darryl Levitt, a Toronto-based M&A lawyer with Macleod Dixon.

Current global demand for uranium is 180 million pounds a year, of which 140 million pounds comes from mine production. The rest is filled by stockpiles and downgraded weapons-grade uranium, according to Cameco.

With China set to boost its nuclear capacity from about 11 gigawatts now to at least 80 gigawatts by 2020, it alone will need up to 60 million pounds of extra uranium a year.

The Asian superpower has already signed long-term deals with Cameco and Areva, shifting pressure on utilities in Europe, the United States and South Korea to find other sources of uranium to fuel their current and future nuclear plants.

And, with Russia set to stop selling downgraded weapons uranium, this has led some countries to start stockpiling the metal again in fear of pending shortages.

For all the warnings, some power companies still may be unprepared for the realities of the upcoming crunch, according to Paladin's Chief Executive John Borshoff.

"The utilities remain blissfully ignorant," said Borshoff last week at the BMO Global Mining Conference, "thinking that somehow, at current prices, well-meaning but totally inadequate juniors will somehow get their operations off the ground in ridiculously short-time frames."

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(Additional Reporting by Euan Rocha; Editing by Frank McGurty and Rob Wilson)

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