Metal Prospects Uranium Market Outlook Third Quarter 2013

Transcription

1 RBC Dominion Securities Inc. H. Fraser Phillips (Analyst) (416) Thomas Klein (Associate) (416) Steve Bristo (Associate) (416) June 18, 2013 Metal Prospects Uranium Market Outlook Third Quarter 2013 Demand We forecast average uranium demand growing at 4.7% per year through 2020, driven primarily by nuclear power growth in China. We assume gradual reactor restarts in Japan beginning in late We assume a slow restart schedule given the more stringent requirements of the Nuclear Regulatory Authority (NRA). We do not include the three reactors that are more than 40 years old and reactors that are thought to lie on active faults. By 2018, we estimate that the Japanese nuclear fleet will run at 80% of its pre-fukushima level. Supply Our supply forecast is largely unchanged from one quarter ago. The only adjustment that we made is to lower 2013 supply by 2 million pounds due to a disruption in mining operations at Areva s Somair mine in Niger (nearly 6.5 million pounds annual production and almost 4% global mined supply). The loss of production appears to have had only a modest effect on the spot market, although it has reduced our forecasted 2013 surplus by approximately 25% to 5.1 million pounds. Our forecast post-2013 remains unchanged. All values in U.S. dollars unless otherwise noted. Priced as of prior trading day s market close, ET (unless otherwise stated). For Required Non-U.S. Analysts and Conflicts Disclosures, please see page 26. Uranium Price Forecast (US$/lb) New Old % Chg. 2013E $45.00 $ % 2014E $65.00 n/c n/c 2015E $75.00 n/c n/c 2016E $75.00 n/c n/c 2017E $80.00 n/c n/c Long-term $65.00 n/c n/c Note: Price changes were originally published in our June 6, 2013 research comment, Q Commodity Price Revisions & Outlook: Poor Fundamentals, Attractive Valuations. Market Balance and Inventories We expect the current surplus to give way to a deficit in 2014, followed by two years of balanced markets in 2015 and 2016 as Cigar Lake ramps up. In 2017 and beyond, we are forecasting significant supply deficits, which will exceed 35 million pounds by We believe that new supplies needed to fill the growing deficit will require uranium prices higher than $80/lb to provide the incentive to develop. Price Forecasts Both the spot market and term market have been under pressure from a lack of demand because interest in the uranium market has steadily declined over the past several months after an uptick in activity in January and February Sellers appear reluctant to offer material below $40/lb, and we believe the spot price is well supported by costs at this level. However, prices are currently testing support at the $40.00/lb level once again. We expect prices to begin to move higher in the latter part of 2013 in response to progress on the restart of Japanese reactors and the end of the highly enriched uranium (HEU) agreement. We lowered our uranium spot price forecast for 2013 to $45.00/lb from $48.29/lb to reflect performance year-to-date. Our spot price forecasts for 2014 through 2017 and our term price forecasts are unchanged. Our long-term price forecast remains $65.00/lb in 2013 US dollars. Risks to Forecast Nuclear accidents Any new major problem with a nuclear reactor could quickly curtail new reactor builds and significantly reduce demand. Supply Execution or regulatory problems could reduce mine supply. Investment demand Material owned by speculators and investors could temporarily flood the market, while incremental purchases could intensify any upward price movement once the market begins to tighten.

2 Metal Prospects: Uranium Market Outlook Third Quarter 2013 Table of Contents Uranium Supply/Demand Balance... 3 Exhibit 1. Uranium/Supply Demand Balance (MM lb U 3 O 8 equivalent)... 3 Exhibit 2. Global Uranium Supply/Demand Balance... 4 Exhibit 3. Global U 3 O 8 Supply versus Demand (000 lb)... 4 Exhibit 4. Global U 3 O 8 Supply/Demand Balance and U 3 O 8 Price... 4 Exhibit 5. Long-Term Contract Coverage, 2004 to Exhibit 6. Relative Size of the Uranium Market, 2012 (US$B)... 6 Exhibit 7. Uranium Incentive Pricing Cost Curves All Mines, Existing and Planned... 6 Exhibit 8. Uranium Incentive Pricing Cost Curves Future Projects Only (15% Rate of Return)... 7 Exhibit 9. RBC Capital Markets Uranium Supply Forecasts (Q1/07 to Q1/13, in million pounds U 3 O 8 )... 7 Exhibit 10. Estimated Uncovered Uranium Requirements (2012A 2025E)... 8 Exhibit 11. RBC Capital Markets Uranium Price Forecast (US$/lb U 3 O 8 )... 9 Exhibit 12. Spot versus Term Contract Uranium Prices... 9 Exhibit 13. Annual Volumes and U 3 O 8 Prices... 9 Exhibit 14. Uranium Supply, 2008A to 2020E (000 lb U 3 O 8 ) Exhibit 15. Uranium Mine Supply, 2007A to 2020E New vs. Q4/11 Forecast (000 lb U 3 O 8 ) Exhibit 16. Changes in Uranium Mine Production, 2008A to 2020E (2007 base year; 000 lb U 3 O 8 ) Exhibit 16, cont d: Changes in Uranium Mine Production, 2008A to 2020E (2007 base year; 000 lb U 3 O 8 ) Exhibit 17. Mine Supply, Non-Mine Supply and Demand Exhibit 18. Global Mine-Sourced Uranium, Uranium Demand, and Price Forecast Exhibit 19. Uranium Production by Region, 1948 to 2020E (000 lb U 3 O 8 ) Exhibit E Production by Geographical Region Exhibit 21. RBC Capital Markets 2013 Uranium Production Cash Cost Curve Exhibit 22. RBC Capital Markets Long-Term Uranium Production Cash Cost Curve Exhibit 23. Long-Term Uranium Production and Requirements (1945 to 2020E) Exhibit 24. Secondary Uranium Supply, 2003A to 2030E Exhibit 25. Uranium Demand, 2005A to 2020E (000 lb U 3 O 8 ) Exhibit 26. Utility Strategic Inventory in Terms of Desired Level of Forward Requirements (Demonstrated as a Percentage of Utilities Replying), 2011 vs and 2009 vs Exhibit 27. Nuclear Power Generation Current, Under Construction, and Planned Exhibit 28. WNA Global Reactor Statistics (September 2002 to January 2012) (Number of Reactors) Exhibit 29. Nuclear Contribution to Electricity Generation Exhibit 30. Forecast Uranium Demand by Region, 2003 to 2030E Exhibit 31. Uranium Demand by Region Exhibit 32. Uranium Demand Growth Exhibit 33. Nuclear Fuel Cost Analysis Exhibit 34. Nuclear Contribution to Electricity Generation (US$/ MWh) Exhibit 35. Levelized Production Cost by Fuel Costs for Nuclear, Gas (CCGT), and Coal Exhibit 36. Nuclear, Gas, and Coal Production Costs Including CO 2 Cost June 18,

3 Metal Prospects: Uranium Market Outlook Third Quarter 2013 Uranium Supply/Demand Balance Exhibit 1. Uranium/Supply Demand Balance (MM lb U 3 O 8 equivalent) U3O8 Production: 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Western World Existing Planned Total % Change Year/Year 4.6% 3.0% -6.3% 0.2% 8.1% 2.1% 10.0% 10.6% 11.4% 2.0% 6.2% 6.0% 3.3% Former East Block Existing Planned Total % Change Year/Year 13.8% 36.7% 15.1% 8.0% 3.8% 4.8% 2.3% 3.0% 3.9% 3.1% 2.9% -0.6% -1.8% Total World Existing Planned Total % Change Year/Year 7.9% 15.5% 3.1% 4.1% 5.9% 3.4% 6.1% 6.9% 7.9% 2.5% 4.7% 3.0% 1.1% Former Soviet Union Exports: 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Russian EUP Re-enriched Tails HEU Feed HEU Feed II Kazak EUP Total HEU Feed: 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E GNSS (U.S. Quota) Cameco/Cogema/Nukem Total Other: 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E USEC Sales U.S. Government Stockile Sales TVA DOE HEU MOX & Reprocessed U Total Supply: 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Total U3O8 Supply % Change Year/Year 4.7% 13.0% -0.4% 0.7% 4.0% 4.4% -6.0% 5.2% 7.2% 1.6% 2.4% 1.3% 0.5% Demand: Reactor & Inventory Requirements 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E RBC Demand % Change Year/Year 7.2% 1.8% -2.7% 3.2% 3.8% 6.8% 3.0% -2.2% 7.5% 8.8% 5.3% 0.6% 7.5% Market Balance & Price 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Implied Market Surplus/Deficit: Average Spot Price US$/lb U3O8 $63.02 $46.66 $46.46 $57.01 $48.83 $45.00 $65.00 $75.00 $75.00 $80.00 $80.00 $80.00 $80.00 Average Term Price US$/lb U3O8 $84.13 $66.00 $60.29 $67.48 $60.72 $58.00 $75.00 $80.00 $80.00 $85.00 $85.00 $85.00 $85.00 Source: World Nuclear Association, Ux Consulting, company reports, RBC Capital Markets estimates Uranium prices are again testing support at the $40/lb level. We expect that support will hold once again at current levels but also that uranium prices will remain relatively subdued in the near term. We expect prices to begin to move higher in the latter part of 2013 in response to progress on the restart of Japanese reactors and the end of the HEU agreement. The longterm price indicator has maintained a significant premium to the spot price, and we anticipate this will continue. Beyond 2013, we expect the looming supply-demand deficit will drive prices higher. China continues to be the main driver of increased demand, targeting 60GW of nuclear generation by 2020, which is up from its current nuclear generation capacity of 13GW. At the same time, new mine supply growth has been negatively affected by depressed uranium prices. We think this will contribute to a pronounced uranium supply-demand deficit. We forecast the uranium spot price will increase to $65 per pound in 2014, $75 in 2015 and 2016, and $80 in 2017 through to Our long-term uranium spot price remains $65/lb per pound in 2013 US dollars. June 18,

4 1970A 1972A 1974A 1976A 1978A 1980A 1982A 1984A 1986A 1988A 1990A 1992A 1994A 1996A 1998A 2000A 2002A 2004A 2006A 2008A 2010A 2012A 2014E 2016E 2018E 2020E thousand lbs U3O8 Uranium Price (US$/lb) 2003A 2005A 2007A 2009A 2011A 2013E 2015E 2017E 2019E 000 lbs U3O8 thousand lbs U3O8 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E thousand lbs U3O8 Metal Prospects: Uranium Market Outlook Third Quarter 2013 Exhibit 2. Global Uranium Supply/Demand Balance 50,000 40,000 30,000 20,000 10, ,000-20,000-30,000-40,000-50, , , , , , , , ,000 75,000 50,000 25,000 0 Net Balance (000 lbs, LS) World Supply (000 lbs, RS) World Requirements (000 lbs, RS) From the current surplus, we expect the market to move into deficit in 2014, followed by two years of balanced markets in 2015 and 2016 as Cigar Lake ramps up. In 2017 and beyond, we forecast significant supply deficits, which will exceed 35 million pounds by We believe that new supplies needed to fill the growing deficit will require uranium prices higher than $80/lb to provide incentives to explore, finance, and develop new projects. Our supply forecast includes the development of 14 new mine projects producing approximately 50 million pounds by Source: Ux Consulting, World Nuclear Association, RBC Capital Markets estimates Exhibit 3. Global U 3 O 8 Supply versus Demand (000 lb) 300, , , , ,000 50,000 Other Secondary USEC HEU FSU Secondary Former East Bloc Mine Western World Mine We forecast new supply will be added to the market in the coming years, but that will not be enough to meet demand. Supply has been negatively affected by depressed uranium prices over the past four years, which have contributed to the growing supply-demand imbalance beyond Global Demand Source: Ux Consulting, World Nuclear Association, RBC Capital Markets estimates Exhibit 4. Global U 3 O 8 Supply/Demand Balance and U 3 O 8 Price 115,000 90,000 65,000 40,000 15,000-10,000-35,000-60,000-85, ,000 $ $80.00 $60.00 $40.00 $20.00 $0.00 Our analysis suggests that the uranium market will require substantial, new sources of uranium to fuel the projected growth in the global nuclear reactor fleet and that significantly higher uranium prices will be required to encourage new project development. Net Balance (000 lbs, LS) U3O8 Price (US$/lb) Source: Ux Consulting, World Nuclear Association, RBC Capital Markets estimates June 18,

5 million pounds U3O8 Metal Prospects: Uranium Market Outlook Third Quarter 2013 The Long-Term Uranium Market Uranium is unique in the metals world in that utilities needs are very predictable in volume and timing, and are absolutely necessary. As a result, utilities can and will purchase uranium well in advance of deliveries. Therefore, utilities are normally looking to establish long-term contracts every year, and in each year, they will purchase a portion of their future needs. This activity continues until their needs are close to 100% covered as each year approaches. Exhibit 5. Long-Term Contract Coverage, 2004 to Jan-06 Jan-07 Jan-08 Q1/ Q1/2010 Q1/2011 Q4/2011 Q1/2012 Q4/2012 Q1/ Source: Ux Consulting (Q1/13) Based on our forecast of available uranium supplies (mine sourced and non-mine sourced), we do not think that there is sufficient uranium to cover the needs of (and certainly not beyond that time frame). No HEU II The current HEU downblending program provides 20 million pounds U 3 O 8 to the market each year. On August 24, 2010, the Director General of Rosatom, Sergey Kirienko, gave a speech in Toronto, Canada. After his speech, Mr. Kirienko was asked if he would comment on the future of HEU downblending after the end of the current accord in 2013 for either internal (Russian) or external needs. His answer was quite clear: there will be no downblending of HEU to low enriched uranium (LEU) for the foreseeable future except in the extreme situation driven by force majeure. We believe Mr. Kirienko s statement re-affirms our view that there will be no continued HEU downblending after December June 18,

6 Incentive Price (US$/lb U3O8) Oil Gold Copper Aluminum Silver Nickel Zinc Uranium 2012 Market Value (US$ billions) Metal Prospects: Uranium Market Outlook Third Quarter 2013 Uranium Pricing: Lack of Transparency Drives Uncertainty The uranium market is small. In 2012, global demand was approximately 184 million pounds (not only reactor requirements) or, measured at spot prices, a market of about $9 billion. This pales in comparison to gold, copper, aluminum, silver, nickel, and zinc. Additionally, the number of buyers, sellers, and traders in the uranium business is extremely small when compared to other metals. When combined with the secrecy that has always been associated with this industry, the uranium market is very opaque. Exhibit 6. Relative Size of the Uranium Market, 2012 (US$B) $300 $250 $200 $150 Despite significant price increases over the past 10 years, the uranium market is relatively small compared to other base and precious metals. Note: Calculated using estimated global demand and priced at estimated spot levels. $100 $50 $0 Source: World Nuclear Association, Ux Consulting, RBC Capital Markets estimates Incentive Pricing for Uranium Supplies We created incentive cost curves using various rates of return to illustrate the required uranium prices to provide mine developers with the incentive to build new projects. Each curve on the graph in Exhibit 7 represents a required rate of return. The new projects that are proposed for near- to mid-term development require $60 80/lb depending on the rate of return required. We think mining companies will look toward the higher rates of return ( %) to account for the risks associated with the development of uranium mines (see next section). Based on our analysis, 23 million pounds of additional uranium can be brought into production between $60/lb and $70/lb and an incremental 50 million pounds can be added at prices between $80/lb and $100/lb. Exhibit 7. Uranium Incentive Pricing Cost Curves All Mines, Existing and Planned $200 $180 $160 $ % 10.0% 12.5% 15.0% 20.0% $120 $100 $80 $60 $40 $20 $ Cumulative Production (mm lbs U3O8) Source: Company reports, Ux Consulting, RBC Capital Markets estimates June 18,

7 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E Mine Supply (M lbs) Incentive Price (US$/lb U3O8) Metal Prospects: Uranium Market Outlook Third Quarter 2013 Exhibit 8. Uranium Incentive Pricing Cost Curves Future Projects Only (15% Rate of Return) $160 $140 $120 $100 $80 $60 at 15% IRR $40 $20 $ Cumulative Production (mm lbs U3O8) Source: Company reports, Ux Consulting, RBC Capital Markets estimates Uranium Supply Forecasts Execution Problems Looking back at our supply forecasts from 2007 to present, we have observed a very clear pattern: The expected supply from 2007 through 2012 has dropped dramatically. Looking at our forecast compared to 2008A, 2009A, 2010A, 2011A, and 2012A, we see supply reductions of 19 million pounds, 14 million pounds, 24 million pounds, 29 million pounds, and 37 million, respectively. Most of these shortfalls have been driven by either problems with existing operations or delays in new mine production, with an emphasis on the latter. The pattern remains the same. Our supply forecast for 2013 to 2015 is lower today than it was in Most of the decrease in our supply forecast is attributable to a decline or delay in new projects as the uranium price declined post-fukushima. Additionally, we do not see any reason that the problems that hampered new supply between 2007 and 2011 should disappear completely. Rather, we think there is a good chance that future supply realizations will again disappoint. We do not think that this risk is discounted in the current uranium price. Exhibit 9. RBC Capital Markets Uranium Supply Forecasts (Q1/07 to Q1/13, in million pounds U 3 O 8 ) : Supply forecasts have trended much lower : Forecasted supplies continue to trend lower Q1/07 Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q1/12 Q4/12 Q1/13 Fukushima supply response Source: Ux Consulting Company reports, RBC Capital Markets estimates June 18,

8 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E millions lbs U3O8 % of Demand Uncovered Metal Prospects: Uranium Market Outlook Third Quarter 2013 The Role of the NYMEX Futures Uranium futures began trading on the NYMEX in May Volumes have been quite low despite three years of trading. We believe that market participants have yet to find value through trading the NYMEX uranium futures. There are certain attributes of the uranium market that we think make uranium futures quite different from other commodity futures: Uranium futures cannot be settled with physical delivery (this is not unique to uranium). The uranium future is settled based on the Ux Consulting spot price at the end of the month. This is quite different from other commodities that trade on a daily basis. In general terms, futures prices are expected to converge with the spot price on the day of settlement. This may not always be the case with the uranium futures. The market participants for the futures market and the spot market will likely be very different. We estimate that the spot market comprises fewer than 150 participants globally. The futures market is more or less open to anyone who can afford it (with a single contract of 250 pounds U 3 O 8 trading for less than $15,000). Therefore, we believe that there will be two different groups of buyers and sellers with different motivations. The spot market participants will transact in physical material, while those trading futures will settle in cash. Long-Term Contracting Exhibit 10. Estimated Uncovered Uranium Requirements (2012A 2025E) % % % % 50 20% 0 0% U.S. Utilities Non-U.S. Utilities Percent of demand NB. The uncovered demand is only for existing reactors and does not include new builds. Source: Ux Consulting, RBC Capital Markets estimates As we have witnessed over the past few years, the Midterm market continues to evolve, and most recent contracting activity has occurred in this market. The Midterm market is one in which prices and volumes are generally fixed at the time of signing. According to Ux Consulting, for long-term contracts, suppliers are favouring market-related pricing models with a preference for long-term price indicators whereas utilities prefer spot. For spot related long-term deliveries, offers without floors and ceilings are becoming more common while the floor and ceiling prices have moved in opposite directions. June 18,

9 million lbs US$/lb US$/lb U3O8 Metal Prospects: Uranium Market Outlook Third Quarter 2013 Exhibit 11. RBC Capital Markets Uranium Price Forecast (US$/lb U 3 O 8 ) Current Previous Change LT Price 2007A $98.68 $ $ A $63.02 $ $ A $46.66 $ $ A $46.46 $ $ A $57.01 $ $ A $48.83 $ $ E $45.00 $48.29 (3.29) $ E $65.00 $ $ E $75.00 $ $ E $75.00 $ $ E $80.00 $ $ E $80.00 $ $ E $80.00 $ $ E $80.00 $ $80.00 Long-Term $65.00 $ $60.00 We lowered our average uranium price forecast for 2013 to reflect year-to-date performance. We believe the uranium price will gradually increase starting in H2/13 as Japanese nuclear reactors are restarted and the HEU agreement expires. Source: Ux Consulting, RBC Capital Markets estimates Exhibit 12. Spot versus Term Contract Uranium Prices $160 $140 $120 $100 $80 $60 $40 $20 $0 Long Term Contract Price Spot Price The term price has come down from its peak of $95/lb but has remained fairly robust relative to the spot market. The term price has dropped to $56/lb from $60/lb at the beginning of At the end of April 2013, it had increased slightly to $57/lb where it remains. Source: Ux Consulting, RBC Capital Markets estimates Exhibit 13. Annual Volumes and U 3 O 8 Prices $125 $100 $75 $50 $25 Spot volumes were down in 2012 as market activity remained subdued due to the effects of the Fukushima disaster. However, contract volumes were up significantly, which in our view is an indication of robust, long-term demand Spot Volume (mm lbs, LS) Completed Contract Volume (mm lbs, LS) Annual Average Spot U3O8 Price (US$/lb, RS) $0 Source: Ux Consulting, RBC Capital Markets estimates June 18,

10 Metal Prospects: Uranium Market Outlook Third Quarter 2013 Uranium Supply Exhibit 14. Uranium Supply, 2008A to 2020E (000 lb U 3 O 8 ) Year 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Africa 19,760 21,553 22,210 22,930 26,894 27,293 30,190 30,912 31,128 33,171 39,900 45,882 53,464 Australia 21,872 21,922 16,282 15,921 18,532 18,529 18,087 18,155 23,434 21,711 20,911 21,088 21,695 Canada 23,845 24,193 24,207 23,713 23,283 23,710 26,867 34,354 39,292 40,067 40,567 41,067 36,721 Kazakhstan 22,148 35,481 44,207 50,578 53,748 56,913 57,858 60,097 62,983 64,964 66,849 65,927 64,248 Russia 9,155 9,266 9,261 7,782 7,360 7,760 8,580 9,360 9,660 10,310 10,960 11,310 11,360 Ukraine 2,100 2,548 2,210 2,314 2,314 2,314 2,314 2,314 2,314 2,314 2,314 2,314 2,314 USA 3,891 3,851 4,521 4,415 3,865 4,605 6,610 7,150 7,250 8,200 8,200 8,200 8,200 Uzbekistan 6,000 6,250 6,240 6,250 6,250 6,250 6,250 6,250 6,250 6,250 6,250 6,250 6,250 Other 4,458 5,754 5,759 6,479 6,477 6,474 6,474 5,884 5,903 5,956 6,053 6,060 6,105 Total Mine Supply 113, , , , , , , , , , , , ,357 y/y Change 7.9% 15.5% 3.1% 4.1% 5.9% 3.4% 6.1% 6.9% 7.9% 2.5% 4.7% 3.0% 1.1% Year 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Non-Mine Supply Former Soviet Union Supplies Russian Govt Stockpiles 8,000 7,000 6,000 5,000 5,000 5,000 5,000 5,000 5,000 4,000 3,000 2,000 1,000 Re-Enriched Tails 10,000 9,000 7,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 HEU Feed 0 8,000 8,000 8,000 8,000 8, HEU II Kazak EUP Total FSU 18,000 24,000 21,000 17,000 17,000 17,000 9,000 9,000 9,000 8,000 7,000 6,000 5,000 HEU Feed (to West) GNSS (US Quota) 7, Cameco/Cogema/Nukem/GNSS 19,000 12,000 12,000 12,000 12,000 12, Total HEU USEC Sales 4,900 4,900 4,600 4,600 3,900 3,400 2,900 1,600 1,600 1,600 1,600 1,600 1,600 Other U.S. Government Stocks 0 3,425 4,647 5,213 4,800 8,681 7,639 7,639 8,305 8,032 5,222 3,066 2,972 TVA 2, US HEU Blend-down (Non-TVA) MOX + RepU 6,500 7,600 7,500 6,700 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 Total Other 8,880 11,025 12,147 11,913 11,800 15,681 14,639 14,639 15,305 15,032 12,222 10,066 9,972 Total Non-Mine Supply 50,780 51,925 49,747 45,513 44,700 48,081 26,539 25,239 25,905 24,632 20,822 17,666 16,572 Secondary Supply as % of Total 31% 28% 27% 24% 23% 24% 14% 13% 12% 11% 9% 8% 7% TOTAL URANIUM SUPPLY 164, , , , , , , , , , , , ,929 y/y Change 4.7% 13.0% -0.4% 0.7% 4.0% 4.4% -6.0% 5.2% 7.2% 1.6% 2.4% 1.3% 0.5% Source: World Nuclear Association, Ux Consulting, company reports, RBC Capital Markets estimates Supply Our supply forecast is largely unchanged from one quarter ago. The only adjustment we made is to lower 2013 supply by 2 million pounds due to a disruption in mining operations at Areva s Somair mine in Niger (nearly 6.5 million pounds annual production and almost 4% of global mined supply). The loss of production appears to have had only a modest effect on the spot market, although it has reduced our forecasted 2013 surplus by approximately 25% to 5.1 million pounds. Our supply forecast post-2013 remains unchanged. Most of our forecast new supply comes from state-owned entities (i.e., ARMZ, Kazatomprom, and CGNPC) operating in developing countries that are increasing their supply contribution significantly (i.e., Namibia, Niger, Tanzania, and Kazakhstan). While we are confident that most of the forecast production will come to fruition, if projects are delayed, then the market could be much tighter than we are forecasting and uranium prices much higher than anticipated. June 18,

11 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Mine Supply (000s lbs U3O8) Metal Prospects: Uranium Market Outlook Third Quarter 2013 Exhibit 15. Uranium Mine Supply, 2007A to 2020E New vs. Q2/13 Forecast (000 lb U 3 O 8 ) 220, , , , , , ,000 Current Forecast Previous Forecast Source: World Nuclear Association, Ux Consulting, company reports, RBC Capital Markets estimates Primary Mine Supply Exhibit 16. Changes in Uranium Mine Production, 2008A to 2020E (2007 base year; 000 lb U 3 O 8 ) Year 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Africa Akouta Arlit (642) 2,556 2, ,468 2,468 2,468 2,468 2,468 2,468 2,468 Langer Heinrich ,305 1,351 2,701 3,160 3,142 3,142 3,142 3,142 3,142 3,142 3,142 Kayelekera ,742 2,200 2,862 3,108 2,898 3,133 3,133 2,685 2,236 2,236 2,236 Rossing (1) (3,266) (2,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) Dominion - (193) (193) (193) (193) (193) (193) (193) (193) (193) (193) (193) (193) Vaal Reefs Azelik (Niger - Chinese owned) ,500 2,000 2,000 2,000 2,000 2,000 2,000 Ezulwini Imouraren, Niger (AREVA) ,600 5,200 7,800 MWS ,020 1, Husab ,500 5,000 7,500 12,500 Mkuju River ,104 3,000 3,000 Rossing Additions Trekoppkje Randfontein ,000 1,000 1,000 1,000 1,000 Total Africa - 1,793 2,450 3,171 7,134 7,533 10,855 11,789 12,219 14,261 20,990 26,972 34,554 Australia Ranger - (71) (3,261) (5,800) (3,444) (4,794) (6,035) (6,965) (2,089) (3,812) (3,812) (3,812) (3,812) Olympic Dam (1,796) Four Mile ,000 1,500 2,000 2,000 2,000 2,000 2,000 Beverley - 17 (533) (455) (453) (253) (53) Honeymoon Olympic Dam (Expansion) Jabiluka Valhalla/Skal ,179 2,729 Yeelirrie (CCO) ,500 Total Australia - 50 (5,590) (5,951) (3,340) (3,343) (3,784) (3,717) 1,562 (161) (961) 218 4,268 Canada McArthur River - 1,624 2,770 2,770 2,340 1,767 1,624 1,624 1,624 1,624 1,624 1,624 1,624 Cigar Lake ,900 11,100 15,800 16,500 17,600 18,100 18,000 McClean Lake - (1,475) (1,018) (3,302) (3,302) (3,302) (3,302) (3,052) (3,302) (3,302) (3,302) (3,302) (3,302) Rabbit Lake (1,390) (3,483) Aurora Midwest (McClean) ,500 4,000 4,000 4, Total Canada (132) (562) (135) 3,022 10,722 18,422 19,622 20,122 20,622 13,088 Continued on next page June 18,

12 Metal Prospects: Uranium Market Outlook Third Quarter 2013 Exhibit 16, cont d: Changes in Uranium Mine Production, 2008A to 2020E (2007 base year; 000 lb U 3 O 8 ) Year 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Kazakhstan LLP Kazatomprom - (450) (400) (684) (570) (400) (150) (150) (150) (150) (150) (150) (150) Stepnogorsk - (398) - (385) (300) (338) (1,300) (1,300) (1,300) (1,300) (1,300) (1,300) (1,300) Akdala (78) (75) (75) (75) (75) (75) (75) (998) (2,677) Inkai - 1,359 3,333 3,667 3,833 4,333 4,333 4,333 4,333 4,333 4,333 4,333 4,333 N. Kharasan ,078 1,369 1,657 2,469 2,969 3,470 3,970 4,970 4,970 4,970 South Inkai - 1,071 3,289 2,893 3,738 3,581 3,581 4,047 4,045 4,049 4,049 4,050 4,050 Muyunkum (KATCO) - 4,650 5,174 5,553 5,831 5,974 6,274 6,474 6,474 6,474 6,474 6,474 6,474 Karatau (Budenovskoye) - 1,600 2,745 3,953 3,592 3,500 3,500 3,500 4,358 5,216 6,100 6,100 6,100 Budenovakoye 1, 3, 4 (Akbastau) - 1,014 1,560 2,874 2,990 3,675 3,700 4,450 5,200 5,200 5,200 5,200 5,200 Central Mynkuduk - 1,671 2,030 2,531 2,866 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 Western Mynkuduk ,580 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 Irkol ,170 1,726 1,870 1,870 1,870 1,870 1,870 1,870 1,870 1,870 1,870 Semisbai ,040 1,040 1,040 1,040 1,040 1,040 1,040 1,040 1,040 1,040 Zarechnoye ,476 1,757 1,768 1,768 2,090 2,090 2,090 2,090 2,090 2,090 Kharasan ,560 2,080 2,600 2,600 3,380 4,000 4,000 4,000 4,000 Total Kazakhstan - 13,334 22,060 28,430 31,600 34,765 35,711 37,949 40,836 42,817 44,701 43,779 42,100 Spain ,124 1,173 1,474 China - 1,300 1,690 2,080 2,080 2,080 2,080 2,080 2,080 2,080 2,080 2,080 2,080 Czech Republic - 16 (24) (89) (91) (94) (94) (684) (684) (684) (684) (684) (684) Other - (20) (365) Total Other - 1,296 1,301 2,021 2,019 2,016 2,016 1,426 1,550 1,907 2,550 2,599 2,900 Russia Priargunsky - (120) (338) (2,233) (2,730) (2,730) (2,210) (1,430) (1,430) (780) (130) (130) (130) Dolmatovskoye Khiagda ,141 1,141 1,441 1,441 1,441 1,791 1,841 Total Russia (1,373) (1,795) (1,395) (575) ,155 1,805 2,155 2,205 United States AREVA/Christensen Ranch PRI/Crow Butte PRI/Highland/Smith R (300) URI/Kingsville Dome - (222) (264) (264) (264) (264) (264) (264) (264) (264) (264) (264) (264) URI/Vasquez - (37) (37) (37) (37) (37) (37) (37) (37) (37) (37) (37) (37) IUC/White Mesa - (278) (19) (387) Mestena/Alta Mesa - (3) (203) (203) (203) (203) (703) (703) (703) (703) (703) Goliad/Palangana Willow Creek ,000 1,000 1,500 2,000 2,000 2,000 2,000 Lost Creek (URE) ,000 1,000 1,000 1,000 1,000 1,000 Nichols/Hank Total USA - (40) (26) 714 2,719 3,259 3,359 4,309 4,309 4,309 4,309 Uzbekistan Navoie Total Uzbekistan TOTAL CHANGES TO SUPPLY - 17,590 21,670 27,153 35,494 40,619 50,427 62,097 78,916 84,373 93, , ,888 CHANGES TO SUPPLY BY REGION Africa - 1,793 2,450 3,171 7,134 7,533 10,855 11,789 12,219 14,261 20,990 26,972 34,554 Australia - 50 (5,590) (5,951) (3,340) (3,343) (3,784) (3,717) 1,562 (161) (961) 218 4,268 Canada (132) (562) (135) 3,022 10,722 18,422 19,622 20,122 20,622 13,088 Kazakhstan - 13,334 22,060 28,430 31,600 34,765 35,711 37,949 40,836 42,817 44,701 43,779 42,100 Russia (1,373) (1,795) (1,395) (575) ,155 1,805 2,155 2,205 Ukraine USA - (40) (26) 714 2,719 3,259 3,359 4,309 4,309 4,309 4,309 Uzbekistan Other - 1,296 1,301 2,021 2,019 2,016 2,016 1,426 1,550 1,907 2,550 2,599 2,900 Total - 17,590 21,670 27,153 35,494 40,619 50,427 62,097 78,916 84,373 93, , ,888 Source: World Nuclear Association, Ux Consulting, company reports, RBC Capital Markets estimates June 18,

13 A 2013E 2018E U3O8 Supply (000 lbs) 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 000 lbs U3O8 U3O8 $/lb 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 000 lbs U3O8 Metal Prospects: Uranium Market Outlook Third Quarter 2013 Exhibit 17. Mine Supply, Non-Mine Supply and Demand 300, , , , ,000 50,000 - We are forecasting a significant deficit starting in 2017 and growing thereafter. We continue to see a large supplydemand gap opening in the near term and growing significantly post While this seems to be many years away, we believe that the uranium price will need to reach higher levels in order to spur the development of new projects to fill this gap, and those projects will likely take many years to bring into production. Existing Supply Likely Additions Possible Additions Secondary Sources Global Demand Source: World Nuclear Association, Ux Consulting, RBC Capital Markets estimates Exhibit 18. Global Mine-Sourced Uranium, Uranium Demand, and Price Forecast 350, , , , , ,000 50,000 0 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Mine-sourced uranium production remains well short of demand. Secondary supplies and certain inventories will likely help minimize the gap until 2013 when the US-Russian HEU agreement terminates. Starting in 2014 and beyond, we forecast a growing deficit. Production Requirements Average Uranium Spot Price (US$/lb) Source: World Nuclear Association, Ux Consulting, RBC Capital Markets estimates Exhibit 19. Uranium Production by Region, E (000 lb U 3 O 8 ) 250, , ,000 Other USA Canada Africa Australia The rising uranium price from 2003 onward stimulated a significant rise in mined output, particularly from Kazakhstan and Africa. 100,000 Uzbekistan Ukraine 50,000 Russia Kazakhstan 0 Eastern Bloc Source: World Nuclear Association, Ux Consulting, RBC Capital Markets estimates June 18,

14 Cash Cost (US$/lb U3O8) Cash Cost (US$/lb U3O8) Metal Prospects: Uranium Market Outlook Third Quarter 2013 Exhibit E Production by Geographical Region Uzbekistan 4% USA 3% Ukraine 2% Russia 5% Other 3% Africa 18% Kazakhstan 36% Australia 12% Canada 16% The distribution of global uranium production has changed dramatically over the past few years. In 2006, uranium production was led by Canada, Australia, and Africa. In 2012, the global leader was Kazakhstan, followed by Africa, then Canada and Australia. We believe much of this change is driven by the different regulatory environments across these jurisdictions. Source: World Nuclear Association, Ux Consulting, RBC Capital Markets estimates Exhibit 21. RBC Capital Markets 2013 Uranium Production Cash Cost Curve $ $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $ E Uranium Cash Cost Curve 90th Percentile We estimate that the ninetieth percentile of the current uranium cash cost curve is $50/lb. As a result, we believe the current spot price of $39.75/lb is reasonably well supported from a cost perspective. $ Cumulative Production (mm lbs U3O8) Source: Ux Consulting, Company reports, RBC Capital Markets estimates Exhibit 22. RBC Capital Markets Long-Term Uranium Production Cash Cost Curve $ $ th Percentile $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $ Cumulative Production (mm lbs U3O8) We forecast a long-term uranium price of $65/lb (2013 US dollars) starting in Our long-term price is based on the ninetieth percentile of our cash cost curve forecast (including sustaining capital). We believe this level is appropriate for maintaining uranium production over the long term. We believe our higher-price forecasts between 2014 and 2020 are sufficient to bring enough production to the market to satisfy future demand. Source: Ux Consulting, Company reports, RBC Capital Markets estimates June 18,

15 2003A 2005A 2007A 2009A 2011A 2013E 2015E 2017E 2019E 2021E 2023E 2025E 2027E 2029E 000 lbs U3O E 2017E Million pounds U3O8 Metal Prospects: Uranium Market Outlook Third Quarter 2013 Exhibit 23. Long-Term Uranium Production and Requirements (1945 to 2020E) Historical inventories were built up from the mid-1950s through the late 1980s. However, much of the uranium produced during that period was, and still is, used for military purposes. We believe there is no significant inventory remaining outside of military or government material that is not destined for reactor requirements. Western Production Eastern Production Requirements Source: Ux Consulting, World Nuclear Association, RBC Capital Markets estimates Secondary Uranium Supply Exhibit 24. Secondary Uranium Supply, 2003A to 2030E 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Secondary material has comprised a large portion of uranium supply over the past 20 years. We believe there will be no continuation of the current HEU supply agreement with Russia when it expires in 2013 (see the Highly Enriched Uranium and Russian Suspension Agreement sections on the following page). HEU Russian Government Stockpile Sales MOX & RepU Re-Enriched Tails US/USEC Government Stockpile Sales Source: Ux Consulting, RBC Capital Markets estimates Aside from the primary mine supply of uranium, a key component of the supply-demand balance is the contribution from secondary sources. The secondary sources are varied and comprise the following: MOX and RepU See below. US/USEC Government stockpile sales The sales of previous government strategic stocks that have been deemed surplus. Some of this material is sold through the United States Enrichment Corporation (USEC), which is a public company that was previously a government organization. Russian Government stockpile sales Surplus strategic stocks. Re-enriched tails Derived from the waste streams of previous enrichment (called depleted uranium) that are reprocessed to extract additional usable uranium. HEU See below. Cameco, Areva (the French nuclear utility), Nukem (a German nuclear services company), and GNSS (Globe Nuclear Supply Services) The original companies that were assigned the rights to sell the HEU and LEU products outside of Russia. Effective January 2004, GNSS lost its rights to sell Russian HEU and LEU materials. June 18,

16 Metal Prospects: Uranium Market Outlook Third Quarter 2013 MOX and RepU Mixed oxide fuel (MOX) is a combination of plutonium oxide recovered from spent fuel and new uranium oxide from DU (a waste product of the fuel enrichment), while reprocessed uranium (RepU) involves the removal of uranium and plutonium from spent fuel to fabricate new fuel. Although these two fuel sources have been used for many years, the contribution has been quite low (approximately 5% of total uranium supply). We have assumed that the contribution from both MOX and RepU will decrease, on both a percentage and an absolute basis. With a high uranium price, the economics of reprocessing become more attractive (still considered marginal and done more for political than economic reasons), but the ability to increase production is currently limited by the capacity of existing facilities. We believe the secondary supply will remain fairly constant and predictable. However, with high uranium prices, the potential increase of supply from MOX, RepU, and re-enriched tails exists. Highly Enriched Uranium Historically, more than half of the uranium produced in the world has been used in the production of nuclear weapons and in fuelling military vessels. However, since the end of the Cold War in the early 1990s, many weapons have been dismantled under international treaties, and some of the highly enriched uranium (HEU) and plutonium has been declared surplus. In 1993, the governments of the United States and Russia agreed to allow 500 tonnes of Russian surplus HEU containing about 90% U 235 to be sold into the market as blended-down LEU containing about 4% U 235 ; this equates to approximately 395 million pounds of U 3 O 8. The agreement called for the material to be sold into the market over a 20-year period. While Russia has significantly reduced its supply of weapons-grade uranium through the HEU program, the United States has not. Depending on political pressure and the availability of resources, there is always a possibility that US material could find its way to the market in the future. However, the economics of downblending, coupled with significant technical challenges, minimize this risk. Russian Suspension Agreement (RSA) Russia and the United States have established a framework to allow for the importation of Russian-origin uranium products starting in 2011 through 2020 (after the expiry of the HEU agreement in 2013). We continue to believe that the RSA is focused on providing US utilities with access to Russian-enrichment services. We do not think that the RSA will introduce any new uranium to the global supply chain; therefore, our supply-demand forecast is not affected by this agreement. Russia has already negotiated a number of agreements with US utilities under the RSA, and in March 2011, Techsnabexport (TENEX) established a commercial relationship with USEC that allows Russia to sell enriched-uranium product (EUP) to the US for 10 years starting in While the RSA specifies the quantities of EUP that can be sold into the US, we believe the crux of the agreement was for the sale of enrichment services rather than uranium. Of particular note are the following aspects of the amended RSA: The annual quotas come into effect post-2013 and equate to 20% of the total forecasted US annual consumption (as per the World Nuclear Association s (WNA) 2005 Reference Case adjusted to 0.30% tails assay), and all material will be measured in terms of kilograms of EUP standardized to 4.4% U 235 with a tails assay of 0.30%. Russia can sell uranium from EUP stockpiles that were brought into the US as part of deliveries grandfathered by the original 1992 RSA. No further approvals are necessary for sales of these EUP stockpiles if the sales are made before January 1, While Russia considers SWU transactions services, the US wishes to treat them as goods and, therefore, subject to antidumping regulations. Essential definitions and processes under the amendment remain to be clarified by Statements of Administrative Intent to be issued by the US Government at some undetermined time in the future. Reopener periods in 2016 and 2019 will allow adjustments to these export limits if the WNA s forecasts of US demand are revised higher. The US may consider termination of the amended RSA if Russia fails to carry out its commitments under the initial HEU agreement. Although implementation has not yet been set, the US believes that Russian uranium imported for initial cores should be used exclusively for that purpose and, if not, should be counted against the export limits under the amended RSA. June 18,

17 Metal Prospects: Uranium Market Outlook Third Quarter 2013 The US can unilaterally increase the export limits to address what it calls unforeseen situations of substantial market disruption but has stressed that such an action would only be taken to support the U.S economy and after consulting the domestic uranium industry. US Department of Energy Excess-Inventory Sales On December 16, 2008, the US Department of Energy (DOE) released its Excess Uranium Inventory Management Plan that provided details regarding the US Government s plans to dispose of its excess uranium inventories. The inventories, totalling 153 million pounds, were built up over decades primarily through enrichment activities, weapons programs, and the US-Russian HEU program. The uranium is in various forms, some of which are readily saleable, whereas others require substantial processing to bring to commercial-reactor standards. The DOE plan calls for the selling of uranium into the US market over a period of at least 25 years and not exceeding 10% of US demand, except in the case of special needs such as initial cores. It is important to note that the government stated that the disposition will be carried out in a manner that minimizes any material adverse effects on domestic uranium mining. We interpret that to mean the government will look to sell the uranium in such a way that it does not have an overwhelming negative effect on the prevailing uranium price, thereby hurting domestic uranium producers. We have adjusted our uranium model to account for the DOE s schedule. On March 2, 2011, as part of the 2008 Excess Uranium Inventory Management Plan, the DOE announced that it intends to sell approximately 5 million pounds of uranium into the market each year from 2011 to The proceeds from the sale will be used to fund the cleanup of the Portsmouth Gaseous Diffusion Plant. In response to the DOE s announcement, the Ux Consulting weekly uranium spot price dropped 5% to $66.50 per pound from $69.75 per pound. On May 26, 2011, Traxys North America announced that it had entered into an agreement to purchase all of the uranium that the DOE had intended to sell through We view this as positive news because in the past the DOE sold this material via auction, thereby putting downward pressure on the spot price. However, we believe Traxys will be a far more responsible seller of the material and will not likely sell in a market-disruptive manner. On May 15, 2012, the DOE released a Secretarial Determination to raise its annual uranium sales limit to approximately 7.5 million pounds U 3 O 8, from 5 million pounds. Although the additional DOE sales added to the surplus in 2012 and may contribute to a larger surplus in 2013, it will not be sufficient to balance the market in 2014 and beyond, once the HEU accord expires. Additionally, only a portion of the incremental pounds will likely make its way onto the spot market, thereby reducing the effect on that more sensitive and volatile market. US DOE Excess-Inventory Sales There are five basic types or forms of uranium that are part of the DOE s plan, and for each one, there are potential limits on how quickly and at what cost it can be brought to the market. Unallocated US Highly Enriched Uranium: 32.5 million pounds U 3 O 8 This highly enriched material (greater than 20% U 235 ) is not allocated for any specific purpose and is expected to be sold gradually over many years as weapons are dismantled and the material is rejected by US naval reactors. US-Origin NU as UF 6 : 13.4 million pounds U 3 O 8 The DOE has an inventory of natural uranium (0.71% U 235 ) in UF 6 form (NU uranium hexafluoride is uranium that has been converted and is the feedstock for enrichment plants). This inventory was built during historical DOE enrichment activities and could not be sold until March We think that this material is being sold and that it is likely in commercial form. Russian-Origin NU as UF 6 : 32.3 million pounds U 3 O 8 This material was accumulated by the DOE as part of the US-Russia HEU deal signed in The material was under a moratorium until March 2009, and it meets commercial specifications. The DOE is considering several options, including enriching it to LEU levels to reduce storage costs and maintain a strategic fuel inventory. June 18,