UK broker Liberum has sounded a note of caution about the future supply-demand balance in the uranium market.
In a detailed 11-page research note Liberum set out its case that although demand for uranium from new power stations is likely to be material, the rise of renewables and an increasing tendency to favour gas-powered electricity generation will mitigate against any significant breakout in the price in the near-term.
In particular, Liberum also noted that the uranium market is not currently in deficit, as supply from stockpiles continues to be fed into the market, and that it could take years before all this inventory is drawn down.
Much of this analysis is based on projections put together by BP in its Energy Outlook report. BP has downgraded its future demand estimates for power from coal, nuclear and hydro. The likely reduction in coal-fired power is not particularly surprising, as this trend has been well highlighted both in the financial and in the popular press. Even the Chinese are beginning to move on from coal, although it does still have far more adherents in Africa and the Far East than it does in Europe.
In the case of hydro power, it's the capital costs involved that will likely render it less popular. But nuclear has a powerful mixture of environmental, political and capital risk that has meant that a range of forecasters, not just BP, are now becoming quite conservative in their predictions for future demand.
At the lower end of the scale, Statoil predicts demand for nuclear power will grow by just over 1% by 2040. The EIA has growth at around 1.5%, while BP is roughly in the middle with a forecast of 1.8% growth. At the high end is CNPC, which forecasts demand growth of just over 3% by 2040.
These figures show an industry in reasonable shape, but not one that's likely to roar away. And uranium miners, therefore, will have to model current and future production very carefully to ensure an economic return.
Notably, Liberum is lukewarm towards market favourite Berkeley Energia (LON:BKY). Liberum highlights permitting issues with the Spanish project, although Berkeley Energia itself has recently highlighted the significant support it has both from government and local communities on the ground in Spain.
What's perhaps more interesting from the perspective of the Liberum research isn't so much the likely success of failure of Berkeley's Salamanca mine itself, but the fact that it's the only uranium mine of any significance currently in development anywhere in the world.
Still, all that being said, Liberum does expect a steady increase in the uranium spot price over the next five years, rising from the current price of around US$20 to closer to US$60 by 2025.
That should go a long way towards making the Berkeley Energia mine economic, and might perhaps stimulate further mine restarts. But of course, if those restarts bring further supply into the market, the price itself will be subject to more downward pressure.
Liberum's preferred way of playing these complex dynamics is through market newcomer Yellow Cake PLC (LON:YCA), which is aiming to trade in uranium and in particular is likely to buy up much of the spot market excess supply that's currently available.
Clearly, if the uranium price does move as Liberum expects, this could be a very successful medium-term strategy. It also obviates the need for mining and permitting risk, and although there is significant capital outlay involved, that capital will come straight onto the Yellow Cake balance sheet and can be marked to market.
But for all its risks, the financial forecasts Liberum has put together for Berkeley Energia still make it look fairly attractive. The company is likely to have cleared its debts in five years, and to be generating a profit of around US$170mln.
That's not bad going from a company which has only been around a couple of years, and goes to show that even in unfavourable markets, skilled positioning and skilled people can still get things done.