Merrill Raises Uranium Price Forecast on Mine Delays

Merrill Raises Uranium Price Forecast on Mine Delays

Merrill Lynch & Co. raised its 2008 uranium price forecast by 78 percent, citing delays in new mine output and increased demand for the fuel from nuclear reactors being built in China and India.

Uranium for immediate delivery may average $75 a pound in 2007 and $80 in 2008, Merrill said in a Dec. 8 report. Uranium has averaged $46.58 a pound this year, according to U.K.-based industry publisher Metal Bulletin Plc, beating the $44.12 the securities firm forecast in July.

Uranium has gained 78 percent this year as record oil and gas prices and emission charges on fossil-fueled generators spurred demand for alternate sources of energy. The radioactive metal, currently $64 a pound, has gained almost $8 since Cameco Corp., the world’s biggest producer, said Oct. 23 its Cigar Lake project in Canada will be delayed after a flood.

“We don’t see a major trigger on the horizon that will force spot prices down,” Merrill analysts Vicky Binns and Daniel Hynes said in the report. “The delay of Cigar Lake and the imminent arrival of India into the commercial fuel market have created a notable increase in demand.”

About 440 reactors contribute 16 percent of the world’s electricity currently, according to the World Nuclear Association. At the end of November, 28 plants were under construction with a further 62 ordered or planned. India, which runs 16 reactors, is building another seven, and targeting nuclear capacity of 40,000 megawatts by 2020.

Cigar Lake

Merrill had expected 2008 prices to decline after averaging $53 in 2007. Uranium surged 76 percent last year, according to Metal Bulletin. The metal was at $64 a pound on Dec. 8.

Analysts have raised uranium price forecasts and slashed production assumptions since the Cigar Lake flood.

Prices may average $100 a pound in 2007 before easing to $85 in 2008 and $75 in 2009, Toronto-based RBC Dominion Securities Inc. said Nov. 17.

The mine, which would have provided about 10 percent of the global supply at full output of 18 million pounds a year, may be delayed by two years, RBC Dominion said.

Cameco plans to provide a revised timeline and cost estimate for Cigar Lake in February.

Uranium may gain at least $10 a pound next year and will “probably spike higher” if the next news from Cigar Lake is worse than previously thought, said Jean-Francois Tardif, senior portfolio manager at Sprott Asset Management Inc. in Toronto.

Prices may climb to between $75 and $90 in the spring of 2007, Tardif said in an e-mail.

New Mines

Merrill has assumed Cigar Lake will be delayed at least a year. Third-quarter output from BHP Billiton’s Olympic Dam mine in South Australia was also down 8 percent from their preceding quarter, the research firm noted.

Merrill is forecasting global supplies, estimated at 164.8 million pounds this year, to rise 4 million pounds during the next two years. Increased demand in Russia will limit exports while rising costs and planning delays are likely to slow output from smaller projects worldwide.

Still, Kazakhstan has the potential to “flood the market” if it meets its 2010 output goal of 39 million pounds, Merrill said. The nation produced about 10 million pounds in 2005, and Merrill’s forecasts assume that will climb to 26 million by 2010.

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