• We believe that the world is on the verge of a uranium renaissance, and in our opinion, the financial markets continue to underestimate the potential for a rapid increase in uranium demand going forward.
• Based on the lEA's new Global Energy Mix target, uranium demand could increase by around 300% by 2050 with the construction of over 1000 new reactors.
• Uranium has been one of the worst performing commodities in spot price terms, falling by more than 35% year to date.
• We find that the performance of uranium prices is significantly underperforming that of other energy commodities such as crude oil, thermal coal and natural gas this year.
• We believe the current spot price of USD57/lb is not high enough to encourage new uranium supply and expect that continual supply issues and the likelihood of increased demand from the utilities sector will drive price higher going forward.

IEA calls for 1,000 new reactor builds by 2050

On June 8 the International Energy Agency (IEA) presented its new 2050 energy targets to Energy Ministers from the G8, China, India and Korea. The IEA has outlined two scenarios for the world's energy mix in 2050 with the ultimate objective of reducing carbon (C02) emissions to 2005 levels (ACT Scenario), with an upside target of reducing 2050 level emissions by 50% below current levels (BLUE Scenario).

To achieve these targets the IEA has outlined a required energy mix that has a significantly higher contribution from nuclear energy, along with renewables, solar, hydro and wind, Figure 1. The IEA has stated that our current energy path is not sustainable and that "If governments around the world continue with policies in place to date, C02 emissions will rise by 130% and oil demand will rise by 70% by 2050". The price tag of the additional investment to achieve the BLUE Map scenario has been estimated at USD45 trillion with a call for USD10-100bn in R&D expenditure per annum.

In order to achieve the ACT and BLUE Scenarios the IEA estimates that between 24 and 32 new 1,000Mw nuclear reactors will be required per annum between 2010 and 2050. This equates to between 960 and 1,280 new reactors, on top of the 448 reactors currently in operation. We forecast that an additional 79 new reactors are expected to be in operation by 2015. Therefore the IEA is targeting at least a doubling in global nuclear reactors by 2050.

Uranium demand could increase by c.300%; supply could struggle to respond

Using lEA's 2050 energy mix targets, we estimate that uranium demand could increase by 215% under the ACT Scenario and by 290% under the BLUE scenario, to 243kt and 300kt of U308 per annum respectively, Figures 3 and 4. Even if either scenario is achieved, which is heavily reliant on international legislation and government willingness to adopt and embrace change, we believe that the world is on the verge of a uranium renaissance. In our opinion, the financial markets continue to underestimate the potential for a rapid increase in uranium demand going forward. Saying that, we do acknowledge that the increase in demand may be slow, and we forecast just a 2% demand increase between 2008 and 2010, but a 17% increase between 2010 and 2015. We believe the biggest impediment to achieving the lEA's ACT and BLUE targets is not global legislation change, but, the potential inability of uranium supply to respond to a likely spike in demand from 2015 onwards.

To put it into context, the world's largest uranium development project is the well documented expansion of the Olympic Dam mine, located in South Australia, with a total uranium resource (measured, indicated, inferred) of ~2,240kt of uranium. We believe that the proposed expansion of Olympic Dam involving a large open cut mine and expanded processing facilities could deliver an additional 15ktpa of uranium from 2016 onwards. However, the world would need to find and develop an additional ten Olympic Dam sized mines by 2050 to supply sufficient uranium to the world's nuclear reactors under the ACT scenario and an additional 15 Olympic Dam sized mines under the BLUE scenario. Severe under investment in the uranium sector has resulted in few if any significant new uranium discoveries since 1980. Therefore we believe that supply could struggle to respond to the potential increase in uranium demand between 2010 and 2050.

Uranium price underperforming other energy commodities during 2008 but we expect a price bounce in 3Q

We note that uranium is significantly underperforming other energy commodities in 2008, Figure 6. In our view, the current spot price of USD57/lb may not be high enough to encourage new uranium supply, from both greenfields and brownfields projects, particularly from projects in high cost construction countries such as Canada, Australia and the US. We believe that continual supply issues and the likelihood of increased demand from utilities should drive the spot price higher in during the third quarter of this year.

Price strength from 3Q 2008

We remain confident prices will improve in 2008 and the coming years. Below we present three arguments supporting this assertion.

1. Supply issues to persist

Although supply-side dynamics have done little to affect prices thus far in 2008, we think production shortfalls will continue to dominate the uranium market in the medium to long-term.

Two regions dominate the share of new production over the next 5 years: Canada's Athabasca Basin and Kazakhstan. However, current and future production problems have persisted in both. In Canada, Cameco's Cigar Lake project continues experience significant problems that have thus far delayed the project, which was supposed to supply around 10% of the world's current mined consumption in 2008 until 2011 at a minimum. Meanwhile in Kazakhstan, although there are very ambitious mined capacity increases, given recent experiences we remain skeptical of those targets being met. Earlier in the year, guidance for output in 2008 was reduced as a result of sulfuric acid shortages and questions remain over the country's ability to provide adequate power supply, transportation and skilled labour.

In addition, the energy crisis in southern Africa limited uranium output in the region early in the year and threatens to hamper production for a minimum of four years or until South Africa's Eskom can increase electricity generation capacity. Although we forecast a slight market surplus in 2009 of 2.8Mlb we believe that further supply disruptions to existing operations and greenfield and brownfield project delays could easily swing the market into deficit.

2. Increasing reliance on mined supply

The shorter-term market appears to be relatively well-supplied. This has been achieved through lower than expected spot procurement, the success of Paladin and other new entrants to the market and adequate secondary material (HEU feed, recycled fuel, US government stocks). However, we think the market will retighten relatively quickly for a number of reasons. First, secondary supplies are finite and rapidly being depleted. Since 2006, the percentage of mined supply needed in the global market has increased and will approach 90% by 2014. Second, as mined supply increases in importance, so does the significance of the success in new projects entering the market. By 2014, the market will require all new projects to successfully come to market without delays.

3. Utilities likely to re-enter market in Q3

In our view, the combination of production problems and dwindling secondary supply will lead to a greater propensity for utilities to scramble to secure supply. We believe that utilities will re-enter the market strongly from 3Q 2008 driving the spot price up from around the current US$59/lb. Currently, there are 79 new reactors with regulatory approval scheduled to come on-line between now and 2015 with dozens more in permitting stages. While North America and Europe have the highest concentration of current installed capacity, the growth story is in Eastern Europe and Asia, particularly in China and India. Utilities will likely build inventories or accelerate long-term procurement.