The U3O8 Spot Price is Overrated

In this post-Fukushima world, uranium investors need to remember a key fact about the U3O8 spot price: utilities are not responsible for the recent noteworthy decline to just over $40 per pound — the lowest weekly level since March 2010, a full year before Fukushima.

During recent conference calls with analysts to discuss quarterly financial statements, both Uranium One (TSX:UUU) and Paladin Energy (TSX:PDN,ASX:PDN) said traders and financial entities, plus a few producers, account for much of the recent spot volume.

As Uranium One observed in a November 5 press release on Q3 financials, “elling activity has been dominated by producers closing sales for year-end cash flow, and by traders unwinding long positions or engaged in short-selling.”

Meanwhile, Paladin said last week that spot buying by brokers, traders and financial entities continues to increase, and that those market players have accounted for more than 40 percent of all purchasing since 2008. At the same time, utilities have accounted for less of that spot buying for several years.

Don’t get me wrong. Monitoring the U3O8 price is a quick and easy way for investors to take the pulse of the uranium market. And yes, producers generate revenue (and those lovely dividends) from supply contracts that can be based on that price.

But it’s just one diagnostic test and it clearly doesn’t give investors a complete picture of the market’s health — which, let’s face it, is more about producers and utility end users than speculators, who have a different set of near-term financial priorities than investors.

A better indicator are mid- and long-term prices, which have remained in the $50s and $60s, respectively, for several months. It may surprise some uranium investors to know that two years ago, term prices were at roughly the same levels as they are today.

And while term buying has been quiet for most of 2012 Paladin, for one, expects that to change in 2013.

“We’ve seen some North American utilities enter the market already, and several have said after the first of the year they expect to look for term contracts,” a Paladin executive told analysts during last week’s conference call. “We think that will help both the long-term and spot price move up.”

The executive wasn’t talking about China, Russia, India, Brazil, the United Arab Emirates or any of the other countries where nuclear energy is expected to grow and somehow “rescue” uranium from its post-Fukushima slump.

No, he was talking about North America, the largest, most mature nuclear market in the world. When utilities in the US and Canada start signing long-term contracts again, so will utilities everywhere.

And when spot volume dries up for the rest of year — and it will, because the holiday season is upon us and people have other things on their mind — please don’t panic. Instead, remember that it’s temporary and meaningless, and that term prices are solid. And take the medication. It will help with that spot price obsession.