While uranium prices post a fragile recovery we have seen a definite pick-up in exploration activity even as cost cuts and shutdowns of operating facilities have prevailed. The increased exploration activity may seem counterproductive, but there is a clear answer if you take a quick look at the economics of uranium mining.
When the uranium sector boomed miners were willing to explore and mine even at a high cost. But, that all changed when prices crashed. Now, miners are seeking cost efficiencies, mothballing expensive mines while exploring for reserves with lower costs that will enable them to be competitive even if this downturn persists. CRU’s examination of global uranium mining costs showed that weighted average global site costs fell by $1 per pound in 2015 to $31 per pound. This was the first year of global mining cost deflation since 2010. Productivity improvements were one of the factors behind the lower costs.
CRU’s $31/lb cost is somewhat positive as it puts many miners near profitable territory even in the current pricing environment. If, however; newer capacity hovers around this cost it could push the more expensive miners out of business. $50 has long been cited as a breakeven point for miners.
The latest EIA full-year report on the sector showed that as of 2015 in the US the estimated uranium reserves were 66 million pounds U3O8 at a maximum forward cost of up to $30 per pound. While this means that the US can compete on a global pricing schedule, it is important to note that under higher cost allowances the amount of mineable uranium increases dramatically. In the cost bracket of up to $50 per pound, there is an additional 100 million pounds of uranium reserves.
In order to survive, it makes sense for uranium miners to seek out lower-cost operations even if they are mothballing their higher cost operations. But this means that over the long run the entrance of lower cost uranium production could put a lid on a big price rally as miners can justify increasing output in a lower cost environment.