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Jeff Combs: You need to consider how much things have changed from when the current HEU deal was signed. At that time, the Russian economy was struggling, as was Russia’s nuclear power program. Now Russia’s economy is much more robust, thanks to energy exports. Russia is experiencing a nuclear power renaissance of its own. From this perspective, I think it’s quite unlikely that the HEU deal will be renewed. When I say that, I’m referring to the deal between an agent acting for the Russian Government and an agent acting for the U.S. Government. I don’t think that necessarily means that there will not be any HEU blended down after the current deal is over, but that could be done for internal consumption in Russia or be used as supply for countries where Russia is exporting fuel for Russian-supplied reactors.

StockInterview: The trading volume on the spot uranium market has fallen off after what transpired in 2005.

1. Jeff Combs: The volume now is certainly less than what it was last year. Volume so far for the year is 6.3 million pounds on the spot market. If this rate were maintained, it would put volume close to 20 million pounds for the year. This would make it more of a typical market in terms of volume from the standpoint of recent history before 2005. Whether or not volume is higher than this depends a lot on the extent to which utilities that are out in the long term market, right now, are able to get offers to cover requirements in 2007, 2008, and 2009. If they’re not successful, they might come back into the spot market. That could boost spot buying somewhat later in the year. Also, some producers have been buying on the spot market. If this buying picks up, it could add to volume as well.
2. StockInterview: Do you believe we’re going to see $50/pound uranium in the near term? Jeff Combs: Oh yes, I think there’s a good chance that we’ll see $50 per pound uranium this year, more likely in terms of long term contracts. I think the highest prices may be reached within the next couple of years. I think that’s when supply will be the tightest. In our uranium market report, we develop three price scenarios – a base case, a high-price case, and a low-price case. Price spikes or overshoots its long-run equilibrium in all three scenarios. In the high case, which would be the most dramatic spike, I would say it would be somewhere in the $60 - $70 range. Price certainly could be higher than this if the wheels come off the wagon. I think you’re definitely looking at price going into the $50s. It’s not too difficult to see a scenario where price goes into the $60s. And then it would come down from there.

StockInterview: What goes up must come down? Jeff Combs: I don’t think these higher prices are sustainable in the long term. You also have the situation now where utilities are going out to buy uranium, and they’re not finding what they want over the 2007-2009 period. It might be the case that some of these newer producers, or producers in the process of expanding production, really aren’t in a position to offer the supplies in those years. Ultimately, they will have the supply to offer in maybe 2009 or 2010. Since they’re not offering it right now, price can be pushed up a fair amount, setting up the possibility for a correction in a few years when more of these supplies become available to the market. In the short term, uranium supply and demand are very inelastic. This sets up the potential for an explosive response in price, as witnessed by the recent behavior in price. I have to admit we’ve had to adjust our price projections upwards on more than one occasion.

StockInterview: What would be on your checklist of “shocks to the market” or the “wheels coming off the wagon”?

Jeff Combs: What we’ve pointed out for a while is that you have the vast bulk of supply coming from a few major production centers and blended-down HEU. If you have a problem with any one of those, it can have a large impact on the market. Obviously, we’ve already had problems at Olympic Dam and McArthur River, and now Cigar Lake, even before it gets into production. If you have problems at any of these in the future, or at Rossing or Ranger, it’s going to impact the market. If you had some problem with the HEU deal between U.S. and Russia, it could have a devastating impact on the market. In the past, these problems have been caused by fire and floods, but other factors such as trade policies or the shortage of equipment could negatively impact supplies going forward.