Product Stewardship

• Marketing
• Procurement

PRODUCT STEWARDSHIP

Marketing

The Rio Tinto Uranium team focuses on the marketing of the uranium produced by Rio Tinto’s uranium mines.

The strong upward momentum in prices that has characterised uranium prices over the past three years continued for the first half of 2007, with much of the later price increase driven by speculators. However, spot prices declined sharply in the middle of the year as utility fuel buyers opted to stay out of the market. Despite this, overall levels of buying activity remained high, slightly lower than the record levels of 2005 and 2006.

According to Ux Consulting, the spot price for uranium increased from US$72 at the end of 2006 to a record high of US$136 in June 2007, before correcting downwards and ending the year at US$90 – an increase of 25% on December 2006. The long-term uranium price reached US$95 in May 2007 and remained stable for the remainder of the year.

The volatility of the spot price and the magnitude of recent price rises contributed to the decline in sales volumes. Many utilities, particularly in Europe, deferred buying opportunities in 2007, citing an overheated market as the reason. However, the reduced sales volumes are also a reflection of a decline in uncovered fuel requirements as many utilities have now procured sufficient fuel for the next few years. Sufficient near term sales opportunities still exist, but market conditions are expected to become more difficult over the next year or two.

In 2007, the majority of the industry’s new long-term contracts were negotiated using market related terms, which is the price valid at the time of delivery as opposed to the price at the time of the agreement. Very few deals were contracted using fixed prices. Market related pricing has the advantage of capturing any future price increases, while future earnings are protected through the introduction of price protection in the form of a minimum, or floor, price. It remained very much a seller’s market through 2007, although floor prices came under increased downward pressure as the year progressed.

Estimates for future nuclear fuel demand vary considerably, but it became clear over the last few years that a nuclear renaissance is under way. Concerns about climate change issues and greenhouse gas emissions, security of energy supplies, and the increasing cost of fossil fuels are all factors prompting a change in attitude towards nuclear energy as a base load electricity source. Many countries are now re-evaluating their energy policies, and nuclear energy is finally being recognised as a clean, efficient, large scale energy source that produces no greenhouse gases.

“During 2007, Rössing had another strong year for uranium sales. Some of this success can be attributed to the prevailing market conditions, but equally important were the strong relationships that Rössing has with its long-standing customers. The strength of these relationships, some of which now stretch back over 30 years, ensured that Rössing was well placed to optimally meet its customers’ requirements.”

CLARK BEYER
Managing Director: Rio Tinto Uranium

The highest rates of nuclear growth are expected in China and Russia, with India potentially following suit. In Europe, political opinion has shifted considerably in a very short time and countries such as Germany, Sweden and the United Kingdom, which had originally planned to phase out nuclear power, are now seriously re-evaluating its role. The United States of America is looking at more than 20 new reactors that are already in the planning, licensing and development stage.

This theme is echoed through South-east Asia, South America, parts of Africa, the Middle East, and even Australia, as governments seek long-term solutions to tomorrow’s energy concerns.

Although uranium prices increased significantly in 2007, the average sales price realised for Rössing was somewhat lower – for two reasons. Firstly, uranium is typically priced and sold in US Dollars, which can leave Rössing exposed to exchange rate fluctuations. Secondly, like most of the other major producers, Rössing still has some lower priced legacy contracts on its books: term contracts that were negotiated when the price of uranium was much lower than today. Over the next few years these contracts will expire, and the average sales price will increase considerably to reflect the higher market prices.

Through its marketing arm, Rio Tinto Uranium, Rössing is committed to seeking new long-term contracts that maintain exposure to future market prices, but also have sufficient downside protection to underpin the long-term investments extending the life of the mine. The company remains committed to maintaining a diverse international customer base that provides the greatest total return, while minimising risk and complying strictly with all international safeguard regimes. Rössing prides itself on the longevity of its relationships with the premier nuclear power utilities around the world.

Several years into this price recovery, the market outlook for uranium – and, therefore, for Rössing – remains positive. Indeed, existing mined supply continues to lag behind demand, and expectations for new reactor needs are higher now than at any other time. Additional primary supply from new mines and expansions to existing operations are also starting to emerge, but will take time to reach the market. In the meantime, the nuclear renaissance is under way, and large, experienced suppliers like Rössing are in the best position to benefit.