Outlook for uranium mining costs

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Objective Capital's Industrial Metals, Minerals & Investment Summit 2010
London Chamber of Commerce and Industry
3 November 2010
Speaker: Ian Hiscock, CRU Strategies

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Outlook for uranium mining costs

  1. 1. INDUSTRIAL METALS, MINERALS AND MINEABLE ENERGY INVESTMENT SUMMIT 2010 LONDON CHAMBER OF COMMERCE & INDUSTRY ● WEDNESDAY, 30 NOV 2010 www.ObjectiveCapitalConferences.com Outlook for uranium mining cost Ian Hiscock – Consultant, CRU Strategies
  2. 2. © 2010 CRU International Limited confidential What Price Supply? An analysis of uranium costs Ian Hiscock – CRU International
  3. 3. © 2010 CRU International Limited confidential Presentation Outline  Introduction - Why Study Costs  Where Are We Now? - 2009 Costs and Cost Curve  Where Are We Going? - The Outlook to 2030  What Does It Mean? - Conclusions
  4. 4. © 2010 CRU International Limited confidential Presentation Outline  Introduction - Why Study Costs  Where Are We Now? - 2009 Costs and Cost Curve  Where Are We Going? - The Outlook to 2030  What Does It Mean? - Conclusions
  5. 5. © 2010 CRU International Limited confidential Why is the cost of uranium mining important, and to whom? Producers Consumers Mining Costs Investors Regulators Benchmarking & Project Valuation Market Opportunities Contract Negotiation Optimise Regulations & Royalties Future Performance Supply Security Anticipate Opportunities and ProblemsLong-term price indicator
  6. 6. © 2010 CRU International Limited confidential Who are CRU?  Leading research group focused on: • Mining and metals • Chemicals and fertilizers  Independent, with a global presence • Established in the late 1960s • Privately owned to ensure its independence • Offices in London, Beijing, Santiago, India, Australia and North America
  7. 7. © 2010 CRU International Limited confidential CRU’s 2009 cost curve covers over 98% of primary uranium supply. • Costs are estimated on a bottom-up basis • Consistent approach between mines and across macro-economic and consumable inputs • Key input drivers (e.g. sulphuric acid price, wage rates, exchange rates) are provided by dedicated in- house analysts and economists
  8. 8. © 2010 CRU International Limited confidential Costs are assessed at four different levels, offering insight into industry behaviour over different time horizons Site costs: Labour, fuel, power, consumables, etc. Business costs: Site costs + realisations costs (i.e. sales & marketing, transportation) Corporate costs: Business costs + corporate overhead + remediation costs Economic costs: Corporate costs + capital charge CRU’s Value-Based Costing (VBC) methodology: Benchmarking Long run investment decisions, long run price Measure free cash flow Business efficiency
  9. 9. © 2010 CRU International Limited confidential Presentation Outline  Introduction - Why Study Costs  Where Are We Now? - 2009 Costs and Cost Curve  Where Are We Going? - The Outlook to 2030  What Does It Mean? - Conclusions
  10. 10. © 2010 CRU International Limited confidential Breakdown of uranium supply in 2009 Uranium supply, by source type and by country Primary Supply Secondary Supply 18,079 tonnes of U3O8 equivalent:  Recycled or reprocessed material, either from surplus nuclear weapons or used fuel Drawdown of stockpiles and inventories 59,857 tonnes of U3O8 equivalent:  Material produced at mining operations Data: CRU Analysis
  11. 11. © 2010 CRU International Limited confidential New low-cost ISL supply and lower input prices drive average costs down to $28.51/lb  Average economic cost down -14.1%  More low-cost supply in 2009 • An additional 4,636 tonnes U3O8 from ramp-ups at Kazak ISL operations. • 6 out of the 10 lowest cost mines are in Kazakhstan • McArthur River increased production by 1,169 tonnes U3O8  Wages and consumable costs fall in 2009
  12. 12. © 2010 CRU International Limited confidential Cost curve is still relatively flat with a sharp step tail. Economic Cost Curve 2009 0 10 20 30 40 50 60 NominalUS$/lbofU3O8 Cumulative Production ('000 tonnes U3O8) Data: CRU Analysis. Note: The cost curve covers 98% of world primary production in 2009. (This includes 1.3 k tonnes from China, India and Pakistan, which is treated as zero-cost)
  13. 13. © 2010 CRU International Limited confidential Presentation Outline  Introduction - Why Study Costs  Where Are We Now? - 2009 Costs and Cost Curve  Where Are We Going? - The Outlook to 2030  What Does It Mean? - Conclusions
  14. 14. © 2010 CRU International Limited confidential Kazakhstan is expected to be the dominant producer to 2020 0 5 10 15 20 25 30 35 40 '000tonnesofU3O8 2009 2014 2020 2030
  15. 15. © 2010 CRU International Limited confidential Strong growth potential for Kazakh supply, but significant challenges and risks. Sulphur Burner (under construction) P2O5 production Smelter Uranium Mine  Output could double within 10 years  Geology – the Key cost advantage  Cost structure is more varied  Sulphuric Acid consumption high  Skilled labour shortages  Infrastructure bottlenecks $39.70 2009 2014 2020 2030 NominalUS$/tonne Sulphuric Acid Costs Black Sea Benchmark Estimated costatmine gate
  16. 16. © 2010 CRU International Limited confidential Most of the world’s primary uranium was found within 30 years of WW2… Total amount of exploration expenditures and uranium resources found (in primary deposits): 1940-2010 PrimaryUraniumFound(ktU3O8) Olympic Dam (Cu-U-Au deposit) found in 1975 – contains 2517 kt U3O8 ExplorationExpenditures(2010$M) Data: Expenditures derived from OECD Red Book and MEG, MinEx Consulting and CRU Analysis Note: Based on all primary uranium deposits >0.5 kt U3O8. Includes adjustment for deposits with no reported discovery year 860 kt
  17. 17. © 2010 CRU International Limited confidential …and uranium exploration spending has dropped over the last two years Uranium spot price versus total expenditure on uranium exploration: 1940-2010 UraniumPrice(2010$/lbU3O8) Data: Expenditures derived from OECD Red Book 2009 and MEG, MinEx Consulting and CRU Analysis ExplorationExpenditures(2010$M)
  18. 18. © 2010 CRU International Limited confidential On average, the next generation of projects have lower grades than current operating mines 0.1 1 10 100 1000 0.1 1 10 100 1000 10000 Closed Mine Operating Mine Development Feasibility Exploration Stalled Pre-Mined Resource (mt ore) Grade(kgU3O8/t) Data: MinEx Consulting and CRU Analysis
  19. 19. © 2010 CRU International Limited confidential In 2020, macro-economic cost pressures slow down. New supply at both ends of the cost curve... Economic Cost Curve 2020 0 20 40 60 80 100 120 NominalUS$/lbofU3O8 Cumulative Production ('000 tonnes U3O8)
  20. 20. © 2010 CRU International Limited confidential …“next generation” projects will make their mark; steeper curve, and clear cost step change by 2030. 0% 20% 40% 60% 80% 100% Real(2010)US$/lbofU3O8 U3O8 ProductionPercentile 2009 2014 2020 2030
  21. 21. © 2010 CRU International Limited confidential Presentation Outline  Introduction - Why Study Costs  Where Are We Now? - 2009 Costs and Cost Curve  Where Are We Going? - The Outlook to 2030  What Does It Mean? - Conclusions
  22. 22. © 2010 CRU International Limited confidential Conclusions More low cost supply in the pipeline – Cigar Lake, Kazakhstan .....but
  23. 23. © 2010 CRU International Limited confidential Conclusions  More low cost supply Post 2020 significantly higher costs, due to..
  24. 24. © 2010 CRU International Limited confidential Conclusions  More low cost supply in the pipeline  Post 2020 significantly higher costs Higher cost new entrants not rising input costs
  25. 25. © 2010 CRU International Limited confidential Conclusions  More low cost supply in the pipeline  Post 2020 significantly higher cost  Higher cost new entrants not rising input costs Price will need to rise to incentivise exploration spending and investment in new higher cost mines
  26. 26. © 2010 CRU International Limited confidential Conclusions  More low cost supply in the  Post 2020 significantly higher cost  Higher cost new entrants not rising input costs  Price will need to rise to incentivise exploration spending and investment Demand growth and delays to major projects likely to lead to greater price volatility
  27. 27. © 2010 CRU International Limited confidential Conclusions  More low cost supply in the  Post 2020 significantly higher cost  Higher cost new entrants not rising input costs have the greatest impact on the cost curve  Price will need to rise to incentivise exploration spending and investment  Greater price volatility
  28. 28. © 2010 CRU International Limited confidential Thank you for listening
  29. 29. © 2010 CRU International Limited confidential Contact Details CRU contacts for further information: In London Philip Macoun, Principal Consultant, CRU Strategies (+44 20 7903 2200 * philip.macoun@crugroup.com Ian Hiscock, Consultant, CRU Strategies (+44 20 7903 2244 * ian.hiscock@crugroup.com In the USA Irv Adler, VP, Business Development, North America, CRU (+1 260 918 3643 * irv.adler@crugroup.com In Sydney Philip Sewell, Business Development Manager, Australasia, CRU (+61 2 9387 8842 * philip.sewell@crugroup.com In Perth Allan Trench, Regional Director, Australasia, CRU (+61 (0)43 709 2466 * allan.trench@crugroup.com Website: www.crugroup.com

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