Like the fall in most industrial commodities, uranium has been heavily impacted by a drop in demand from Asia. Following the Fukushima nuclear disaster in 2011, Japanese reactors significantly scaled back their purchases of yellowcake, leading to global over-supply and depressed prices, which have persisted. At current spot prices - hovering below $40 and currently $34 a pound - there are hardly any uranium projects around the world which are economic.
Berkeley's key asset is an exception. Its huge, high-grade development-ready resource, located in Salamanca in mid-western Spain, could make it a top 10 global producer. A recent study suggested that operating expenditure could be as low as $15.6 per pound, thanks in part to excellent local infrastructure and the depth of the deposits. Following a further exploration programme which began this week, the company will look to fund the project, though the likely split between equity and debt is currently unknown. Management has apparently already received numerous offers.
That shouldn't be a surprise, as there's a good bull case for nuclear power. As the graph below shows, uranium prices are expected to rebound in the next few years, as Japan reactivates its nuclear-generating capacity and re-commissions the majority of its reactors. Additional demand is expected from Russia, China, South Korea and India. But until there is greater certainty that uranium prices can return to at least $60, costlier projects will not get off the ground.
As WH Ireland analyst Paul Smith has explained, this period of uncertainty is arguably a good thing for Berkeley, as the longer the market is squeezed, the higher the likelier eventual spike in uranium prices. Once Salamanca comes online, there is significant potential upside if that coincides with a medium-term boost in uranium prices. If prices remain depressed, Berkeley still looks very profitable.
That's not to say that uranium is risk-free. As demonstrated by Fukushima and Germany's de-commissioning programme, generating electricity from nuclear power is politically fraught. But the International Energy Agency expects nuclear to play an ever greater role in electricity generation as the world gradually weans itself off fossil fuels.
