Peninsula Energy (ASX:PEN) has commenced uranium oxide, or U3O8, mining operations from Karoo South Africa to the Powder River Basin in Wyoming. Peninsula plans to produce over 2 million pounds of U3O8 per year from Wyoming starting in 2014 through its U.S. subsidiary Strata. It has prospected over 50 million pounds in South Africa.
All of the new development represented by Peninsula Energy is important to a world moving back into nuclear power development. Shortages of U3O8 are showing up in buoyant prices, and willing investors in the expansion of mining, processing, and conversion operations globally.
One of those willing investors is Citigroup (NYSE:C) Citigroup recently recently borrowed Pala Investment's holdings of 20% of Peninsula shares. This is an abrupt turnaround for Citigroup. Back in 2009, Citi economists predicted that nuclear power plants were too costly, too risky, and too variable to be prudently built. They argued that if the price of carbon were to rise sufficiently, then nuclear might make economic sense. Citi's investment in the front end of the nuclear fuel cycle may signal a new willingness to invest assets under management in greenfield nuclear development.
BlackRock Financial Management is providing a $22 million credit facility written on Powder River Basin production and on funding the exercise of Peninsula officers' options. As of September 30, 2013, BlackRock had a $6 million investment in Peninsula stock. Like Citi, BlackRock seems to be wading into nuclear waters as well.
What is the market for uranium?
Uranium ore is extracted from fluvial sandstone formations. At the mine mouth it is concentrated into uranium oxide, U3O8, also known as yellow-cake. U3O8 is often absorbed into resin beads for transport to processing plants where it is manufactured into fuel rods for energy use and into various metals and other fissile materials for medical and military use.
Over the past 40 years spot prices of U3O8 have ranged wildly from a low of $7 per pound in the 1970's to a high of $138 per pound in 2007. The market seems to be holding steady in the $70-$90 per pound range. This is extremely important since it takes at least $60 per pound to find and produce U3O8. Peninsula was able to lock in a $79 per pound long-term contract with a U.S. utility.
Worldwide there are over 400 nuclear reactors producing over 1,800 terawatt-hours of electricity based on about 375 gigawatts of capacity. This is over 18% of global electricity demand. Another 65 plants are under construction with another 167 planned in 10 years. U3O8 demand will climb from 177 million tons by 2020. An additional 374 million tons will be required for initial cores alone.
Kazakhstan is the world's largest producer with over 44% of production going to China and Russia. Russian heavy enriched uranium, or HEU, and U.S. reenriched tailings as secondary supply are coming to an end. The Russian HEU program was designed to recycle weapons-grade uranium for energy use. Uranium will be be in short supply to fill global energy production.
From its discovery in 1951 to about 1980, uranium mining was booming in Wyoming. Sharp declines in the spot price of U3O8 concentrate forced the closure of many mines in the U.S. Since 2001, mining has come back, mainly through the efforts of Uranium One's Energy Metals subsidiary.
In the Lance Project at the foot of the western approaches to the Black Hills in Wyoming, Peninsula has prospected and upgraded ore reserves to begin production in 2014. It estimates that it can produce over 2.2 million pounds of U8O3 over the next three years. Lance has proven resource of 54 million pounds with another 160 million pounds of prospect.
Why South Africa?
South Africa's energy policy continues to favor non-fossil fuel electricity sources. Several Eskom coal plants are about to retire. Eskom is the national electricity utility. Coal deposits in South Africa and neighboring countries are shifting coal away from thermal uses to production, especially steel making.
South Africa has announced it would bring at least 9.6 gigawatts of nuclear capacity on-line by 2035.
Peninsula just acquired a 74% interest in 36 prospecting rights in the Karoo Basin in South Africa's West Cape. It expects to find both production grade uranium and molybdenum in the sandstone formations. The Karoo Basin is already proving to have over 50 million pounds of reserves. Targeted are over 250 million pounds with production to begin in 2017.
Peninsula can provided diversified production exposure to the growing nuclear power market. Its production at Lance, Wyoming, could be worth more than $1.5 billion based on conservative production levels and a $79 per pound price. Along with a much larger potential in South Africa this stock may well be undervalued at a current market capitalization of $82 million.
Fool contributor Bill Foote has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.