Salman Partners' Senior Mining Analyst Ray Goldie and Research Associate Patrick Donnelly have predicted that uranium prices could reach $200/lb in the next three to five years due to a lack of new mine supply.

Nevertheless, while Goldie, a geologist, and Donnelly suggest that the $200/lb threshold could be reached by the end of 2008, they also advise that "uranium prices could hit a ceiling."

"We think that there is a ceiling because if a utility were to pay US$200/lb for all of its fuel, its total cost of producing electricity would be about US$0.15/KWH, a cost at which most generators could not make money," the analysts explained in a recently published report. They added that $200 uranium "would encourage some consumers to stand on the sidelines until Cigar Lake came on stream, and that prices could not be sustained above US$200/lb for significant periods. But we do believe that a later start of Cigar Lake would lengthen the period during which prices would hover around US$200/lb."

Goldie and Donnelly also urged investors to consider an event that "although we judge it to have a less than 50% probability of occurring, could have a significant impact on uranium prices", that the Russians "must turn off the HEU tap."

Salman noted three recent developments, which they claimed, could have "a profound effect on uranium prices. First, the Russians have asked to renegotiate the deals governing shipments of weapons-grade uranium to the West. Meanwhile, Russian President Vladimir Putin has signed legislation creating Rosatom, a state nuclear energy and arms company, that is expected to have more than 110 units that mine uranium, generate nuclear fuel, design reactors, build missiles, and market nuclear products for export. Third, the U.S. and Russia have reached agreement to extend imports of Russian uranium into the U.S.

"The deal on natural uranium between Russia and the U.S., and the creation of Rosatom may encourage speculation that, now that the Russians have opened a pathway for once again selling natural uranium in the U.S. and that they have a place to park weapons-grade uranium, they may halt the sales of weapons grade uranium," Goldie and Donnelly stated. Since Russian weapons-grade uranium now supplies 13% of global demand for uranium, the analysts said that "we consider that such a move by the Russians would have a profound impact on uranium prices. From Cameco's point of view, such an increase in uranium prices would probably more than offset any loss of sales volumes."

Goldie and Donnelly said they anticipate that beyond 2015-when BHP Billiton's massive Olympic Dam expansion is scheduled to come on line in southern Australia-the supply of uranium could exceed demand.

PRICE, EQUITIES FORECAST

Salman forecasts that the spot price of uranium will average $102/lb this year, $162.50 in 2008, $186.85 in 2009, and $191.87 in 2010. Goldie predicted that the world's top uranium producer, Canada's Cameco, will realize average prices of $38.69/lb this year, $71.92 in 2008, $88.94 in 2009, and $106.25 in 2010.