Marketing of our product

Rössing Uranium produces and exports uranium oxide from Namibia to nuclear power utilities around the world. Thus, our core purpose is to maximise the value delivered to shareholders by being a significant and growing long-term supplier of uranium oxide.

Our product contributes significantly to meeting Namibia's needs by creating wealth to support community infrastructure as well as health care and education programmes, and by delivering financial dividends for our shareholders. Our activities also provide the means and opportunity to develop new approaches to solving the world's environmental and human development challenges, such as climate change and poverty.

Uranium is a relatively common element that is found in the earth all over the world in various levels of grading. The metal is mined in many countries, and processed into uranium oxide (U₃O₈). Uranium oxide has to be further processed before it can be used as fuel for nuclear reactors that generate electricity.

Rössing's existing ore body consists mainly of low-grade ore, in contrast to countries such as Canada and Australia where the grade of uranium in the rock is relatively high. It is, therefore, much more challenging to mine and extract the uranium from the rock cost-effectively.

Marketing of our product

The Rio Tinto Uranium team is responsible for marketing the uranium produced by Rio Tinto's mines to our global customer base of nuclear power utilities. Rössing is the third-largest uranium producer in the world, and it supplies utility customers located in all three major markets: Asia, North America and Europe.

After a relatively quiet start to the year, uranium prices moved up strongly in the second half of 2010. Continued purchasing of large volumes by Chinese companies and producer buying, created an upsurge in spot prices as available supplies tightened.

In addition, financial speculators began to return to the market as buyers, adding to the price pressure and volatility. The spot price rose from a low of around US$40 per pound (lb) in the first half, breaking the US$50/lb mark in late October, and ending the year at US$62/lb.

As one of the market's premier long-term uranium suppliers, our production is not overly dependent on variations in the spot price, and most 2010 production was delivered into long-term contracts. The long-term price also rose in late 2010 as long-term procurement activity began to increase in Europe, the United States of America and China.

In the second half of the year the term price increased from US$60 to US$65/lb – ending the year with a smaller premium over the spot price compared to the previous three years, but still showing positive momentum. Rössing's average delivered price for 2010 continued to be among the highest in the industry, reflecting Rio Tinto's and our excellent reputations for stability and reliability.

A number of new mines are expected to enter production over the next few years. Should they become operational as scheduled, we may see some increased competition for new business. However, many of these projects have experienced difficulties due to the weak US dollar (which is the payment currency for uranium sales worldwide) and the lingering effects of the global economic crisis.

At the previous spot price levels in the low US$40s, most of these new, higher-cost projects outside of Kazakhstan were unlikely to proceed. In today's market, they should have a better chance of success, and we can anticipate that at least some of this new production will come to market.

Kazakhstan remains the most important area to watch. The country is now the largest uranium-producing region in the world, having increased output an astonishing five-fold since 2005, including an increase of 10 million pounds of U₃O₈ in 2010 alone. Phrased differently, the production increase in Kazakhstan in 2010 alone exceeds the production increase in any other single country over the past decade. Their ability to exploit vast uranium reserves using (generally) low-cost in-situ leach technology has been an incredible success story. But at the same time, there are signs that continued expansion may not be in the country's best interest. Until October 2010, the spot price had been weak for several years, even as Chinese inventory purchases (most of which came from Kazakhstan) soared.

Much of this weakness was due to the expectation of continued Kazakh mine expansion. It is likely that Kazakh officials will have to balance the desire to produce ever-increasing volumes of uranium with the need to have a sustainable, long-term plan that seeks to maximise revenues over the long run, as well as support for these production centres and the communities that depend on them. Consequently, we expect that future Kazakh production increases may be more measured and may take into consideration the impact on market prices, more than was previously the case. It also highlights why Rössing remains an important source of supply diversification for customers in a market where a full one-third of all mine production now comes from Kazakhstan.

The global outlook for reactor growth has improved as the world economy starts to recover from the financial crisis. The issues of climate change, energy security and increased primary energy demand, as a consequence of urbanisation and economic development, all encourage the further development of nuclear power. As the only large-scale source of clean, competitive electricity that produces no greenhouse gas emissions, nuclear power is viewed by most as a key component of the long-term energy solution in much of the world. The up-front capital costs of building nuclear plants remain high, however, so the process does not always move quickly.

China continues to lead the world in new reactor construction as it pursues a strategy of at least 70 GWe of installed nuclear capacity by 2020 (and well over 100 GWe by 2030). There are currently 26 units under construction in China, and dozens more in the planning stage. This is the reason why China looks set to evolve from a growing presence in the uranium market to one of the major consumers by 2020, along with the US, France and Japan. Rössing was the first major international uranium supplier to China, and continues to develop that important market without losing sight of its long-time customers throughout the world.

The powerful earthquake and tsunami in Japan in March 2011 caused tremendous loss of life, and severely damaged the Fukushima nuclear plant. While this will undoubtedly cause nuclear utilities and governments around the world to re-assess their already substantial safety systems and apply the lessons learned, we do not believe it will have a significant negative effect on nuclear power as an important component of the global energy picture.

However, the incident is likely to slow the development of new nuclear construction in some countries, particularly Japan, as they seek to make nuclear power even safer in areas with strong seismic activity. Germany, a country which has long had a complicated view of nuclear power, may proceed with phasing out some of its 17 units, which will increase the country's already high reliance on coal. But in Asia, North America and elsewhere, nuclear power will remain an important and growing part of world energy due to its role in mitigating carbon emissions and the very low nuclear accident rate over the past 40 years.

By 2030, according to the World Nuclear Association, the number of operating units worldwide will have risen from 441 to more than 600. Within this decade, annual world uranium production will have to double from the current level if it is to fuel existing and new reactors for the next 50 years or longer.

Therefore, the long-term outlook for this industry continues to look very bright. As an established, experienced and reliable producer, Rössing remains in an excellent position to grow its business for many years to come for the benefit of its employees, customers, shareholders and Namibia.