A Uranium Investing Buffet in Texas
Commodities / Uranium May 23, 2007 - 09:01 AM GMT
Sean Brodrick writes : I'm here in Corpus Christi, Texas for the U2007 Global Uranium Symposium, which started on Monday.
That night, we got a tour of the USS Lexington, known as "The Blue Ghost." It's a real piece of history — battling her way through World War II, the big ship survived a torpedo hit and even a kamikaze attack.
Of course, the Uranium Symposium is really about the future. And that's why the entire day was filled with fascinating presentations on my favorite white-hot metal. Heck, after the tour of the Lexington, we ate dinner on the ship and listened to another talk on uranium. Today, I want to tell you what I learned at this buffet of information.
Before I do, I just want to point out that when the conference began on Monday morning, the last I knew was that the price of uranium was $120 per pound. Later that day, Treva Klingbeil of TradeTech quoted a price of $122 per pound. And by the time I was on the Lexington's flight deck, word came that the price had risen to $125 per pound.
Remember, the price was just $72 in January ... so the white-hot metal is up 73% in just a few months. But that's nothing — since 2004, the price of uranium has soared 1,700%!
Surely, it can't go much higher, right? Wrong! Everything I've heard at this conference indicates that uranium prices could go much, much higher ...
More Efficient Plants Equal New Demand
For my first course, I listened to a presentation from Dr. Clifton Farrell from the Nuclear Energy Institute. He explained that even though we haven't built a new nuke plant in years, the increasing efficiency of existing plants is the equivalent of adding 14 new 1-megawatt nuclear reactors. In fact, plants are getting so efficient that they generate electricity at an average cost of just 1.7 cents per kilowatt hour. And operating costs have declined over the last decade.
Dr. Farrell showed us an interesting chart — a commentary on the rising energy prices we are all feeling ...
| Effect of a 50% increase in cost of fuel source on electricity generating costs ... | ||
| Nuclear | Coal | Natural Gas |
| 3% | 21% | 38% |
If you've been reading my stuff for any length of time, you know I think we're rushing toward a head-on collision with Peak Oil, followed closely by Peak Natural Gas. And these will send the prices of oil and gas through the roof. With other fuel sources becoming scarcer, it's likely that coal will rise, too.
So in the face of rising energy prices, and given the proven efficiency of nuclear power, you'd think we'd be building new nuclear plants left and right. That's especially true since the Department of Energy expects electricity demand to increase 40% over the next two decades. Sadly, no — none are being built right now.
However, there is hope: Dr. Farrell says the Nuclear Regulatory Commission is considering 20 combined operating licenses covering 30 new reactors. My immediate thought is that the NRC doesn't have the staff to deal with 20 new operating licenses, but maybe that will change.
Dr. Farrell tossed out some other interesting tidbits, too. He said at least $75 billion will be spent on America's electric infrastructure from now through 2020. And nuclear power is going to get the same "clean energy" production tax credits that wind and other alternative energy sources qualify for now. That could really ramp up new construction!
Dr. Farrell also put up a table of uranium demand and production (in millions of pounds of U3O8). It looked something like this ...
| Uranium Demand | Uranium Production | ||
| 2006 | World | 180 | 110 |
| USA | 57 | 4 | |
| 2025 | World | 230-300 | 170-200 |
| USA | 75? | 10-20? | |
Two things are obvious here:
First, the difference between low and high projected demand is huge, and the same for production. My guess is the high-side on both counts, but that means production still won't be able to keep up with demand.
Second, the U.S. is nowhere near meeting its own uranium needs. Sure, we're probably happier about forking over big piles of money to our uranium-rich friends in Canada and Australia than giving it to the oil sheiks of the Middle East. Still, uranium production should become a national priority.
Did Dr. Farrell have more to say? Sure! In fact, he sat beside me at dinner that night. But I'll save that for another time. Because Dr. Farrell was just an appetizer. The second course was Dustin Garrow of Paladin Resources ...
Welcome to the Sellers' Market!
If you subscribe to Red-Hot Asian Tigers (or if you ordered my first uranium report, The Golden Age of Uranium ) you know that Paladin is one of my favorite uranium stocks. So it was with rapt attention that I listened to Mr. Garrow, who explained how what was once a uranium buyers' market has become a uranium sellers' market.
"The risk has moved from the sellers to the buyers," Mr. Garrow explained. Some examples of that:
- Contracts used to be issued for two to three years and buyers had an option to extend if they wanted to. Now contracts run from four to five years ... even up to 10 years. That lets sellers lock in revenues far over their costs for longer periods of time. And options to extend are only for sellers now.
- Contracts used to cover 200,000 to 300,000 pounds of U3O8. Now, it's more like 400,000 pounds. Delivery times have gone from 60 to 90 days after the buyer said he wanted it to delivery the following year . In other words, sellers don't have to scramble to fill orders.
- Finally, there have long been "Force Majeure" provisions in contracts, which cover "act of God" circumstances like floods. But now sellers are inserting "interruption of supply" language in contracts, because they're often filling gaps in their own supply with uranium from former Soviet Republics. Basically, they no longer need an act of God to hold up a contract.
The biggest thing weighing on some uranium suppliers, said Mr. Garrow, are legacy contracts which were made at much lower prices. You might expect a man from Paladin to point that out. After all, Paladin isn't burdened by those legacy contracts!
The History of Uranium Prices: Swinging Low, Swinging High
Now, on to our final dish of the day: TradeTech's Treva Klingbeil, the editor of Nuclear Market Review . TradeTech is a consulting company that has been publishing uranium market prices since the inception of the commercial nuclear fuel market in 1968 (counting the company's previous incarnation as NUEXCO).
I mentioned earlier that Ms. Klingbeil gave a spot price for uranium of $122 per pound. That was TradeTech's most recent judgment of the price at which a willing buyer and willing seller would conclude a transaction.
Later that same day, we heard that uranium consultants UXC set the price at $125, based on the most recent auction. Does that mean TradeTech was wrong? Not at all, it's just an example of why Ms. Klingbeil says uranium is a "very immature" market. There is no physical exchange at which prices are set. It's all done by auctions and even off-market transactions. This makes for a market that is as transparent as mud.
Ms. Klingbeil gave a fascinating presentation on the history of uranium prices. She explained that military stockpiles weren't even counted until the 1980s. Then Russia decided to sell its 435-million-pound stash. Other stockpiles also came into the market, too. Uranium was quickly hammered down to $10 per pound.
With prices cratering, exploration stopped. Kids who might have gone to school to become nuclear engineers and miners found other things to do. And that's how we've arrived where we are today, with nuclear power enjoying a Renaissance even though there is very little mining activity in the U.S. and not enough engineers or miners to handle the projects already on hand.
Ms. Klingbeil ticked off a number of factors that should keep uranium prices powering higher and nuclear power increasing at the same time:
- Improved reactor performance;
- Renewals of existing nuclear licenses in the U.S.;
- A streamlined process for new licenses;
- Explosive growth of nuclear power in Asia;
- And a growing awareness that nuclear power is "green."
For the next couple years, Ms. Klingbeil expects demand to surge ahead of production. But then, she says, the situation could stabilize or even go into surplus, especially if speculators — who control an estimated 20 million pounds of uranium — start to sell their stockpiles.
In fact, after her presentation was over, Ms. Klingbeil told me that a speculative fund is trying to negotiate the sale of some of its uranium right now.
The real inflection point comes after 2013, with the end of the "Megatons to Megawatts" program, which converts Russian nuclear warheads to nuclear fuel. "That could be a long-term problem," Ms. Klingbeil says.
However, we've already seen major setbacks at big uranium projects like Cigar Lake and Ranger — both of which flooded. Ms. Klingbeil says a shortfall at any big project could send prices much higher in a hurry.
Bottom line: TradeTech expects higher prices in the short-term. The longer-term is much harder to predict.
I Remain Very Bullish On the White-Hot Metal
As for my view, the experts at the conference are confirming what I'm already seeing: Everyone is lining up to say the market will be tight for years.
First, CIBC World Markets raised its forecast for the metal (U3O8) by 40%, predicting it will hit $140 a pound this year and $160 next year.
Then, the head of Uranium One, Neal Froneman, put his uranium price for next year at $250 per pound. He told reporters, "I believe that many forecasts underestimate the growth in demand for uranium that we expect to see as more and more countries announce the construction of new reactors. The market will remain very tight for at least the next five to seven years."
And on Monday, Rio Tinto — which owns a big chunk of the Ranger Mine through a subsidiary — said the uranium market should remain tight until 2012 and beyond!
Heck, we already know that in 2013 we'll see the end of the sale of cheap Russian uranium into the market. So it sounds to me like we're looking at a bull market for at least the next 10 years.
If you want a pure way to play rising uranium prices, check out the Uranium Participation Corp. , a Canadian fund that tracks uranium. The symbol on the Toronto Stock Exchange is U . In the U.S., the symbol is URPTF on the Pink Sheets. (On Yahoo, that would be URPTF.PK.)
Uranium Participation Corp. is trading at about a 16% premium to its net asset value. I look at that as a vote of confidence that the price of uranium will go at least 18% higher. And based on what I've heard at the conference so far, a lot of smart people agree!
Yours for trading profits,
By Sean Brodrick
P.S. If you're looking for my top uranium picks, check out my newest uranium report, The Small Uranium Wonders . It highlights six great mining stocks to jump on right away. I'll also send you four updates throughout the year.
Just call us at 800-400-6916 and say you want "The Small Uranium Wonders" report or order online at my secure website.
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