It's only the Beginning for Uranium
by Dr. Richard S. Appel
June 03/05
A recent event motivated me to write this piece that, if duplicated,
has the potential to help launch uranium to prices that will astound all
onlookers. I first became bullish on uranium in mid-2003. At that time
it appeared obvious that its supply versus demand equation was fated to
seriously drive higher its price. Its annual supply deficit had run 60+
million pounds for several years, oil seemed poised to sharply rise, much
of the above ground governmental and private uranium stockpiles were already
consumed, and a number of new nuclear reactors were either under construction
or were on the drawing boards. Yet, to me, despite these increasingly
bullish factors, this new occurrence had the potential to quickly catapult
uranium’s price and stun the investing public.
A series of events have been transpiring in the uranium industry that
in and of themselves, I believe, are destined to propel the uranium price
to never before seen levels. We have all witnessed the positive influence
that $50 + oil has had upon the price of all alternative fuels. Similarly,
we are aware of the already 30+ nuclear reactors that are scheduled to
be built in China, and the 24 that are to be constructed in Russia by
2020. This is in addition to the thirty + reactors that are currently
under construction worldwide, and does not include the unknown dozens
that will likely be announced as the oil price continues to ratchet higher
in price over the coming years.
An issue of great importance is the earlier vast uranium stockpiles of
the Soviet Union and the United States. They have either already been
largely consumed or are firmly committed to long-term contracts. In the
case of the former USSR, U3O8 was salvaged from their hoard of nuclear
weapons. This was down-blended to produce nearly 400 million pounds of
reactor grade material. It was reported that nearly 175 million pounds
of this commercial uranium has already been utilized, and much of the
balance is to be delivered to three large uranium producers. Finally,
recent statements by President Bush indicate his readiness to clear the
path for a revival of nuclear reactor construction in the United States.
America presently has about 100 active nuclear reactors. Before the accident
at Three Mile Island in the early 1980's, about 250 additional reactors
were scheduled for construction. The fear that this mishap generated caused
the cancellation of these domestic electricity generating complexes and
impeded the proliferation of nuclear power generation world-wide.
This set-back set the stage for what will likely become an unprecedented
boom in the global erection of nuclear reactor plants, as governments
of the world scurry to fill their power production needs. Significantly,
had nuclear power plants been allowed to expand in number since the Three
Mile Island disaster, uranium prices would already be far higher than
currently. It is my contention that this condition is now destined to
change.
Nuclear power is not only the cheapest major form of power generation
and least damages the environment, but it is becoming one of the safest
methods of producing electrical power. Presently, most electricity is
produced by coal, oil, or natural gas fired plants. However, the cost
of these commodities has soared and, in the case of oil and natural gas,
the world will likely be forced to eventually ration their usage. Further,
oil and especially coal are long known to be instrumental in damaging
the world’s ecology due to their various carbon and other emissions.
This is not a problem with uranium power generation. Importantly, newly
commissioned pebble bed modular nuclear reactors have essentially overcome
the potential meltdown threat that has plagued the earlier nuclear reactor
models. I believe all that is needed is public awareness of the availability
of this new technology, and the world will open up to the desirability
of nuclear power creation.
The price of the uranium needed to power a nuclear reactor is but a small
fraction of the cost of the electrical power that it generates. For this
reason, it matters little whether the world price for uranium is $10,
$25, $40 or even far higher. While uranium’s price inelasticity
may place the commercial uranium consumers at a slight disadvantage it
benefits those who either possess or produce U3O8.
The utilities require uranium to continue in operation, and will pay whatever
is necessary to acquire their needed supply. Even if uranium some day
spikes to $100 a pound, the nuclear plants will have no alternative but
to purchase their uranium fuel. In this event, the cost of the electricity
delivered to the consumer will be higher. Yet, it will likely remain competitive
with that produced by the primary alternative sources of fuel.
The event that impelled me to pen this missive was the recent explosive
rise in the spot uranium price. In the two weeks prior to May 11, 2005,
uranium rose $5, from $24 to $29 a pound. This shocked the market! It
was primarily the result of the advent of two uranium holding funds. Their
mandates were to purchase and inventory U3O8 to the benefit of their shareholders.
Those who invest in these funds will directly profit from any uranium
price appreciation. In December, 2004, Adit Capital Management was launched.
Upon its inception, it reportedly held about $26 million worth of uranium.
On May 11, 2005, the Uranium Participation Fund was listed on the Toronto
Stock Exchange. They stated that their initial raised capital was $90
C. million. In a listing statement, they announced the recent $52 million
purchase of 1.85 million pounds of U3O8 at $27.87 per pound. It was the
acquisition of Uranium Participation Fund’s initial uranium inventory,
along with reported purchases by a few U.S. utilities, that carried uranium’s
price so sharply higher.
As I witnessed this enormous two week leap in U3O8's price, it struck
me that a temporary panic had enveloped the uranium market. After pondering
this event, I realized that it took the aggressive purchase of only a
few million pounds of uranium to sharply impact its price. To me, this
highlighted the true tightness of the uranium market, and made me contemplate
what the future likely held.
The Impact That Uranium Funds
Can Have On The Market Is Enormous
The primary uranium users are electrical power generating utilities.
They have typically been in the uranium market for a number of years and
both understand the market and can predict their uranium requirements.
This places them in a position where they can pick and choose their spots
to purchase the U3O8 that they need. Further, most utilities sign long-term
agreements with either their suppliers or the uranium producers themselves.
This normally allows them to stagger their acquisitions so as not to roil
the uranium market.
A uranium fund on the other hand has money that it must deploy on short
notice. It is likely that some U3O8 holders held out for higher prices,
knowing that the Uranium Participation Fund was in the market for a substantial
amount of uranium, and it needed it immediately. The fact that some utilities
apparently entered the fray to make additional purchases, also helped
drive the market quickly higher.
To my mind, this event indicates how easy it is to spook this market!
And, despite the fact that uranium traded as low as $7 a pound only five
years ago, it makes me wonder how much pressure its usual limited short-term
availability can place upon its market if large demands arise.
The all-time high spot uranium price was about $40 a pound. When it occurred
it was rumored that long-term contracts were struck as high as $70. Significantly,
this occurred in 1980, so these prices represent substantially higher
levels in current dollars. Of major importance, the sharply elevated prices
were still economic for the utilities at the time.
After this peak, uranium’s price plummeted and remained suppressed
for most of the balance of the 20th century. More than two decades of
uninspired and often sub-economic uranium prices caused world-wide production
to decline. Further, this and ore depletion forced the closure of numerous
mines. Additionally, few new mines came on stream during the past two
decades, and uranium exploration essentially ground to a virtual halt.
Despite the fact that higher prices have generated a renewed impetus to
explore for uranium deposits, it will likely take years before ample production
occurs to meet the increasing shortfall. Uranium deposits are similar
to diamond mines. They are typically small but are of quite high grade.
This makes them among the most difficult mineral deposits to locate and
profitably mine. Significantly, it can take up to ten years from discovery
to production, to bring a uranium mine on line in most important U3O8
producing nations. Permitting is a major delaying factor for various safety
and environmental reasons.
I believe that the emergence of Adit Capital Management and the Uranium
Participation Fund are at the forefront of what will likely become a wave
of similar uranium holding companies. If I am correct, and a number of
such entities arise, their thirst for the metal in the spot market has
the potential to tip the supply versus demand balance. If this results,
it will drive the uranium price far higher than even the other incredibly
positive fundamentals appear destined to do.
The motivating forces behind equity managers are far different than those
who direct the classical uranium consuming companies. If a substantial
amount of money from this likely emerging sector enters either Adit Capital,
Uranium Participation, or their yet to be named progeny, an unprecedented
amount of demand will be created for uranium. Given our recent experience,
when a few million pounds of spot market uranium demand almost overnight
drove prices 20% higher, it will be impressive to witness the outcome
as future market players become aggressive in their uranium purchases.
Uranium’s future contract price is currently $28 a pound. It will
be important to observe if the $29 spot price holds, to give a true indication
of its underlying strength. It would be normal to expect the spot price
to somewhat soften once the demand from the Uranium Participation Fund
is satisfied. However, to me, given the fact that uranium’s secular
Bull Market remains in its relative infancy, I anxiously await how the
myriad of bullish factors coalesce, and propel it sharply higher in price.
I publish Financial
Insights. It is a monthly newsletter in which I discuss gold, the
financial markets, as well as various junior resource stocks that I believe
offer great price appreciation potential.
Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.
CAVEAT
I expect to have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence, I will be
putting my money where my mouth is! However, if this troubles you please
avoid those that I own! I will attempt wherever possible, to offer stocks
that I believe will allow my subscribers to participate without unduly
affecting the stock price. It is my desire for my subscribers to purchase
their stock as cheaply as possible. I would also suggest to beginning
purchasers of these stocks, the following: always place limit orders when
making purchases. If you don't, you run the risk of paying too much because
you may inadvertently and unnecessarily raise the price. It may take a
little patience, but in the long run you will save yourself a significant
sum of money. In order to have a chance for success in this market, you
must spread your risk among several companies. To that end, you should
divide your available risk money into equal increments. These are all
speculations! Never invest any money in these stocks that you could not
afford to lose all of.
Please call the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and
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