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It’s Only the Beginning for Uranium

By Dr. Richard S. Appel
www.financialinsights.org.
June 3, 2005

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.

The above was excerpted from the June 2005 issue of Financial Insights © May 30, 2005.

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 is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly has a position in any of the securities mentioned. He will make every effort to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel encourages your letters and emails, but cannot respond personally. Be assured that all letters will be read and considered for response in future letters. It is in your best interest to contact any company in which you consider investing, regarding their financial statements and corporate information. Further, you should thoroughly research and consult with a professional investment advisor before making any equity investments. Use of any information contained herein is at the risk of the reader without responsibility on our part. Past performance does not guarantee future results. Dr. Appel does not purport to offer personalized investment advice and is not a registered investment advisor. The information herein may contain forward-looking information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the company’s actual results of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.