[+ Font] :: [- Font] :: Printable

Turbulent Treasure Chest : Gold, Nuclear and Politics
Is South Africa a ‘buy’? (PART II)

Investment Indicators from Peter George
May 9th, 2005

(Part I available at 321gold)

Scripture

“In those days it was not safe to travel about,

For all the inhabitants of the lands were in great turmoil.

One nation was being crushed by another and one city by another,

Because God was troubling them with every kind of distress.

But as for you, be strong and do not give up,

For your work will be rewarded.”

2 Chronicles 15:6-7

SUMMARY

The above scripture aptly describes the increasingly stressful times we live in. Back in February, Paul Katzeff, of ‘Investor’s Business Daily’, summed it up:

“Conflict in the Middle East. Markets worrying about access to crude oil. Consumers cursing gasoline prices. And environmentalists warning about global warming.”

A week ago, President Bush felt it necessary to address the energy issue and did so in a special speech. He endeavoured to show the American public that, despite their widespread concerns, he nonetheless had ‘the situation in hand’. In an effort to allay growing fears about ‘out-of-control’ energy prices, he presented them with a long-term plan to reduce US dependence on imported oil and gas. Amongst minor side issues, his answer was essentially to focus on a return to nuclear energy, raising total US dependence on nuclear, from current levels of 20% to something closer to French levels of 78%. Without specifically linking it to nuclear as the sole practical source, he also mentioned ongoing research into the future role of hydrogen. He emphasized that in his opinion this was where the future lay.

Senator Pete Domenici, Chairman of the ‘Senate Energy and Natural Resources Committee’ echoed Bush’s remarks and gave them added impetus.

In a speech on April 24, he referred to the twin challenges of rising global demand for oil, and the threat of climate change associated with CO2 emissions from carbonaceous fuels - oil, coal, and gas. In line with the President, he predicted the US would be forced to move towards a ‘hydrogen-based’ economy. He went further and drew a parallel between the ‘transportation crossroads’, facing his country a century ago, and that staring us down today.

“In the early 1900’s people still relied on the horse and buggy. The new-fangled automobile was too expensive, unreliable and hard to maintain. Gasoline was impossible to get in most places, and paved roads didn’t exist in most areas.

We are there today with hydrogen. Hydrogen cars are too costly, their performance is unreliable, and hydrogen is virtually impossible to get. We still don’t know how to store it or transport it effectively.

We face precisely the same hurdles our great grandparents faced more than a hundred years ago with the automobile. The choices we make today will determine how swiftly and successfully we overcome these hurdles and move towards the freedom and opportunity a hydrogen society offers us.”

Domenici stated the US was researching several possible sources for hydrogen, from gas to nuclear reactors and windmills but he crystallized the results of his findings to date – that the best source was nuclear. His views coincide exactly with our own. Furthermore, they tie in with what we planned a month ago – a report on the coming role of high temperature nuclear reactors.

Apart from their best-known use as generators of electrical power, high temperature nuclear reactors have two lesser-known claims to fame. The first is ‘desalination’ as a costless spin-off from the cooling process. The second is potentially the most important of all – a future role in the large-scale production of hydrogen. Its greatest attraction here is that the entire chain of production would be totally ‘non-carbonaceous’. At a single stroke it would completely sever America’s growing dependence on imported oil and gas.

In this report we focus on what we believe to be the only credible high temperature nuclear reactor on the drawing boards at this point of time - the South African ‘Pebble Bed Modular Nuclear Reactor’. Without recognizing or understanding South Africa’s leading-edge position, here is what Domenici said:

“Personally, I believe high-temperature nuclear reactors offer the ideal source for hydrogen for four reasons.”

His most important reason for endorsing them was the following:

“Nuclear reactors have the capacity to produce hydrogen in the volumes we will need if we power our cars with hydrogen. I don’t believe windmills or similar non-carbon sources have the potential…we need.”

Then he made his first mistake:

“We are still 20 years away from the kind of high-temperature reactors that easily produce hydrogen, but Department of Energy Research at Idaho National Laboratory is promising.”

To the contrary, the most ‘promising’ research is not taking place in the US. It takes place in South Africa, and to a lesser extent China. Second, and most pertinent, the first ‘demo-model’ is not 20 years away but only 5. The first contracts have already been awarded. Construction will start end 2007 at Koeberg, 100 kilometres up the West Coast from Cape Town. The site chosen already contains the country’s first and only pair of conventional nuclear reactors built by the French.

Completion of the first ‘demo’ is set for end 2010. Commercial units will be available from 2013 onwards – 8 years time. No doubt in a crisis the process could accelerate. In a ‘war-time situation’, this is normal. One recalls the mass production of ‘Liberty’ ships during the Second World War. If ‘Peak Oil’ becomes reality in the next 2-3 years, we face a similar type emergency.

Don’t be surprised if South African nuclear engineers are then called on to appear before the United Nations - to give the reason for the hope that they have. The solution to the crisis will lie in their hands.

The purpose of this report– effectively ‘Part 2’ - is thus fourfold.

1. It is to study the likely impact of this new reactor on world energy markets in general and the South African economy in particular.

2. It is to assess the investment potential of South Africa’s ‘new baby’ even though an entry-level stake will probably require a minimum investment of R2 billion, equivalent to $350m.

3. It is to suggest that one or more of the likely recipients of Barclays Bank’s R32 billion ‘buy-out’ of South African banking group ABSA, might well consider using part of their proceeds to invest in the Pebble Bed company while the opportunity exists. It will be like snapping up Microsoft at a dollar a share ten years ago, compared to its current price of $24.

4. Finally, it will be to conclude with an overall political evaluation of the South African investment scene – both over the short and long term. We will deal with every prickly pear on the political table. Due to the recent publication of a detailed biography of South African President Thabo Mbeki, we have decided to postpone our political analysis until it can be dealt with in greater detail in a Part 3. The book, by William Gumede, gives a detailed history of the inner workings of the ANC over an extended period of time. The writer believes it would be foolish and short-sighted to ignore such fresh evidence.

In Part 1 of this report – published April 5 – we superimposed the likely effects of an extended boom in commodity prices on South Africa’s latest economic statistics. Based on our assumptions we re-worked government GDP forecasts to end 2010.

In this month’s report - Part 2 - we discuss the long-term implications of the coming revolution in nuclear energy. In particular, we assess the dramatic opportunity it creates for South Africa’s ‘Pebble Bed Modular Nuclear Reactor’. The export potential of this technological ‘wunderkind’ will boggle the minds of subscribers. As in a relay race, its impact from 2010 onwards, takes over the baton from gold and commodities. The picture is exhilarating. It could set South Africa on an exciting growth path for the next two decades.

South Africa’s Minister of Finance Trevor Manuel may after all prove correct – but not for the reasons he thought. The growth rate of the country’s Gross Domestic Product could indeed average the 6% per annum he thinks is possible. Contrary to his expectations, most can flow through the effects of natural market forces. It will not have to be ‘engineered’ through a ‘copy-cat’ explosion of deficit financing and debt as is happening in the US, the UK and Australia. Instead, it can generate from intrinsic growth – the result of booming exports, and accelerating foreign investment.

Section 1.1 – 1.5 for subscribers only

1.6 Conclusion of Part 1 – Gold’s contribution to GDP by 2010

At the end of Part 1 we reached the conclusion that by end 2010, gold’s contribution to South Africa’s GDP would rise from last year’s level of 2% to 10% if the Rand/$ rate strengthens to R3,5/$ and 14% if the rate remains unchanged at R6,3. The overall contribution from mining and processing of total metals and minerals, could rise from 13,5% to 18% with a rand rate of R3,5/$ and from 13,5% to 27,5% should the rand remain unchanged at R6,3/$. Consider how desperately miners and other exporters are calling for a weaker rand – up to R7,5/$ if government intervenes as requested. Let us then acknowledge that our own estimates – based on an eventual rand rate of R3,5/$ - are the epitome of caution. If they materialize, they spell unmitigated excitement for offshore investors who benefit from a ‘double-whammy’ – a runaway rise in gold and share prices, accompanied by a strengthening rand as well. This time the extent of the rise in dollar gold makes it possible for the rand to strengthen without hurting share prices. In fact they benefit from low inflation.

We turn now to the period after 2010 – coinciding with the onset of nuclear revolution, as set out in our summary.

2. DEVELOPMENTS FAVOURING NUCLEAR

Negative attitudes to nuclear energy are melting faster than the polar ice caps. In April a year ago, when US Department of Energy ‘boffs’ issued their annual report on expected energy trends to 2025, oil was trading close to $30 barrel. In recent months, less than a year later, it has twice approached $60, before pulling back to $49. Major support sits on the 200-day moving average at $46. We doubt it will breach that level, before resuming the uptrend and we expect it to end the year at $65. No wonder Bush has a problem – others too. That is why attitudes to nuclear are beginning to change. We foreshadowed this in our November 2004 report entitled: ‘Nuclear Revolution in the making’.

When Bloomberg canvassed UK watchers recently, for an opinion on nuclear as an alternative to oil, 79% voted in favour of a switch, if it promised cheaper energy. Gone are the ‘hang-ups’.

French ‘Authorities’ have been equally quick off the mark. An order for a nuclear reactor from Finland, and prospects of more from China, helped consign memories of Chernobyl and Three Mile Island to outer darkness. French politicians are rapidly seeing the light, re-affirming their faith in nuclear. The reason is simple. No large potential customer like China, is going to trust a supplier whose country is anti-nuclear.

Until very recently, the US buried herself in a minefield of anti-nuclear regulations. Despite the President’s avidly ‘pro-nuclear’ speech, there remain deep-seated pools of hostility in official circles, a hangover from the virulently anti-nuclear days of Carter. Even now, barring a miracle, the country’s ‘advanced nuclear research reactor’ - the Fast Flux Test Facility in Hanford, Washington – plans to close, and soon. Built in 1978, the institute has been under a DOE ‘death sentence’ since 1990, on the pretext of saving costs.

Given Senate unawareness of the DOE’s relative slow start in the race to produce hydrogen – way behind emerging market ‘upstarts’ like South Africa and China – a severe wake-up call is necessary to get nuclear back on track. Bush’s speech is a small beginning but, while Democrats still call for wind and solar, and whine about nuclear waste, progress will be slow.

2.1 Safer disposal of nuclear waste now possible

There has been one encouraging development of late. Researchers at Lehigh University, Sandia National Laboratory, and Idaho National Laboratory have jointly developed and patented a new alloy. It could help the US more safely dispose of the 50,000 tons of nuclear waste currently stored at 125 sites in 39 states. It is nickel-based with added ‘gadolinium’ and shows far greater ability to absorb the deadly radioactive neutrons emitted by nuclear waste. The gadolinium-nickel alloy recently passed an important test:

‘it can be fabricated in large quantities using conventional ingot metallurgy and fusion welding techniques’.

We quote from PhysOrg.com:

“The researchers’ discovery, which was announced in an article in the December 2004 issue of the American Welding Society’s Welding Journal, caps a four-year study funded by the US Department of Energy’s Spent Nuclear Fuel Program.”

“The article comes amidst a controversy over plans by the Bush Administration and Congress to transport the nation’s spent nuclear fuel to Nevada and deposit it inside Yucca Mountain about 90 miles northwest of Las Vegas.”

Contentions that the Yucca Mountain project is environmentally unsafe should now recede.

2.2 Why a ‘Green’ sees ‘Red’

Environmental nuts are an international phenomenon. This is not for a moment to ignore the growing dangers of global warming, but when they focus their efforts on nuclear to the exclusion of all else, they have moved beyond the pale of common sense. South Africa has her own variety and we discuss them later. Meantime, we refer them to the views of top British ‘Greenpeace’ spokesman James Lovelock. In May 2004, he published an impassioned plea to phase out fossil fuels and said nuclear power was the last, best hope for averting climatic catastrophe. His statement appeared in ‘The Independent’ in London:

“Opposition to nuclear energy is based on irrational fear, fed by Hollywood-style fiction, the Green lobbies, and the media. Even if they are right about its dangers – and they are not- its worldwide use as our main source of energy, would pose an insignificant threat compared with the dangers of intolerable and lethal heat waves and sea levels rising to drown every coastal city of the world. We have no time to experiment with visionary energy sources; civilization is in imminent danger and has to use nuclear, the one safe, available energy source, now, or suffer the pain soon to be inflicted by our outraged planet.”

3. WHAT IS THIS PEBBLE BED?

In sharp contrast to the slow pace of change in the West, Africa and Asia have long been planning to seize the day. When the World Nuclear Association published its latest update, China was bottom on a list of thirty users of nuclear power at less than 2% of total generation. South Africa was twenty-fifth at 6%. Yet the two are now co-operating in a joint venture, which could rock the energy markets and steal a vital march on competitors in the West.

Two recent articles sketch the background. The first appeared in Beijing on October 5, 2004:

“China leading world in next generation of nuclear plants.”

It went on:

“Facing enormous demand for electricity, China is to build dozens of nuclear plants in the next half century and is at the forefront of efforts to develop the next generation of safer, more efficient reactors. …China is set to become the world's biggest market for atomic power in the future. Top nuclear scientists from around the world gathered in Beijing during the last week of September, 2004.

Due to huge energy needs spurred by its booming economy and an environment choking on fossil fuels like coal, China has ambitious plans to build up to 30 nuclear reactors by 2020.

China and South Africa are leading the world in the development of the next generation of reactors. Both nations enjoy full government backing and tremendous cooperation with international nuclear engineers. Both have plans to build 160 Megawatt demonstration Pebble Bed Modular Reactors by 2010. They hope eventually to commercialize the technology and bring electricity and modern lifestyles to communities throughout China and Africa.

If the Pebble Bed reactor can fill this tremendous need and demonstrate that it is safe, this will be very significant for the future of nuclear power. The reactor is theoretically "meltdown proof" which means that accidents like the Chernobyl nuclear disaster could be avoided, while the cost of the reactors should fall significantly as multiple safety systems and expensive pressure domes will not have to be built. The "inherent safety" of the reactors stems from the helium gas coolant that is used. Helium is completely inert. Fuel for the Pebble Bed is another key. The Uranium Oxide is encased in round, pebble-shaped balls, coated with silicon carbide and graphite shells. The method of manufacturing, storing and using the fuel renders a conventional ‘meltdown’ physically impossible.

The modular structure of the Pebble Bed makes it possible to produce the reactors in a factory - not on site as with traditional light and heavy water reactors. "The reactor will be built in a stable environment in a factory, with highly trained workers. This will eliminate errors in construction substantially reduce the costs of construction.”

OUR COMMENT. The spent fuel remains in ‘pebble form’ and is therefore far harder to process into weapons-grade uranium than normal fuel rods would be. The ‘Iran’s’ of this world may become safe customers of a Pebble Bed because it would give them scant ability to abuse their position, by attempting to make bombs from nuclear waste. It is still encased in silicon balls and is unsuitable for reprocessing. Furthermore, it is also easier to dispose of than the steaming rods from traditional water-cooled reactors. It is also far safer to store because it cools of its own accord and cannot go ‘critical’.

Article 2 on the Pebble Bed appeared on the front page of the London Financial Times on February 8, 2005. The heading read:

“China Claims Nuclear Power First As It Selects Site for Pebble Bed Reactor”

In the Executive Intelligence Review of February 25, analyst Nancy Spannaus summed the gist of the FT article as follows:

“The article, backed up by an extended feature about China’s nuclear program, accurately described China’s drive to develop the world’s first commercially operated version of revolutionary nuclear design which would be ‘meltdown-proof,’ and provide the basis for cheap, safe, and massively expandable nuclear power generation worldwide.”

Here are some excerpts:

“China is poised to develop the world's first commercially operated "pebble bed" nuclear reactor after a Chinese energy consortium chose a site in the eastern province of Shandong to build a 195MW gas-cooled power plant. An official representing the consortium, led by Huaneng, one of China's biggest power producers, said the proposed reactor could start producing electricity within five years.

If successfully commercialized, the pebble bed reactor would be the first radically new reactor design for several decades. It would push China to the forefront of development of a technology that researchers claim offers a new "meltdown-proof" alternative to standard water-cooled nuclear power stations.

China and South Africa have led efforts to develop "pebble bed" reactors. The reactor's proponents say the dispersal of its fuel among hundreds of thousands of spheres prevents a meltdown. They further argue that being ‘modular’, pebble bed reactors offer the hope of cheap, safe and easily expandable nuclear power stations. This has great appeal for China, which is struggling to meet huge growth in energy demand while avoiding environmental disaster.”

OUR COMMENT: Last year China installed 50,000 MW of power generating capacity - the equivalent of 50 new plants of 1,000 MW each. This year they plan to install 60, of which two will be nuclear, the balance coal-fired. Forty percent of China’s rail system is devoted to transporting coal to power stations and factories. The place is clogging up and the atmosphere in major towns and cities is poisonous.

Being small and modular, Pebble Bed reactors suit the start-up requirements of remote areas. They make it easy to add extra modules as demand for power increases. Six Pebble Beds of 165 Megawatts each are the rough equivalent of one large station of a conventional type, generating 1000MW.

Sections 3 – 6 for Subscribers only

7. CONCLUSION

South Africa is poised to enter a period of accelerating growth. They have much to offer the world economy – a powerful blend of commodities, energy ‘know-how’, and point of access to the rest of Africa.

In the writer’s experience there has seldom been such an opportunity for major investors to participate in such an exciting long term investment.

For the small man, it is added evidence to support the wisdom of jumping aboard the nuclear train.

From a South African perspective, the most exciting means of entry remains near-term potential uranium producer, AFLEASE Gold and Uranium.

More follows for Subscribers:

We encourage you to access the full report at Peter George’s website with a view to becoming a SUBSCRIBER. The address is:

www.investmentindicators.com

------------------------------000000000000000000000000000----------------------------

DISCLAIMER

Readers are advised that the material contained herein is provided for informational purposes only. The authors and publishers of this letter are not acting as financial advisors in providing the information contained in this publication. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment related advice. Readers are urged to consult an investment professional before making any decisions affecting their finances.

Any statements contained in this publication are subject to change in accordance with changes in circumstances and market conditions. All forecasts and recommendations are based on the currently held opinions and analysis of the authors and publishers. The authors and publishers of this publication have taken every precaution to provide the most accurate information possible. The information & data have been obtained from sources believed to be reliable. However, no representation or guarantee is made that the information provided is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Markets change direction with consensus beliefs, which may change at any time and without notice. Past results are not necessarily indicative of future results.

The authors and publishers may or may not have a position in the securities and/or options contained in this publication. They may make purchases and/or sales of these securities from time to time in the open market or otherwise. The authors of articles or special reports contained herein may have been compensated for their services in preparing such articles. Peter George Portfolios (Pty) Ltd and/or its affiliates may receive compensation from the featured company in exchange for the right to publish, reprint and distribute this publication.

No statement of fact or opinion contained in this publication constitutes a representation or solicitation for the purchase or sale of securities or as a solicitation to buy or sell any specific stock, futures or options contract mentioned in this publication. Investors are advised to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.