Uranium Bull Market: Only Tip of the Iceberg
In mid September, Mitchell Dong, chief investment officer of Solios Asset Management told a news wire service, “I think we are seeing the tip of the iceberg of financial investors entering the physical uranium market.” At the Platts Nuclear Fuel Strategies conference in Washington, this past week, Mitchell Dong was a pit bull. Not only did he take extensive notes during the speeches, but he was first-in-line to question the majority of the speakers after their presentations. Clearly, whatever initial purchases his fund or funds had made, in entering the physical uranium and equities markets, he probably wasn’t finished loading up. Nearby, a trio of Greenwich, Connecticut hedge fund managers quietly listened to the presentations. Later, they lunched alone at their table while we observed them huddled in deep discussions about what bets they might place in the uranium bull market. Long-time insiders have kept trying to put this bull market into whatever context they could. A difficult task since many of them endured a twenty-plus-year uranium drought, which only came out of hibernation the past few years. Some admitted they had nearly given up on the sector as the years passed by. Now, they and everyone else involved is trying to figure out how to make the Big Score on this amazing nuclear renaissance. Of course there were opposing views on how to deal with the uranium price. Charles Peterson, an attorney at DC-based Pillsbury Winthrop Shaw Pittman LLP, hinted at a more transparent market, hoping uranium might be offered on a future exchange. He compared to the accessibility of other metals where traders use speculators. Later in the day, Patricia Mohr, Vice President for Economics, at Canada’s Scotiabank warned the industry that if uranium were traded on a futures market, its volatility might already have it trading at $100/pound. Again, the uranium price worried many at the conference. Ending the HEU hung around at the back of the minds of utility executives probably because many wondered where future SWU would come from, should the Russians terminate supplies to U.S. utilities. Should preparations not be taken at this time, it would not surprise us to see a super-spike in the price of uranium which Sprott Asset Management’s Kevin Bambrough has occasionally warned us about. U.S. utilities remain complacent, assured the Department of Energy will come to the rescue at the last minute. But will they? On the outside chance we might get insights into the complex and secretive Russian mind, we cornered Andrey A. Orekhov, counselor for the Science and Technology Department at the Embassy of the Russian Federation. He briefly attended the conference to eavesdrop on what Ronald Lorentzen, Director of the Office of Policy within the U.S. Department of Commerce, had to say at his presentation with regards to ongoing Russo-U.S. negotiations. We tested the waters by talking about the new generation of nuclear reactors, and brashly asking him if he could introduce us to Sergei Kirienko, head of Russia’s atomic energy agency, Rosatom. Instead he referred us to a lesser light for an interview. Then, we asked him if we had been accurate in reporting that Russia’s aggressive nuclear ambitions would drive the uranium price to $100/pound. Pondering our question for a while, as if weighing whether the wrong answer would lead to his next meal in a Russian prison, Orekhov looked off into a far corner of the room and responded, “Who knows?” His question concisely summarized the collective thoughts of the conference. No one really knows how much higher the price of uranium will run, whether it will reach $100/pound (and higher) and how soon it might arrive at the century mark. As we noted in an earlier part of this series, Dustin Garrow remarked of a possible run to the $80 to $100/pound level. The Florida Power and Light spokesman believed $52/pound was too high. Renaissance Could Hit a Wall Garrow made an interesting point at the beginning of his presentation, announcing, “There are now more than 400 uranium companies.” The implications of his comment are wide-ranging should one pause to ponder what he meant. Fuel Cycle Week senior editor Nancy Roth addressed this in the October 3rd issue. She reported upon the events and revelations at the Platts conference, writing, “Several speakers mentioned serious technology and equipment deficits that are a legacy of this dormant period (the uranium depression: 1980 – 2003), along with the dearth of nuclear personnel from uranium miners to nuclear engineers.” These observations swipe at both sides: uranium producers and utility end-users of the uranium. If the labor and equipment shortages fail to provide sufficient uranium for utilities, then the price is likely to rise much higher. At the same time, should nuclear power plants fail to staff up their operations, or construction delays impact the building of new reactors, a lesser quantity of supply, less than what has been projected, will be required. To make it short and simple: this industry is still too ‘new’ to realize all of the complications required to move forward. As Ms. Roth wrote in an email to us, “I think the uranium industry has a real chicken-and-egg problem in reinventing itself, and I think a key indicator of the severity of the problem might be in these production costs.” The cost to which she was referring was the expense required to extract uranium from the ground. In the United States, there are a handful of in situ recovery operations. That is an insufficient number to adequately calculate an average production cost for a mining operation. What happens when another half dozen uranium properties commence new mining operations? One of the hidden problems within the uranium development sector is the lack of proven miners. Over the past year, a few existing U.S. uranium producers experienced employee raids by the newly arrived development companies. We suspect more will take place, as several companies move closer to the mine development stage. Raids are taking place because of a lack of skilled and proven personnel. Patricia Mohr brought up another of many interesting points. Increased mining output during 2004 and 2005, but in the first half of 2006 Mohr observed, “Mine production probably dropped in the first half of 2006.” She believes production was about 20 percent of companies planned. She pointed out Australia’s Ranger mine production was lower because of a cyclone; Olympic Dam because of declining ore grades. Rugged granite, from which Namibian uranium is mined, has reportedly caused problems at this country’s Rossing mine. Mohr believes the mine’s output could slow down in the second half of the year. We believe the production costs for many of the up-and-coming projects are going to be greater than expected. When was the last time a new uranium mill was built? Not in this century. When was the last great uranium deposit discovered? Twenty years ago. How does a new company calculate its start-up and operating mining and milling costs in today’s dollars? Some might believe they know the answer, but we won’t really know until the actual production scenario takes place. And that might be two years down the road at the very earliest. Factors such as those do puzzle the forecasters, the analysts and the industry insiders. They truly do not have a proven benchmark against which to make an accurate evaluation. The last time they could was during the uranium bull market of the 1970s. What about those 400 uranium companies? “Do you read their news releases?” asked Nancy Roth. She does, we read many of them. “Aren’t most of them just hype?” she inquired. We had to agree with her assessment. But in understanding the junior uranium companies, it is the news release which attracts investors to provide market support for their stock prices. Some have no real plans but to mine the stock market, as author and long-time uranium insider Julian Steyn once told us. Over dinner, Ms. Roth provided us with an important insight. She covers the NRC hearings for various companies hoping to move their projects forward. Those who are actually meeting with NRC aren’t doing so for a free trip to Washington at the expense of their shareholders, but instead to bring their project into the mine development stage. Among the most recent applicants were some of our favorites, such as Uranerz Energy (AMEX: URZ), UR-Energy (TSX: URE) and Energy Metals (TSX: EMC). Another was the privately held Concentric Energy Corp. Coincidentally, StockInterview fan Laura Stein had been emailing us to meet with Ralph Kettell, Chief Executive of Concentric Energy. Because of Ms. Stein’s insistence, and our review of Mr. Kettell, we met with him about his project. Aptly, he chose the Greenbelt exit on the Baltimore-Washington Parkway. For those unfamiliar with this exit, it is the road to NASA. As an electrical engineer, it was for NASA that Kettell designed the radio frequency (RF) portion of the Space to Space Communications System used in the construction of the International Space Station. Kettell also likes to seriously dabble in natural resource stocks, having been the lead investor and a director in AuEx Ventures. No stranger to the uranium market, he had written an article for a resource website in 2003, proclaiming the coming bull market in uranium. Kettell forecast that some of his favorite stock picks, such as Strathmore Minerals – then trading for about C$0.30/share, would jump by 1000 percent. Strathmore’s 2006 high was C$3.00. Kettell had created an index of five uranium stocks (there weren’t 400 to choose from, back in 2003) from which he started at a base number of 100. Kettel’s favorite stocks were Cameco Corp (NYSE: CCJ), Denison (TSX: DEN), International Uranium Corp (TSX: IUC), JNN Resources (TSX: JNR) and Strathmore Minerals (TSX: STM). He told us this past spring, the value of his index had soared to the 3,000 level – up 30 times from when he began tracking his favorite uranium stocks. Since then, the index had dropped to 2,200. We asked him in which direction he believed it was heading next. He responded, “I’ve looked at the technicals (technical analysis), and it should blow through the 3,000 level in 2007.” By early 2007, Kettell believes his private company, Concentric Energy, should be publicly trading. He told us he had rounded up the support of Jim Dines, Doug Casey and other newsletter writers for his private placement stock. Kettell said Pinetree Capital (TSX: PNP) was one institution backing his project. His company plans to develop the Anderson uranium mine, about 75 miles northwest of Phoenix, Arizona. The property had produced about 33,000 pounds in the 1950s. Additional exploration by Unocal and Urangesellschaft in the late 1970s demonstrated sufficient promise in the property. He told us Unocal was planning a 2,000-ton-day mill in 1978 for a proposed open pit mine. We mention this meeting to bring home a very strong point about the future price of uranium. Upon our asking Mr. Kettell what his operating costs for the milling and mining operations at the Anderson property, he told us, “About $65/pound.” At least he was honest. This may not be the price level U.S. utilities want to hear about, but it might become the floor price for the future price of uranium. Perhaps, Mr. Kundalkar, the vice president from Florida Power and Light whom we mentioned during the first article in this series, should pay attention to what the uranium miners are saying. We are.
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