Uranium to Head North of $500/Pound?

Uranium to Head North of $500/Pound?

mythical stock picker James Dines recently compared uranium stocks to the high-flying net stocks of the halcyon days of the Internet expansion era. While the much-hyped and fleeting Y2K crisis never materialized, the U.S. energy crisis for highly sought uranium has been developing for more than twenty years. nevertheless early in the current bullish uranium cycle, investors are scoring triple-digit returns on what some are calling a ‘renaissance in nuclear energy.’

Just as investors caught the curve of a new paradigm in communications and commerce with Internet stocks, many early birds have already begun investing in the nuclear energy story. The nuclear story pitch is simple: How do you adjust to a enormous rush for electrical strength need while faced with the dire threat of carbon dioxide emissions and its direct impact on global warming? The growing consensus is that fission-based nuclear strength may become the meaningful stop-gap energy different for this century and possibly until reliable technologies can effectively provide the method for replaceable-sourced energy.

Nearly 2 billion people across the planet have no electricity. The World Nuclear Association (WNA) believes nuclear energy could reduce the fossil fuel burden of generating the new need for electricity. The WNA forecasts a 40-percent jump in worldwide electricity need over the next five years. The world’s most populated countries, China and India, are in the time of action of creating the largest energy-consuming class in the history of earth. Both plan aggressive nuclear energy expansion programs. Dozens of lesser developed countries, from Turkey and Indonesia to Vietnam and Venezuela, have announced their eagerness to pursue a civilian nuclear policy to assistance strength needs for their thriving middle classes.

In a nutshell, global utilities are going to need uranium to help satisfy the increasing number of nuclear strength plants hypothesizedv over the next twenty years. Herein lays the crisis: the world has been living off rapidly dwindling inventories since the last uranium up cycle. Uranium is now in shorter obtainable supply for civilian energy use than ever before. Over the next decade, as need continues to outstrip supply, analysts are predicting utilities will break up known uranium inventories sending identify uranium prices to record highs. During this set afloat phase, investors have taken notice, chasing up the stock prices of many uranium producers and exploration companies.

Uranium Prices May Reach “Unbelievable Highs”

Toronto-based Sprott Asset Management research analyst, Kevin Bambrough, told STOCKINTERVIEW.COM, “There is a good possibility of a supply crunch that could excursion uranium prices to unbelievable highs.” Various analysts predict price targets for identify uranium, in the near-term, above $40. Canadian Augen Capital Corp’s managing director David Mason speculated, “$100 (US) a pound is within reason within the next year or two.” Sydney-based Resource Capital Research is half as generous, forecasting $50/pound by 2007, explaining another 40 percent jump in identify uranium prices will be “pushed by end users in the strength generation market which is urgently trying to obtain supply into the future.”

How high could identify uranium prices run? Kevin Bambrough made a hypothetical case for uranium trading north of $500. “It’s a ridiculous price,” Bambrough confided. “It’s hard to speculate if this is already going to happen.” While he admits that price would not be sustainable, Bambrough makes an interesting point about the concerns facing utility companies, charged with providing us with our electricity. In his futuristic scenario, Bambrough speculated, “There’s a chance that some facilities will have to choose shutting down their nuclear plants (if they can not acquire uranium to fuel the facility).” On that basis, Bambrough calculated the operating costs of a nuclear facility versus the operating cost of a competing fuel. In his conjectural form, Bambrough used natural gas priced at $5.

Bambrough explained, “Assuming that the coal-fired plant’s operating capacity, before you would basically shut down a nuclear facility, you would be comparing it to what you would have to bring on, which would be natural gas. If there is a shortage there (with natural gas), what price would it take before I am willing to shut down my nuclear facility? If you were to shut off the nuclear capacity, and fire up more gas to replace it, it would send gas prices by the stratosphere.” And that doesn’t factor in the cost of shutting down a nuclear facility, itself an expensive course of action. The analyst said he reached his calculation of “north of $500/pound” for identify uranium, under an extraordinary emergency supply crunch, by answering this question: “How much would people pay before they shut it (a nuclear plant) down if there is a shortage of uranium?”

Bambrough’s point illustrates that, unlike coal or natural gas, the cost of uranium in the nuclear fuel cycle is minimal. consequently, uranium is unprotected to an ever greater price rise without the blowback of consumer panic found in rising fossil fuel prices. Uranium prices might have to approach the level of Bambrough’s hypothetical forecast before already registering concern on an ordinary consumer’s radar.

Despite the recent parabolic rise in identify uranium prices, Bambrough doesn’t foresee the uranium frenzy peaking until the years 2013-2015. What will happen then? “There’s a good chance that the HEU agreement won’t be renewed,” said Bambrough. “Russia may not be selling their uranium. The Russians may want to keep up onto what they have.” And if they do sell, they may not sell to the U.S. In 2004, U.S. utilities imported more than 80 percent of their uranium supplies from foreign supplies. “It could be that the Russians are interested in trying to build nuclear plants for other countries and be in that business,” he suggested. “That may go hand in hand with ‘we’re going to build you the facility and we can guarantee you supply.’ And Russia would be using the balance of that uranium for their domestic needs.” Bambrough also cited the problem of mines expiring in the confront of a possible new need.

He concluded, “There are time lags to bring new production on versus what needs to be replaced in that 2013 period.” The International Atomic Energy Agency forecast nuclear electrical generating capacity to soar by more than 40 percent by the year 2030, which may further excursion need for tight uranium resources, especially during the period of Bambrough’s forecasted period.

Historical cycles sustain identify prices higher than $40/pound, a level above where uranium may hover for several years. The current cycle of rising uranium prices closely parallels the jump which occurred between February 1975 and April 1976. identify uranium prices soared from $16 to $40/pound during that 15-month period. During the 1970s cycle, uranium steadily rose from $6.75/pound in November 1973, peaking in July 1978 at $43.40/pound. Uranium held above $40/pound for nearly four years from April 1976 by February 1980. In this cycle, uranium prices bottomed at $6.40 in January 2001, creeping higher into 2004. Since late last year, identify uranium prices soared with the same momentum seen thirty years ago. If history repeats itself, identify uranium prices should trade above $40/pound this year, and stay above that level until the end of this decade or perhaps for a longer stretch.

The meaningful yardstick in calculating how much higher uranium prices will climb is by keeping track of the number of new nuclear facilities being constructed or hypothesizedv. Estimates vary wildly, from as few as thirty by 2020 to more than 150 before 2050. “A few years ago, when we first started investing in uranium,” Bambrough explained. “There were very few plants being hypothesizedv. The numbers have doubled for hypothesizedv facilities. And for every one you hear about, there’s a lot more being planned.” That puts uranium miners into an enviable position. Bambrough additional that utilities have to obtain their fuel supply for up to six years out, once they decide to build a nuclear facility. “The fact is the supply is just not there,” warned Bambrough.

According to the U.S. Energy Information Administration, “Cumulative unfilled uranium requirements for U.S. civilian nuclear reactors for 2005 by 2014 were reported to be 365 million pounds U3O8e. The quantity of maximum deliveries of uranium for the same period under existing buy contracts totaled 181 million pounds.” Nearly 67 percent of the maximum expected market requirements for uranium without a contract. Over the next decade, U.S. utilities will need to newly buy more than 36 million pounds of uranium oxide each year, on average, in order to keep their nuclear strength plants running. According to the Department of Energy website, contracted purchases from all suppliers precipitously falls in 2007 below 40 million pounds. By 2008, the amount of contracted uranium sinks below 20 million pounds.

In short, U.S. utilities may soon be scrambling for uranium inventory to fuel their nuclear reactors, or confront the “ridiculous price(s)” research analyst Kevin Bambrough warned about. An excerpt from The International Atomic Energy Agency’s booklet, examination of Uranium Supply to 2050, produces out Bambrough’s thesis, “As we look to the future, presently known resources fall short of need.” The deficit between newly mined uranium and reactor need has averaged about 40 million pounds yearly over the past decade, cannibalizing existing inventories. As we begin 2006, the supply/need imbalance has reached a basic phase.

Where Will the Uranium Come From?

In his September 2004 presentation to the World Nuclear Association, Thomas L. Neff of MIT’s Center for International Studies, stated, “The net consequence of nearly twenty years of inventory liquidation is that existing higher-cost suppliers were pushed out of business, new mines were discovered from starting, and exploration was neglected.” Neff warned in his conclusion, “The problem is the one to two decades that will be needed to expand (production) capacity and build the flow of nuclear fuel that meet the expanding requirements horizon.”

The 1970s price spike in uranium was limited because existing uranium mines were quickly ramped up to supply utilities with fuel. Neff noted, “This is not the case today and a longer period of high prices could prevail.” In Neff’s examination, uranium prices would have risen well above $100/pound in the mid 1970s, using continued 2004 US$. On that basis, Bambrough’s hypothetical forecast above $500/pound may be not too far out of reach. Neff summarized why the problem has reached a basic stage, “We are currently facing the consequences of what may be the largest consistent divergence between expectations and reality in the 60 year history of uranium.”

Kevin Bambrough offered some slight relief for the uranium inventory problem, “There are a number of mines coming on, and there are talks of expansion.” He gave Australia’s Olympic Dam as one example, and additional, “There’s lots of talk about big production coming on in Kazakhstan, but I’ve also heard reports saying that’s very optimistic.” The International Atomic Energy Agency (IAEA) is less sanguine, “rule times to bring major projects into operation are typically between eight and ten years from discovery to start of production. To this total, five or more years must be additional for exploration and discovery.” The IAEA doesn’t foresee relief until 2015 to 2020.

For the time being, U.S. utilities are forced to bide their time while they continue to rely mainly upon newly mined uranium imported from Canada or Australia. Once the world’s largest uranium producer, the estimated recoverable reserves in the United States now ranks but eighth in the world with four percent of known global reserves. Those 125,000 tonnes of uranium would supply 250 million pounds of uranium, far less than the unfilled maximum requirement for U.S. utilities over the next decade. The majority of domestically mined uranium now comes mainly from Wyoming, Texas and Nebraska. Permitting operations are progressing in New Mexico, once the country’s largest producer of uranium, which may become a meaningful uranium supplier later this decade.

“For people who want to bring on new (nuclear) facilities and contract for it, it’s very difficult to do that,” said Bambrough. “You have to go to mines that are not already there however in order to try and contract supply.” In this light, it appears the greatest opportunity will appear with the junior uranium companies, which obtained known uranium resources during the last down cycle, and whose operators abandoned such similarities because of low prices. As Neff warned in his presentation, “Uranium prices have recently reversed a twenty year decline, seemingly surprising many buyers and sellers.” Buyers will be combing the same company lists investors examine. Just as investors will be racing to find the best uranium juniors for investment purposes, utility buyers and uranium traders will be scrambling to clarify which company could provide them with a long-term uranium supply.

How Can Investors Profit?

Bambrough recalled compiling a worldwide list, in 2003, of a insignificant 25 companies involving in uranium mining and exploration. “I cut the list down to around ten that looked to be promising,” said Bambrough. “I’d say that today there are nevertheless less than 30 uranium companies that present a good reward-to-risk ratio considering the enormous move the sector has made.” Depending upon whose list you believe, the number of companies now mining or exploring for uranium stretches to about 200. The majority trade on either the Canadian or Australian stock exchanges.

So how do you separate the possible winners from the also-ran’s? “People in the industry sort of know who’s real and who’s not,” said Bambrough. “I think a lot of the pure exploration companies are more likely to fall on tough times.” Bambrough warned, “I think there will be a real separation between the have’s and the have-not’s, those who truly have uranium and economic deposits. A lot of exploration companies are more likely to fall on tough times. Those are the ones that will get hurt because they don’t have anything to fall back upon. They have to go to market to keep raising money to do the expensive drilling that needs to be done. It costs so much.” Miller additional, “It will take exploration funds, good geology, and some luck to find new uranium deposits in these frontier areas. The success rate of each individual prospect will be far less than 1 in 100.”

What sort of companies has Sprott Asset Management invested in? Bambrough responded, “We have preferred to invest in companies that have acquired similarities that were once owned and were actively being worked by majors at the end of the 70’s bull market.” He additional, “The cost of uranium exploration is so large there is great value built into many of these similarities. Specifically, millions of dollars worth of drilling work and data have been collected on some similarities. In some situations, mining shafts have been built that only require rehabilitation at a fraction of the cost of starting fresh with a green fields project.” Another example of what he does and doesn’t like, “The guys that picked up stuff in the last year, when they saw the uranium expansion, they just said, ‘I’m going to go grab some land.’ I have greater confidence in the guys that have been there for a longer period of time, bought things when they were being thrown away at the lows, and waiting for the uranium price to rise.”

Bambrough shared a few of his favorite uranium stocks. “Of the companies that we own, we own a larger percentage of Strathmore Minerals (TSX: STM; Other OTC: STHJF) than almost any other company,” said Bambrough. “We think they’ve got some great similarities. They were guys who got into the game very early, and who have skills as they do with David Miller (president and chief operating officer of Strathmore Minerals) in understanding the uranium business. And they have a very large amount of databases, as does Energy Metals Corporation, which is extremely valuable in understanding the similarities.” Both Strathmore Minerals and Energy Metals have similarities in New Mexico and Wyoming. “I think the future for New Mexico is quite good,” Bambrough noted, “in addition as ISLs in Texas and Wyoming.” Said Strathmore’s president, David Miller, “Strathmore is the only company to open an office up in New Mexico dedicated to bringing similarities into production. The office is staffed by two veteran uranium men, John Dejoia, VP of Technical sets and Juan Velazquez, VP of Environmental and Government Affairs. They have a number of subcontractors doing various required work to bring projects forward to acquire permits to mine.”

Another Sprott Asset Management favorite is Tournigan Gold Corp (TSX: TVC). “You look at a past producing vicinity,” Bambrough pointed out. “They went and got old mines.” Tournigan recently drilled the historic Jahodna uranium resource in Slovakia, once drilled by the Russians. The company also holds uranium similarities in Wyoming and recently acquired uranium similarities in South Dakota. He also likes Western Prospector (TSX: WNP), saying, “Western Prospector has gone by areas where in some situations, there are shafts there that were dug by the Russians. A lot of work was before done.” Others rounding out Bambrough’s preferred list of juniors include Paladin Resources (TSE: PDN) and Aflease, now trading as SXR Uranium One (TSE: SXR). “We also have a bit of investment in the Labrador area, and very small, mainly in Altius (TSX: ALS),” additional Bambrough. “It’s something we’re watching. We think it’s a promising area.”

Where the Action Is

The more adventurous price action may be found in the current consolidation within the uranium sector. Bambrough observed, “There appear to be a few aggressive junior uranium companies that seem to be moving forward and working to build a ‘major’ company.” In November, one uranium exploration company, Energy Metals Corporation (TSX: EMC) began takeover procedures to acquire two other uranium juniors, Quincy (TSX: QUI) and Standard Uranium (TSX: URN). Standard Uranium has since traded nearly 70 percent higher. “There are people who have nearby similarities, and it makes sense for them to come together,” advised Bambrough.

In late December, another of Bambrough’s favorite uranium companies, Strathmore Minerals (TSX: STM; Other OTC: STHJF), announced it had “engaged National Bank Financial as its exclusive financial adviser to review transaction alternatives to maximize shareholder value from its uranium assets.” Questioned about this news release, CEO Dev Randhawa told StockInterview.com, “National Bank has the best technical team and will help us reach the right decision to maximize the assistance to our shareholders.” In a December 7th observe to his subscribers, Canaccord’s David Pescod wrote, “We talked to Dev Randhawa of Strathmore Minerals because Strathmore seemed to be the one company on most people’s list as an obvious take-out target. When we talked to Dev, clearly he wouldn’t be negative to a take-out as long as the price is right, and he already gives us a 50/50 bet that they won’t be around in the next six to twelve months.” In a 2005 research report, the Cohen Independent Research Group set a price target of C$4.29/proportion for Strathmore Minerals, based upon the current identify uranium price.

How does Bambrough envision the uranium bull market unfolding for investors? “I think the market could really use more large cap uranium companies, since large fund managers currently can really only look to Cameco (NYSE: CCJ) and Energy Resources of Australia (ASX: ERA) to get exposure to the uranium market,” said Bambrough. “There are several junior companies that should come together to form large uranium companies to leverage their extremely valuable skilled personnel, lower the expensive costs of permitting and exploration, and achieving other economies of extent.” How soon would it be before a larger company, combining some of these promising juniors, reaches listed position on the New York exchange? “I would guess that a NYSE listing may not come until 2007 or 2008,” responded Bambrough. “I think that when the tap comes for a lot of these companies, it will come to those that are in production. You’ll be able to see a nice production profile, several projects, diversification, cash flows, and a nice pipeline of projects.”

As for the approximately 200 uranium exploration companies that have sprouted up in less than two years, Bambrough advised, “I don’t understand why people would put so much money into grassroots similarities when there are similarities that were (already) worked on, and you can continue on their work. The idea is we are continuing on those projects instead of going grassroots. It’s the logical place to go for me.” Bambrough is nevertheless enthusiastic about the uranium sector and closed his remarks, saying, “I expect that we will see a great out performance by quality uranium companies as they move their projects forward. We nevertheless see some incredible values and are nevertheless actively investing in the space. We are nevertheless in the early days of the uranium bull market.”

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