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Uranium to Head North of $500/pound?
Canadian Research Analyst Forecasts Severe Uranium Supply Crunch
for Next 10 Years
Rising Uranium Price May Consolidate Exploration Sector, Driving
Intense Takeover Activity
Legendary 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.
Still 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. It describes a rapidly evolving
global scramble to satisfy an inevitable worldwide surge in
electricity demand. The growing consensus is that fission-based
nuclear power may become the significant stop-gap energy
alternative for this century and possibly until reliable
technologies can effectively provide the means for
renewable-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 demand
for electricity. The WNA forecasts a 40-percent jump in
worldwide electricity demand over the next five years. The
world's most populated countries, China and India, are in the
process of creating the largest energy-consuming class in the
history of earth. Both plan aggressive nuclear energy expansion
programs.
In a nutshell, global utilities are going to need uranium to
help feed the increasing number of nuclear power plants proposed
over the next twenty years. Uranium is now in shorter available
supply for civilian energy use than ever before. Over the next
decade, as demand continues to outstrip supply, analysts are
predicting utilities will snap up known uranium inventories
sending spot uranium prices to record highs. During this launch
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 drive uranium prices to
unbelievable highs." Various analysts predict price targets for
spot 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 spot uranium prices will be "driven by end users in the
power generation market which is urgently trying to secure
supply into the future."
How high could spot 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 even 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 obtain 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, such as natural
gas.
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 you were to
shut off the nuclear capacity, and fire up more gas to replace
it, it would send gas prices through the stratosphere." And that
doesn't factor in the cost of shutting down a nuclear facility,
itself an exorbitant process. The analyst said he reached his
calculation of "north of $500/pound" for spot 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?"
Despite the recent parabolic rise in spot 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 hold 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 sources. "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 face of a potential new demand. He concluded, "There are
time lags to bring new production on versus what needs to be
replaced in that 2013 period."
The key yardstick in determining how much higher uranium prices
will climb is by keeping track of the number of new nuclear
facilities being constructed or proposed. 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 proposed.
The numbers have doubled for proposed facilities. And for every
one you hear about, there's a lot more being planned." That puts
uranium miners into an enviable position. Bambrough added that
utilities have to secure 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.
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 result of nearly twenty years of
inventory liquidation is that existing higher-cost suppliers
were driven 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 analysis,
uranium prices would have risen well above $100/pound in the mid
1970s, using constant 2004 US$. 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 critical
stage, "We are currently facing the consequences of what may be
the largest sustained divergence between expectations and
reality in the 60 year history of uranium."
"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 even there yet
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 properties
because of low prices. As Neff warned in his presentation,
"Uranium prices have recently reversed a twenty year decline,
apparently surprising many buyers and sellers." Buyers will be
combing the same company lists investors scan. Just as investors
will be racing to find the best uranium juniors for investment
purposes, utility buyers and uranium traders will be scrambling
to identify 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
mere 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 still less than 30
uranium companies that present a good reward-to-risk ratio
considering the massive 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.
What sort of companies has Sprott Asset Management invested in?
Bambrough responded, "We have preferred to invest in companies
that have acquired properties that were once owned and were
actively being worked by majors at the end of the 70's bull
market." He added, "The cost of uranium exploration is so large
there is great value built into many of these properties.
Specifically, millions of dollars worth of drilling work and
data have been collected on some properties. In some cases,
mining shafts have been built that only require rehabilitation
at a fraction of the cost of starting fresh with a green fields
project."
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
properties. 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 properties." Both Strathmore
Minerals and Energy Metals have properties in New Mexico and
Wyoming. "I think the future for New Mexico is quite good,"
Bambrough noted, "as well 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
properties into production."
Another Sprott Asset Management favorite is Tournigan Gold Corp
(TSX: TVC). "You look at a past producing region," 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
properties in Wyoming and recently acquired uranium properties
in South Dakota.
Where the Action Is
The more adventurous price action may be found in the ongoing
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 neighboring
properties, and it makes sense for them to come together,"
advised Bambrough. "At least joint ventures, if not full
consolidations, to take advantage of the extreme costs in
permitting."
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
benefit to our shareholders." In a 2005 research report, the
Cohen Independent Research Group set a price target of
C$4.29/share for Strathmore Minerals, based upon the current
spot 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 exorbitant costs
of permitting and exploration, and achieving other economies of
scale." How soon would it be before a larger company, combining
some of these promising juniors, reaches listed status 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 properties when there are properties that were
(already) worked on, and you can continue on their work. The
idea is we are continuing on those projects rather than going
grassroots. It's the logical place to go for me." Bambrough is
still 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 still see some incredible values and are
still actively investing in the space. We are still in the early
days of the uranium bull market."
About the author:
James Finch regularly contributes to StockInterview.com, which
can be visited at http://www.stockinterview.com. Mr. Finch does
not hold equity positions in the companies he features in his
column.
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