Profiting from Peaceful Uranium Use

Big news out of Moscow yesterday. And I don't mean the news that got the big headlines.

Someone in the Bush foreign policy and national security arena may just have been very much awake at the switch. If my analysis proves correct, the current president will get the credit but the American people and the rest of the world will reap the benefit, and a massive benefit it will be, surpassing any success in picking a stock or being right on a market gyration.

This is purely speculation on my part, but it is speculation born of 6 years in special operations and 30 more in intelligence operations and analysis. The big news out of Moscow yesterday is that the Russians, hungering for national security (as a nation with 57,792 kilometers -- 35,910 miles – of border to defend, always has) and a return to world power or at least world prestige, may be ready to do some serious horse-trading. It starts like this...

In exchange for Moscow allowing the US to transit military equipment to Afghanistan across Russian territory or airspace, I believe the US will quietly scale back its commitment to deploy defensive ballistic missiles in Poland and the Czech Republic, removing a major fear the Russians have of seeing yet another invasion from that direction.

However -- in the world of realpolitik, it may never have been our intent to place advanced weapons systems in locations so geographically untenable and easy to attack by any nation with lightning-fast armored, mechanized infantry and fine special operations forces – like, say, Russia.

But as a bargaining chip, it would have been a subtle threat, just like our long-ago opening to China to remove a Russian bulwark, or funding the much-derided Strategic Defense Initiative, both gestures that now-unclassified Soviet-era documents show clearly struck fear into the Russians. If it was intended as a bargaining chip to be used at a future time, it was brilliant.

Ah, but is it worth using this chip merely for an alternative access route to ensure re-supply and strategic air assets in Afghanistan? I don’t think so. But what I think is significant – and is the real quid pro quo – is buried deeper in the public statement, almost as if it were merely incidental to the process. It is a seed that, if it grows, will provide the prestige and power the Russians miss and crave.

It will ensure that China, Iran, Pakistan and North Korea, all of whom have ballistic delivery capabilities that can currently threaten Russian cities -- three of whom can do so with nuclear warheads -- are prevented or severely constrained from gaining access to the essential ingredients to threaten their neighbors.

And it will mean that US allies like Israel, the democracies of Western Europe, and Japan are no longer directly threatened by these bad kids on the block. Without the threat of Iranian nukes, how might Hizbullah and Hamas suffer in support, and how might Israel be able to deploy scarce resources elsewhere? A discussion might even be quietly taking place right now with the oil-rich Sunni kingdoms in the Mideast: “How far would you boys lower the price of oil if we promised that Iran couldn’t threaten you with nukes?”

I refer to the offhand comments that hinted at the notion that Russia and the US, two nations that have had the ability to destroy the world but have both acted like grown-ups (in that arena, at least) would work together to establish “governance” over the sourcing of uranium and other potentially fissile materials.

This would herald a revival of the once given up for dead Fissile Material Cutoff Treaty (FMCT). The FMCT was a proposal for an international treaty to prohibit the further production of weapons-grade uranium and plutonium. It would not have completely prevented the production of fuel-grade uranium and plutonium, nor of other components in nuclear warheads.

But neither was it pure “Why can’t we all just get along?” wishful thinking. Our two nations now have the intelligence-gathering and monitoring capabilities to drastically cut the flow of enriched uranium, without a continual supply of which rogue states cannot maintain a meaningful enough nuclear program to be a threat.

Without these two super-powers, compliance with FMCT wouldn’t stand a chance. But if both the United States and Russia lined up those allied with them, it would take a serious chunk – as much as 95% of what is available -- off the market or, rather, on the market, but tightly monitored and controlled.

Think that’s pie in the sky? It isn’t. Between the US and the nations closely allied with us, and the Russians and the nations closely allied with them, a monopoly on both uranium resources and uranium production forms a cartel so powerful that OPEC can only look on it with envy.

Canada, Australia, and the US produce 53% of the world’s uranium. Russia, Kazakhstan, and Uzbekistan produce an additional 27%. Just those six nations, working together, could mount a cartel controlling 80% of production, more than OPEC does in oil. With Namibia and Niger in the fold, the figure rises to 95%.

The story is nearly the same when we leave the world of production and go to the proven and probable reserves. Here’s what those look like:

You’ll notice that only Brazil and RSA (South Africa) have uranium in the ground accounting for 5% or more of world reserves. Add those 2 to the 8 discussed above and throw in Ukraine for good measure – which so desperately needs Russian gas and European trade that they would willingly participate in a renewed FMCT treaty -- and you'll find you only have to line up 11 of the world’s 201 nations. If the US and Russian allies all agree, that leaves just 5 remaining in this group to control 91% of the word’s reserves.

That leaves 9% for China, Pakistan, North Korea, Iran and anyone else who wants to create weapons-grade fissile material to try to out-bid each other. And to try to out-bid the uranium companies in the wealthier complying nations mentioned above. At some point it simply becomes uneconomic to try to join the club.

So we can wring our hands and debate and pontificate endlessly about the next Ahmadinejad, Kim Il Sung, Chavez or other tinhorn wannabe autocrat. Or…

We can sit around the table in our striped pants, talking nice and holding our teacups with pinkies extended, hoping our enemies will die of suffocation from the hot air being expended. Or…

We can take advantage of the opportunity to do something meaningful to make the world a safer place. It isn’t inevitable that “Iran gets the bomb.” Whether I am giving too much credit to the intelligence and foresight of the unsung Intelligence Community and State Department heroes whose strategy and deeds will only become public in 40 years (when such things are subject to a first review for declassification) or longer, or whether this scenario is solely of my own reading of the bones thrown into the circle, the net effect is the same: we can do it. We grown-ups can monitor and control what toys the bad kids get to play with. It only takes moral courage and the trading of some bargaining chips yet to be played.

The way to profit from the peaceful use of nuclear power, made easier if grown-ups are monitoring its production and export in cooperation with the rest of the Neighborhood Watch, is to buy the companies that extract and process uranium. Among the largest are BHP Billiton LTD (BHP), Rio Tinto plc (RTO), Cameco Corp. (CCJ), and Areva (ARVCF).

Full Disclosure: We have owned all of these but are not long any of them today. At cheaper prices, we are buyers.

Comments

[User 267997:]

In the short run, aren't those scrapped nuclear warheads going to be recycled into nuclear fuel in competition with traditional suppliers?

Jul 07 09:48 AM

[Joseph L. S...:]

On Jul 07 09:48 AM User 267997 wrote: In the short run, aren't those scrapped nuclear warheads going to be recycled into nuclear fuel in competition with traditional suppliers?

///// Yes. That's the safest and best use for them. But having commanded a number of linguists during START I and II (The Strategic Arms Reduction Treaty) I can tell you that this is a slow and meticulous process. Very little fissionable material comes on-line in any given month, so it adds only incrementally to the supply. In fact, during the 13 years the "Megatons to Megawatts Program" was in operation, it accounted for just 13% of total world requirements for existing power plants. What remains on the table is unlikely to equal this amount.

If you are interested in playing this as an investment theme, United States Enrichment (USU on the NYSE) has held the U.S.contract for "downblending" the nuclear material taken primarily from dismantled U.S. nuclear warheads into the low-enriched uranium fuel used by nuclear power plants.

Jul 07 10:06 AM

[Gyoza Mimi:]

Joseph,

With all due respect, but it is a stretch to call Russia a "nation with lightning-fast armored, mechanized infantry and fine special operations forces". Georgian war showed that nearly 30% of all armored vehicles sent on their own didn't reach destination, breaking down in transit. Georgia managed to shot down numerous Russian planes with its virtually nonexistent air defense system. And Russian special forces showed themselves well in many places - Kosovo (kicked British and American butts by taking over the Pristina airport, just to find themselves asking Brits for food within 2 days due to the ran out food supplies ran), Beslan - murdered 10s of people due to the poor planning and lack of any respect for human life, the theater siege in Moscow - look at the casualties due to the poor planning. So it is a stretch to call Russian military even remotely capable of carrying out any kind of operation besides outright nuclear war or raids to loot unprotected neighboring countries.

U8 is a good subject. From $7 to $137 in no time. However, now it is hovering near 10x price of what it was 10 years ago. It is still a substantial increase, even if it is not $137 anymore. Perhaps in a long run, it may reach above $100 again. But it will be some time before it happens. The Chinese plants are not due for another 5-10 years, and the mid-term supply can be satisfied with the existing resources, including dismantled nukes. During the bonanza of 2007, everyone join the Uranium mining business, so there is no shortage of new discoveries and upcoming mines. What time period do your projections cover?

Jul 07 11:06 AM

[jerrydd:]

I wouldn't be investing long on nukes or it's fuel as reactors are too expensive as now designed for most anyone.

Almost all RE is less expensive now than nuke. And soon especially if the full price is put into coal, oil instead of in our income taxes, etc, will be cheaper than them. Some already are.

Jul 07 11:12 AM

[Mad Hedge F...:]

There are plays out there. If we are just on the verge of entering a long term bull market for nuclear energy, as I mentioned in my earlier piece (www.madhedgefundtrader...), then you would have to expect the same for nuclear fuel producers. Last year, the US consumed 55 million pounds of “yellow cake” or uranium oxide, but produced only 4 million pounds. The rest came out of stockpiles or from imports, much if it from the reprocessed Russian nuclear warheads. The new Dept. of Energy under Dr. Stephen Chu has made a big priority of making loan guarantees available to expand nuclear capacity from a lowly 20% of our total grid. The price of uranium is also rising, dragged up by crude, and has bounced 25% from a low this year of $40/pound, to $50. You can take a look at Austin, TX based Uranium Energy Corporation (UEC), which could start production at its Golead mine next year.

Jul 07 12:11 PM

[Joseph L. S...:]

On Jul 07 11:06 AM Gyoza Mimi wrote:
…it is a stretch to call Russia a "nation with lightning-fast armored, mechanized infantry and fine special operations forces” [and regarding uranium] …During the bonanza of 2007, everyone join the Uranium mining business, so there is no shortage of new discoveries and upcoming mines. What time period do your projections cover?

///// Reply: Gyoza Mimi, I apologize for the delay in responding. I wanted to respond today but also wanted to give the SA Editors a chance to reply to my earlier e-mail to them about how this title had been changed so that readers might believe it was about buying uranium stocks. In my Instablog post (the way most authors submit their articles, posting there with a request that SA consider it for publication) the title was, “Dear Iran, China, and North Korea: Sorry, Boys, No More Enriched Uranium.” The creation of a cartel to control who gets uranium could be the most important breakthrough in years to cripple Iran and N Korea’s ability to threaten the rest of the world.

Regular correspondents, like you, will likely at least skim my new articles, but “Profiting from Peaceful Uranium Use” will attract a very different new reader than the originally-titled article! I am convinced most SA readers care about the world in which investing takes place, not just about what stocks to buy. That was the crux of this article – geopolitical and geostrategic actions.

I understand that SA must change the titles for search engine and other reasons but it is my intent to argue that we need not live in a world of increasing danger; not to recommend uranium stocks! So I can address your first comment in the context of the article but must venture my personal (and unresearched beyond the article’s references) opinion as to uranium…

My view of Russian military capabilities comes from long and close-up study of the culture, mindset, and social and economic factors in that nation as well as first-hand interaction with Russian military leaders. That doesn’t make my analysis correct, or even suggest it is widely-held.

But like many military members, I never underestimate my enemy or potential enemy. There are those without experience in counterterrorism or counterinsurgency who underestimated the Afghans and Iraqis, as well, saying things like, “The world’s most powerful military will whip a few ragheads in a matter of weeks.” Those tribesmen, like the Americans in 1776, are lean and sinewy. They know their terrain while we are just learning it. Their lines of supply consist of getting a little nan-e Afghani (bread) and some water that would give us dysentery.

I would not underestimate today's rebuilt Russian military. The Russians went through some terrible economic times and their military felt the brunt of many of the cutbacks. Your examples above clearly demonstrate that. I remember being in “der alte DDR” (the old East Germany) in 1990 when Russian soldiers were reduced to selling their uniform items to buy food. Russia didn’t want a bunch of disciplined, trained warriors back on its soil and there was nothing for them to do in East Germany. So they sold their medals and insignia and posed for pictures with Western tourists, as their NCOs and military (as opposed to political) officers tried to maintain some semblance of discipline and morale.

I don’t like to see the resurgence of militarism in Russia, which is one reason I advocate so strongly in my article trying to work together to control who gets uranium. I’d rather see the Russians regain their dignity working in economic, social and diplomatic circles. But, absent genuine engagement and, in some areas, cooperation, I strongly believe that under Putin they will turn to militarism if we don’t engage them in other areas.

I further believe that their military shortcomings are rapidly being upgraded and are now almost to the level at which we thought of them, even absent nuclear weaponry, as a true military peer competitor not too many years ago. In short, what I believe about my own nation – don’t mess with us; we make a far better friend than an enemy – I would increasingly warn about the Russians…

As for uranium, as I stated in the article, I want to restrict its passage to irresponsible nations. So I may be the wrong person to fully discuss its investment characteristics. My time horizon covers from next week to the next ten years. I believe that, as Western nations come to its senses and build more nuclear electricity-generating plants, uranium will be of ever greater value. We cannot continue to do insanely stupid things like cap-and-trade, which will become a bureaucrat’s delight and a taxpayer’s nightmare. Solar and wind are so desirable that many have fooled themselves into believing they are current solutions. They aren’t. As we make strides in both areas, I believe we need natural gas and nuclear as cleaner bridges to the future.

Best regards,
JS

Jul 07 04:37 PM

[rrtzmd:]

...how's that GGN trade holding up?...looks like it's down about 10% since you recommended it June 18...gosh, that translates into an annual return of about, uhhhhhhhhh -- NEGATIVE 100%???...but, hey, it's got some great dividends, huh?

Jul 08 12:19 PM

[cowlady:]

The geopolical bent here is what makes this analysis so timely and logical. The prospect of Israel being able to divert its resources elsewhere as result of Hezbollah and Hama's deflation (not monetary) is a charming prospect. The implications are so important, especially to those of us concerned about the Middle East. I'm going to invest in uranium.

Jul 13 04:59 AM