We have been very fortunate to have been in gold and silver this year. As early as February, I began pounding the drum at Seeking Alpha (see here), recommending Silver Wheaton (NYSE:SLW) at 14.38. It closed at $40 Tuesday – and we are now out of it. It isn’t that I think silver’s run is over, or gold’s. It’s just that, after such meteoric rises, I feel both metals need time to digest their gains. And big market moves, like big heavy meals, need to be digested properly before moving on.
Of course, after big meals or market moves there’s always room for a little dessert. What I recommend for dessert is cake: yellowcake or white cake, or both if you have a sweet tooth for profits. I do. In Part I of this series, I’ll make the investment case for yellowcake – uranium – and why I believe it has farther to run than either gold or silver, which have already come so far. In Part 2, we’ll take a bite of white cake – in this case the Platinum Metals Group, and especially, palladium.
I believe both metals are on the side of the angels from a supply / demand standpoint. Palladium has always been a relatively constrained commodity, with Russia and South Africa providing most of the world’s supply. But Russia is finding it less and less in their national interest to export the stuff, while at the same time demand is increasing from industrial users.
And uranium can only benefit with nuclear energy increasing its share of new power plants worldwide. Whether the USA catches this wave or stays out at sea on the nuclear issue, the rest of the world is determined to lessen its dependence on Mideast oil and politics.
The spot price of uranium is now $60, up $8 from a month ago. Whether it continues to race ahead or enjoys a more measured and steady rise, the miners for whom $50 uranium was barely profitable now see a 20% profit potential. Their costs are roughly the same as they were a month ago, but they now have the opportunity to earn a decent return that will only get better if/as the price of yellowcake continues to rise. Supply – shuttered mines thanks to previously lower prices – and demand – an explosion in new reactors planned and begun -- say that it most likely will.
China now says it plans to build 10 nuclear power plants a year for the next 10 years. If they come anywhere close to that number, China will soon be the world’s #1 nuclear power generator. They already consume 5% of the world’s total production of uranium. They are stockpiling, however, and now purchase 10% of annual world production. If their efforts and India’s which are similar, though less aggressive, pan out, the two of them alone will need to buy more than 50% of current annual world production. For the rest of us to have enough left over for our own needs, even without building a single new facility, we will need to ramp up production smartly.
US supplies have been abetted since 1994 by the “Megatons to Megawatts” program whereby Russian nuclear bomb-grade materials have been turned into uranium for use in nuclear fuel. Almost every atomic power plant in the US has participated in this program – to the degree that, today, about one in ten American homes, businesses, schools and hospitals receive electricity generated by this fuel. But the program ends in 2013, if not before – just about the time China and India are cranking up and supplies will be dwindling.Two of our favored Lucky Countries in the developed world have the bulk of the uranium resources – Australia and Canada. Since both nations enjoy strong banking systems, good corporate governance, and respect for intellectual and property rights – unlike many of the more popular “emerging markets” – it is in those two nations and in the US that I see the most fertile opportunities for investing. What follows is only a brief overview. There are hundreds of publicly-traded uranium miners out there. Many, sadly, fit the description of the American adage (often attributed to Mark Twain) that a mine is a hole in the ground with a liar at the top. Others are more ethical, but merely hopeful their acreage may yield commercial quantities of anything. Since I couldn’t possibly cover all of those that qualify as ethical with probable commercial acreage, then, consider the following representative rather than all-inclusive. Of course, virtually every mega-miner has some uranium properties but it is the pure plays, or near pure plays, that give you your best bang for the buck. It’s those we’ll discuss.The class act of the lot is Canada’s Cameco (NYSE:CCJ). It is the only uranium pure play that I might describe as a blue chip. When uranium producers talk about legendary finds, names like McArthur River, Rabbit Lake, Cree Extension Millenium, Moon Lake, Dawn Lake, Read Lake, Kintyre, Smith Ranch and Virgin River are always discussed. Cameco has either joint ventures or 100% ownership of each of these. It owns some of the richest ( in terms of the quality of the ore bodies) uranium mines in the world. Because of this, Cameco is a very low-cost producer. It can produce uranium profitably even at prices in the low $30s, roughly half of what the spot price is today. And it is the only producer that can promise significant product for decades, which makes it desirable to sovereign nations, not just a particular company or plant. Already, CCJ has agreed to supply 20 million pounds of uranium to China through the year 2025. The next pure play, for me, would be Denison Mines (NYSEMKT:DNN). Denison is another North American uranium producer. It's a higher-cost producer than Cameco, with greater leverage both up and down. They've brought in Korea Electric Power as a partner for financing some of their exploration (in exchange for product flow, of course.) And they are partnering more with others, as they have recently done with French mega-nuclear firm Areva at their McClean Lake property in Canada. In the same category as DNN, which is to say down a big notch from Cameco, but up from all the miners with proven reserves, but no proven track record to get it out of the ground at a profit, are both Paladin (OTCPK:PALAF) and Uranium One (OTC:SXRZF) Paladin has two huge properties in Africa, one in Namibia, the world's fourth largest uranium-producing country, and one in Malawi. Paladin has costs of around $30 a pound and has room to expand, which would bring their costs down even more. Uranium One sold a majority stake in itself to a Russian company so they could afford to, and be politically connected enough to, develop uranium mines in Kazakhstan. Russia is a major investor in Kazakhstan, so it helps SXRZF to have a Russian company negotiating deals for you there. It has the potential to become a major producer with the mines in Kazakhstan. The bad news is: it’s in Kazakhstan, a nation not known for the transparency or fairness of its government.
After this second tier, it’s pretty much a free-for-all. Among the primarily US, Canadian and Australian miners I can suggest for your own due diligence are Mega Uranium (OTCPK:MGAFF), whose Lake Maitland project in Western Australia shows promise. Partnered with Japanese investors to deepen their pockets, Mega offers near-term – but not yet -- uranium production at a low cost, probably in the high $20s. It’s properties are in situ favorable – that is, they don’t require “mining” so much as collecting from the sandstone, processing and refining. Then there’s Uranium Energy (NYSEMKT:UEC) which is actually starting production already from its Texas acreage, making it the newest uranium producer on the planet. UEC’s production base is low cost, under $25 a pound, giving them nice leverage if / as uranium prices move higher.Ur-Energy (NYSEMKT:URG) and Uranerz (NYSEMKT:URZ) are both in Wyoming, one of the most mining-friendly states in the Union. I expect to see one or both in production in the next 8-16 months, though URZ also has properties in Texas, Wyoming and Saskatchewan. Wyoming produces the largest amount of domestic uranium with Cameco’s (CCJ) Smith Ranch Mine being the biggest (and the biggest in the USA, as well.) Both URG and URZ have run up quite a bit, so we are looking for a pullback before entering new orders in either.Finally, there are a couple of currently less speculative plays, USEC Inc. (USU), the company that supplies the low enriched uranium ((NYSEMKT:LEU)) for atomic power plants that it is licensed to obtain from Russia under the Megatons to Megawatts program – which will soon end – and from the LEU it produces at the Paducah gaseous diffusion plant in Kentucky – which will not end anytime soon. The other is Uranium Participation Corp (OTCPK:URPTF) which inventories and sells uranium to end users. They are effectively a middleman and incur none of the risks associated with the actual mining. Denison Mines manages their decisions. Its safe to say that Uranium Participation more closely tracks the underlying commodity than any new discovery (or failure to discover!)
Between industrial development and world population growth, planners expect a doubling of electricity consumption in the next 20 years. The best estimates are that demand will outstrip production no later than 2014. Today 440 atomic power plants worldwide supply about 15% of the world’s electricity. Over the next 10 years, 108 new reactors are expected to be completed (mostly in Asia.) Somebody with a big appetite is going to want their yellowcake for dessert…
Disclosure: We and/or those clients for whom it is appropriate are ncurrently long CCJ, DNN, SXRZF, URZ and U (TSE).
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