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Mired in secrecy, the uranium market hopes to someday offer price transparency. The question (or more accurately phrased, the conundrum) is: To whom will the ‘real’ uranium price become transparent? The entire industry appears to behave more like a beehive of cold war spies.

Utility fuel managers compete with a few handfuls of fuel brokers for the best price break. Utilities complain about the unwelcome speculators who’ve entered the market and predict a long-term price about one-half of the US$122/pound price indicator announced in Nuclear Market Review this past Friday. A few uranium miners forecast a price racing past $200/pound. Who is gaming whom? Or is this all part of the negotiations process?

Meanwhile, more price transparency seems to appear at Mestena’s regular spot uranium price auctions than in the overall uranium marketplace. Yet, the amount this private uranium producer has sold is far less than one percent of the uranium consumed in 2006.

uranium

Mestena’s next auction reportedly takes place on May 30th, or at least that’s when offers to buy the U3O8 are due. This time Mestena will have a bit of competition. An unnamed hedge fund has contacted potential buyers to solicit offers for 200 thousand pounds U3O8 and 100 metric tons U as UF6 – two days after Mestena opens the magic envelopes.

‘Fiat uranium’ trading at the widely publicized NYMEX ring moves forward, but the exchange is still searching for participants. In lower Manhattan, this commodity exchange was not only the first commodity forum to offer trading on platinum more than 40 years ago, but in early May began offering ‘paper’ uranium trading. The public can play the paper chase, but not for the real McCoy – U3O8.

A Glimpse Inside this Secret World

Screen shot of actual trading of physical uranium, which took place on May 16th. Buyers offered to pay US$122/pound for June 2007 uranium, or US$125/pound for December 2007 uranium. Transactions were sought for 10,000 pounds of U3O8 at each level, but no sellers were willing to part with their material at those prices.
In mid-town Manhattan, near Grand Central Station, a lesser known ‘commodity exchange,’ run by New York Nuclear, offers screen trading every Wednesday morning between 7:30 A.M. and 9:30 A.M. This is for the real thing – the physical delivery of U3O8. The processed uranium is offered for delivery within a 30-day period at a licensed uranium conversion facility.

No, the public is not invited to this clubby function. One must be a certified market participant to bid for or sell U3O8 through New York Nuclear’s Uranium Online. While NYMEX paper trading is open to amateurs, Uranium Online only permits recognized persons to bid or offer uranium for sale.

Uranium Online screen trading is conducted every Wednesday morning by New York Nuclear, complete with instant messaging and chat rooms. All keystrokes are captured and stored.
“We have all categories as players,” New York Nuclear’s Joe McCourt told StockInterview.com. Those who have signed up to trade physical uranium on his online screen system include uranium producers, hedge funds, fuel brokers and utility fuel managers. “These are the major players in the physical uranium market,” McCourt added.

Our chat with Joe McCourt was quite enlightening. Later in an email exchange with Uranium One chief executive Neal Froneman, we were told Joe is a ‘heck of a nice guy.’ Others in the industry echoed these sentiments.

In a few words, Joe explained why uranium price transparency is presently out of reach, and could remain a mythical goal for some time. “There’s so few players in the business, and there’s a lot of confidentiality,” McCourt told StockInterview. “Everybody wants to see what everybody else does, but they don’t want anybody to see what they do.”

McCourt has also observed this secrecy in his company’s online screen system trading of physical uranium. “Everybody wants to see everybody else’s posts, but they don’t want to post themselves,” he told us.

Surrounded by this degree of secrecy and the recent NYMEX competition, why does McCourt persist? “In my opinion, I think that utilities want transparency,” he told us. “We want to improve how the market works.”

So who participates in the weekly trading sessions? “These are people we know to be bonafide buyers and sellers,” McCourt said. And what makes these bonafide? “We are in touch with the major players. We’ve been in the business for 25 years, and we’ve done deals with many people. We know who is for real and who is not for real.”

How does McCourt screen out the gamers? “We have user agreements, rules and procedures that everybody signs,” he told us. “It’s a contract. When anybody posts something in the system, it’s a like valid offer. They make a commitment.”

Do the buyers and sellers know with whom they are dealing? “No, it’s anonymous,” McCourt said. “Only we know. We stand as the hub. They can see us, but they can’t see each other.” Prior to participation in the online trading, everyone on the system is sent a possible counterparty list.

Those companies who have had bad relationships in the past can strike off parties with whom they will not do business. “People are very concerned about credit,” McCourt explained. “You don’t want to sign a deal with someone if you don’t like their credit, or if you don’t think they are a reliable supplier.” He further explained that risk departments are ‘very involved with procurement these days and companies are very careful about their counterparts.’

What are the bugs in McCourt’s system? “Most material is bought and sold under long-term contracts,” he said. “There’s not a long of activity in the spot market. We are trying to help more activity develop in the spot market by making it easier for people to do deals, having certain delivery times and delivery locations.” In other words, McCourt hope to standardize the secondary market.

But why is there only one two-hour trading session per week? “There’s not a lot of liquidity in this market,” McCourt responded. “We picked two hours once a week to concentrate on this. Otherwise, it’s like watching paint dry.”

New York Nuclear has only one completed one transaction since launching this late last year. Why? “For large companies, this is something new,” he explained. “It has to go through reviews, legal reviews, risk management reviews and all that. It’s a departure from what they normally do.” In other conversations we’ve had with utilities and industry insiders, this is the problem NYMEX faces in drawing utilities into trading on their exchange.

Still, McCourt’s action impacted NYMEX trading this past week. After screen trading was completed last Wednesday, the NYMEX June 2007 U3O8 uranium swap suddenly dropped. During the previous week, McCourt’s screen snapshot, published in his Thursday night edition of FreshFUEL showed June 2007 uranium at $122 and December uranium at $130. This past Wednesday, uranium for December delivery dropped to $125/pound.

No transactions took place. But, it does confirm that buyers would be willing to pay $122 to $125/pound to purchase U3O8 for June and December delivery. Sellers refused to part with their material.

As a fuel broker, which is New York Nuclear’s main business, McCourt said, “As far as spot volume is concerned, I don’t think anyone knows everything that’s going on.” He pointed out his company has been doing transactions off the screens. “We don’t publicize those transactions,” he told us.

McCourt hopes he can grow his online trading business by attracting more buyers and sellers to post on his screen system. “We are helping the buyers and sellers get together so eventually these screens will be populated with a lot of numbers, and hopefully a lot of transactions.” McCourt also pointed out, “That’s going to add tremendous transparency to this market, which doesn’t exist to a great extent now.” He hopes utility buyers can make routine, small purchases instead of infrequent large purchases. “Instead of buying one million pounds every year, they could buy 20,000 pounds every week,” McCourt said.

Conclusion

Over the past year, the combination of a sharp uranium price rise accompanied by the entry of new uranium producers has probably obscured price transparency instead of providing more transparency.

Aside from finding out why there is now a $37/pound spread between the spot and long-term contract price for U3O8, we have one significant unanswered question. At which levels are the ‘escalating’ floor prices in recent contracts announced by Paladin Resources and Uranium One? Until we gain a better understanding of these floor prices, we may not realistically have price transparency.

In the interim, investors and traders can have some glimpse of price transparency but only for short-term trading purposes. In a previous article, we evaluated some of the available market research tools available to the sophisticated investor.

Let’s put this into a weekly timeline for greater understanding.

The first company out of the box with any indication of where the uranium market could head for that specific week and into the early part of the next week is New York Nuclear. Wednesday’s screen trading involving utility fuel managers, fuel brokers, utility risk managers and other buyers square off for two hours, early Wednesday morning, against other fuel brokers, uranium producers or their marketing managers, hedge funds and speculators. To date, price indications are provided as to what buyers could be willing to pay for U3O8 purchases, and at which prices sellers won’t part with their material.

Granted, little transaction activity has taken place on the Uranium Online trading screens, but some price guidance takes place at the Wednesday session. On Thursday night, Washington Nuclear (sister company of New York Nuclear) emails the weekly edition of FreshFUEL to paid subscribers. In the past two issues we’ve reviewed, a screen shot is provided on Page 2. On the back page, FreshFUEL publishes the company’s proprietary Blended Financial Value [BFV] index. The index compares against the “Legacy Spot Price,” which are the price indicators published first by TradeTech and later on by Ux Consulting.

The Blended Financial Value [BFV] published by FreshFUEL had led higher the price indicators published by both TradeTech and Ux Consulting until the past few weeks. The most recent snapshot of the price indicators and the BFV show a muddied picture.
According to Joe McCourt, “The BFV calculates the weighted average price of uranium held by all publicly traded funds as a function of the fund share price. The upward and downward price movement of the BFV reflects North American and European investors’ sentiments on the current spot price of physical uranium.” McCourt points out the calculation is adjusted for ‘cash on hand’ to arrive at an implied uranium price. He believes, “The implied price of uranium should generally be greater than the ‘raw’ spot price exchanged between miners, traders and utilities because it also includes a liquidity premium, a holding expense, a management expense and an underwriting fee.”

Late Friday night each week, TradeTech publishes the weekly spot price in Nuclear Market Review. TradeTech interviews its proprietary list of market participants on Friday afternoon and gathers new data not reported in FreshFUEL. Because the market participants in the Wednesday screen sessions are mostly North American and European, TradeTech may obtain new data or find out about off-screen transactions post-Wednesday’s screen trading. Changes in the weekly spot price are reported on TradeTech’s website at www.uranium.info

Every two weeks, Platts Nuclear Fuel is published for the nuclear industry. In the May 21st edition, one of three front page headlines reported, “Two uranium auctions expected to push U price up.” Spot price transactions, according to traders interviewed, were expected to reach between $120 and $140/pound U3O8. This provides a lengthy review of the entire nuclear fuel cycle. The current issue runs 15 pages. Because Platts emails their newsletter to paid subscribers on Friday before TradeTech issues its weekly spot price, Platts subscribers get the ‘old’ price.

Sometime on late Monday, Ux Consulting reports its spot uranium price to paid subscribers. Only on a few occasions has there been a discrepancy between the UxC price and the TradeTech weekly spot price. As we pointed out in the previous article, Nuclear Market Review subscribers get the jump on Monday’s trading action on NYMEX futures (if there is to be any real action). By the time UxC publishes their spot price, the stock markets are closed, and Joe McCourt’s screen system starts up the following morning and a new cycle has already begun. What worked well for Ux Consulting, until recently, may have become outdated as a result of NYMEX futures.

But, little uranium price transparency has taken place with NYMEX futures. The negligible liquidity tells us there may not be any significant breakthrough coming from NYMEX in the way of transparency in the near future. NYMEX explained this amount of trading was ‘what was expected.’ Ux Consulting president Jeff Combs announced it would take about six months or so to develop. It’s the ‘or so’ part we believe may take longer than Mr. Combs expects.

However, between New York Nuclear’s Wednesday screen trading of physical uranium (as opposed to ‘paper trading’) and TradeTech’s weekly report on the spot uranium price, we obtain some guidance as to the direction of the uranium market.

But we get this only for the short term. Until the long-term uranium price and the spot price narrow the spread, and until price transparency comes about from the ‘escalating floor contracts,’ the public will remain in the dark, ad infinitum.

A real solution would come from physical uranium trading on a grand scale, as Joe McCourt envisions. As with any paradigm shift, and especially one where nuclear fuel is concerned, significant changes could likely move at glacier speed.

Source: A Glimpse Inside The Uranium Market's Secret World