Uranium on the Rise 13 comments
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The past nine months have been very rough for investors in uranium equities, and our long-term chart for the Canadian Uranium Average fully supports this statement, but it appears as though the industry has bottomed and is now on its way up.
Our index fell all the way down to 141.87 on February 8, 2008 from a high of 325.915 on August 9, 2007 and the losses were across the board with only a few winners in that time-frame.
As you can see by the chart below, it appears that in the past week we tested lows set in late January, pretty much held those levels with minimum further movement to the downside. Now uranium equities are moving upwards to test the recent high set on January 24 of this year. If we can get through that level we can move much further as momentum is currently on our side with Cameco (CCJ) recently being upgraded and all things considered a commodity are moving strongly upwards.
click to enlarge
We continue to like the new producers, such as Uranium One (SXRZF.PK), Denison Mines (DNN) and Paladin (PALAF.PK) as well as those who will be bringing projects online in the near future including, but not limited to, UR-Energy (UREGF.PK), Uranerz Energy (URZ) and Strathmore Minerals (STHJF.PK). The newest producers are able to get the highest prices in the industry for their uranium output and they have some of the most favorable terms in the industry in their supply contracts. These newest producers are able to effectively sell their output at almost triple the price, on average, that their larger brethren are able to get due to the latter's legacy contracts.
So although the spot price has declined by nearly 50%, the companies making the most from their output are the new producers. One important note is the fact that Cameco, Energy Resources of Australia and the like will be able to increase profits each year just by signing new contracts which expire (however they need to keep production at current levels to reap the benefits from their rising contract prices which neither CCJ or ERA have been able to do for various reasons).
The companies bringing projects online in the next two years excite us due to the fact that they get to create these favorable supply contracts with the utilities while prices are good and beat everyone to the market before the supply/demand ration begins to deteriorate (which should occur around 2012-2015 when many projects are expected to come online). We suspect that many of the end users are waiting until this period to make their large purchases and are just trying to tread water at this time in order to make it until prices are lower, however if the current building spree of nuclear power plants continues then the shortage of uranium could last many years longer.
For those who missed it, The Wall Street Journal ran an article on the front page discussing China and their need to build new coal plants to meet their power demands recently. For those who miss the irony here, let us explain the significance for you.
First they have a pollution problem which is out of control and coal certainly is not going to alleviate the problem.
Second, they are merely building power capacity to meet today's (not literally, but their present needs-meaning what they see is needed for the coming 18 months or so) needs and not taking into account the fact that they are going to need exponentially more power the more they modernize.
The higher their quality of life rises, the more power each individual uses and one must not forget that China is modernizing the whole country so not only is the quality of life going up for the individual, but more and more people's lives are improving as the country builds new housing for old neighborhoods and cities. In short their current modernized population is still experiencing growth in their quality of life while at the same time their building spree and increased employment is increasing the pool of their modernized population!
The only way to meet their future needs for power (that is without having to have a coal power plant in each neighborhood!) will be to increase their already ambitious building plans for nuclear power plants. It is important to realize that each of these plants will require a fixed amount of uranium each year, and even more important is the fact that in their first year they will require even more uranium due to the fact that it requires more to fire up the reactor for the first time, plus the need to build an initial stockpile. We can picture this as being a multi-generational movement as it takes years to build nuclear power plants in the Western world and there really is no end in sight for power consumption with today's Digital Age running full steam.
The current environment seems to favor those will a will and a want to hold these securities for a few years out as there seems to be good news in the pipeline. After all, why in the world would China and Japan be so interested in signing all of these uranium exploration deals if they were not seriously interested in creating large nuclear industries in Asia? We should know by Monday whether we have gotten above our resistance level in the index so as to move higher across the board. Until then, good luck and happy investing.
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This article has 13 comments:
On the one hand, we have very valid arguments that China will need (and in my view, already has much more massive plans than we have been informed of) to build nuclear plants. However, even in regulatory-lite China, these plants will not be online for at least a decade. And even if China were to double the build-rate of nuclear reactors that the world achieved during the building boom in the 70s-80s, its going to be a long, long time before this drives uranium demand.
Now of course investors are right to try to position themselves for this future demand increase. But the reality is (the analysis that is always skipped) is that there is a lot of production coming on line, from the very companies mentioned here - Uranium One, Denison, etc.
Over the next few years, we are looking at an OVER supply issue, not a shortage. Even with Uranium One's sulfuric acid problems in Kazakhstan, they still expect massive production ramp ups.
There is a contradiction when we talk about the growth prospects for all the companies - based on their production expectations - but then we don't address the broad supply/demand situation for uranium. If these guys meet their targets, we will have an oversupply for years. This is a long time to ride out from an investment perspective.
Moreover, no one is analyzing the true production cost of uranium. And you're going to need to, because even if you don't believe this is a problem, the anti-nuclear side is coming out with a host of well-reasoned arguments that large-scale mining of somewhat lower-grade uranium is going to cost a lot more -- and may even have a negative EROIE! This message will impact the market because the popular press will repeat it, reinforcing its own anti-nuclear bias for a few more years.
Finally -- if you truly believe the nuclear story, why not play the engineering firms that will be booking business from this buildout -- SGR, MDR, FLR, FWLT and of course CEI.PA (AREVA)?
Perhaps this is because the majority of uranium stock traders are basically inept analysts feverishly drawing "trend lines" to try to justify their way out of the hole they are in for chasing uranium equities to unreasonable heights last Spring?
I do not know the percentage of production now, nor anticipated in the future, which is being done in situ, i.e. not by mining in the traditional sense. I know that the properties of the uranium deposit dictate whether that deposit can be recovered with that method, but a certain percent of total world production will be acquired without "mining". There are uranium producers who specialize in this technique, others who use both, others who mine only.
I disagree that nobody is analyzing the true production cost of uranium. I am certain that most every quality operation in the business has that down pat, and could teach us all a lesson on that.
I also disagree on the matter of anti-nuclear bias. From what I read, the tree huggers realize that uranium is a clean fuel and compared to coal, oil, and natural gas, it is a far cleaner fuel to create the world's power - they are in fact now endorsing the use of nuclear vs the carbon fuels, because it is better for the environment.
I do not believe that Mr. Coombes properly addresses the broad supply/demand situation for uranium. As astute as he is, even he cannot know the future supply, nor the future demand, nor the rate of increase of either.
We have almost 300 years supply of coal in the US, more than any other country on earth. Nonetheless, all the coal mine companies are doing just fine. So will the Uranium miners, no matter how many years supply there is in the ground. These mining companies are not stupid.
I don't know where Mr. Coombes got his information that it will be at least a decade before China has nuclear power plants on line. I was in China in October, and that is not what I was told. Their concern to clean up their air is much stronger than you think. They well understand that their coal power plants and manufacturers are polluting their people (especially their children), their water, their land, their health, .... everything. A decade or more to put nuclear power plants on line? I don't think so! They can and will
do it much faster than that. Their testing on pebble bed reactors is almost complete.
There are 440+ nuclear reactors in operation that generalte about 16% of the world's electricity. Another 25 are under construction,
38 are on order, and 115 are proposed. And that is just for now.
Also, there are 284 research reactors, and 220 nuclear-powered ships and submarines patrolling the oceans. The industry is not predicting an over supply of Uranium any time soon - and they may find that they cannot meet the demand, certainly now, maybe never. Only time will tell on this issue. Meanwhile, the miners are buying up more land that they suspect has Uranium deposits. Why in the world would they do that? Not to oversupply the market I am sure!
I am only suggesting that it is possible that Mr. Coombes opinions are just that - his opinions, and he can, and probably, is entirely wrong. I would not let his article scare you away from investing in uranium mining. Instead I would suggest you do your own due diligence, do a LOT of investigation and reading, and decide for yourself. Don't let one man's opinion scare you off. And I am not certain that the "majority" of uranium stock traders are basically inept analysts (while he is not) feverishly drawing trend lines. I think that is simply a hogwash statement to make, and I doubt that he has any facts or evidence to back it up.
Good luck with whatever investing you decide to do - I am going with both big and small uranium miner investments, have already done so, and will do more. And that is just my own decision!
What Mr. Coombes does not account for is "peak oil" . Even if you do not believe in Hubberts Peak oil theory. All oil analysts will agree that all the "CHEAP" oil has been pumped. There may still be a lot of oil on the planet but it is VERY expensive to extract.
As we enter the ENERGY- CRISIS era, we will enter the age of switching from burning Fossil fuels to metal fuels. It is inevitable.
Countries and large corporations will start to hoard oil reserves. Nuclear energy is the only answer, solar/ wind will play a growing but minimal role.
The world is searching for alternatives to $100-200 OIL, first bio-fuels/ ethanol (ridiculous , stupid idea) , today they want to burn as much coal as possible. We all know what burning coal does to the environment. Even if you do not believe in global warming, everyone can agree the damage burning dirty coal does to the environment.
The writing is on the wall, Mr Coombes says we are years away from needing more uranium supplies. He is ABSOLUTELY mistaken. There is already a mining supply shortage.
What do you think the BIG OIL/ Utilities CO/ Sovereign Wealth funds will be buying very soon. Correction,... they are already accumulating.
A Uranium buying PANIC is enevitable.
Thank you for the great article and the posts.