In the previous article we looked at investing not only into Uranium but into any commodity. Often we let our emotions control our decisions. Anger plays a major part in this, when we are disappointed at missing a move in the price. The key thing to remember about markets is that you were not the only one who missed the play and therefore inevitably there will be another opportunity as profits are taken periodically. Markets do not move in one constant direction on any time line. Any investment must be considered with the possibility of a reversal, and we will try to place all advantages to our side before we decide to invest. The same has occurred in the Uranium sector. While many initially felt they had missed the boat in 2006/2007, they may have another opportunity to catch it again. We should consider looking at Uranium stocks from a monthly base rather than a daily or weekly base as this is turning out to be a much longer time line than previously thought.
Many people do not have the whole picture in focus, but we do get some significant clues as to what is happening. I am no artist but we are going to attempt to paint a bullish picture in this article on the possibility of uranium both from a fundamental point of view as well as provide some indicators (not technical) as to the direction the market leaders are taking.
Spot prices in uranium are currently given too much emphasis. The main supply of uranium is through contracts. There are several pieces of news in recent months that make no sense unless key players in the nuclear field are positive that uranium will be playing a major role in the future. The spot prices do not provide an accurate indication of the demand for uranium, though many do consider it and thus we do see interim reactions in the price of Uranium stocks.
Spot prices are based on very small quantities being traded in terms of the contract quantities. None of the utilities that utilize uranium on a regular basis purchase uranium on the spot unless they have a shortfall. Sometimes the utility will purchase direct from the market or the supplier might do so to compensate for a shortfall under a contract. It's just not possible for them to rely on this source of the commodity.
In order to understand this one must be aware that nuclear power stations cannot be shut off in the same manner as one shuts off a TV. It takes weeks to bring a power station on line and to get the right temperatures. Once a power station is shut off it takes a lot more Uranium than normal to restart the unit. In order for the unit not to be shut off, uranium rods/pellets require to be replaced on a regular basis and most companies will sign up a contract of supply with a producer; this contract can run into years of supply. It is essential for companies to have reliable and continuous sources of power.
Uranium is found in deposits as a kind of dried up solution in the chemical form u308 or triuranium octoxide. This has got be extracted from the rock and converted to a more purified product more commonly known as yellowcake. This raw variation must then be converted to the purified version for use in power stations. Depending on the type of deposit different processes are required to extract it. For example Uranium One (OTC:SXRZF) extracts the uranium using an ISL (in situ leaching) process in its Kazakhstan mines. Paladin Energy on the other hand (OTCPK:PALAF), Rio Tinto (NYSE:RIO) and BHP Biliton (NYSE:BHP) all use the open pit mining process to mine the Uranium, which is then taken to a mill for processing. For the sake of security the milling process is in secure locations such as in the U.S. and even there the mills are few. In fact there are only two mills currently operating there while another two are operating in Canada, one of which is owned by Cameco (NYSE:CCJ) in partnership with Dennison Mines(NYSEMKT:DNN). Cameco has underground mines and requires special care due to its deposits having some of the highest concentrations of Uranium found to date. Cameco's McArthur lake deposit has concentrations of over 20% and in some cases up to 40% concentration.
For every ton of rock mined Cameco brings out 200kgs to 400kgs of Uranium. Even simpler, let me make a comparison to gold. At current prices of 45 dollars per pound and 400 pounds to 800 pounds per ton of rock, that gives us $18,000.00-$36,000.00 per ton of rock. I do not know of any gold mining or platinum mining company in the world that comes up with a figure like that.
Uranium costs Cameco roughly $18 per pound and leaves them with a good profit. Most companies cannot compare their deposits in terms of concentration or size of deposit to Cameco's McArthur lake or Cigar lake deposits with roughly 450 million pounds of uranium in the ground at McArthur and a similar deposit at Cigar Lake.
Cameco recently bought over an Australian deposit from BHP Biliton. Last year it attempted to buy out Hathor resources but was beaten by Rio Tinto. While BHP's main line is not Uranium, it is Cameco's. It specializes in nothing but Uranium. If there is a company out there that knows everything there is to know about Uranium it would be Cameco. In short if it did not have confidence in the ability of Uranium to make money Cameco would not be expanding its resources and opening new mines.
In comparison most other companies have deposits with 1% and in some cases 0.5% concentration of Uranium per ton of rock. It's logical to assume that the higher the concentration the cheaper it is to mine, but it's not always the case. However in the case of Cameco it is.
BHP Billiton actually has the largest uranium mine in the world but the concentration of Uranium is miniscule. However the same mine also yields copper and gold, which makes up for the lack of high concentration and makes the mine profitable.
One has to sort through a great deal of information to pick up the thread of exactly in what direction uranium is going. Since this thread is interwoven with politics it gets complicated. Public sentiment plays a large part in the future of Uranium. However the following news stories give an indication of the possible direction uranium may take.
At the end of 2013 we expect that the mega tons to mega watts program will end
In recent news Paladin resources took up a long-term off-take contract with a cash prepayment of $200 million. Two things to consider for a commodity that is moving downward: What company would be willing to purchase the commodity in advance for a long-term to take delivery in 2019? And who would pay $200 million in cash in advance unless certain that the price of uranium were to rise or there was the probability of a shortfall in the supply? That is a very bullish sign if I have ever seen one.
The second event was the issue with Japan stating that it was looking to get out of Nuclear power generation. While this was being stated Japan signed a contract for the supply of uranium with a company in Kahazakstan.
It appears that Japan has no intention of shutting down its source of power considering the alternative of expensive imports of gas, which would be required to continue to satisfy present demand of electricity. It is likely that the rest of the power stations will be brought back online in the near future.
Things got even more interesting as there was more recent news released indicating that Japan was again singing contracts for Uranium with Uzbekistan. Japan's restart of its nuclear power stations is key to initiating a greater demand for Uranium as it will take out the uncertainty of excess Uranium flowing back into the open markets, which would cause an anomaly in the supply demand cross over.
In each of the above news releases we can see an indication of fear of shortfall or a possibility of price rises. If we need to nail the final nail in the coffin here is another piece of news that shows that China is truly moving at a fast pace to try to make up for possible electricity shortfalls.
Cameco has recently come down in price but continues to be the leader in the Uranium sector. Its previous all-time high was around $55. If the price of uranium moves up past previous highs of around $130 we should see Cameco's prices moving north of that.
It is possible that Cameco will aggressively move into a buying spree as other parties interested in uranium begin to push for mergers and acquisitions. Multi mineral company Rio Tinto is also moving into the field after purchasing Hathor resources and a yet-to-be-confirmed deposit. Cameco is in partnership with Denison mine in a potentially large deposit called Wheeler river. The Wheeler River deposit has shown some of the highest concentrations of Uranium found to date - up to 60% concentration. Denison also did a merger/takeover with Energy fuels Inc (EFRFF.PK), which now allows it to concentrate on Wheeler River. It is possible that with Cameco smarting from losing Hathor it will put more emphasis on Wheeler and also consider other deposits in the area as it has been adamant in the past that it wants to concentrate on deposits in Saskatchewan, where most of its paying deposits are. Rio's Rough Rider deposit (Formerly Hathor's deposit) runs beyond its border and we may see the two lock horns sometime in the near future over this deposit. Eventually it is possible that Cameco may either buy out the Wheeler deposit or simply swallow Denison.
The impact of uranium prices moving up may not affect the price of BHP or Rio Tinto as they are both diversified miners with interests in many other minerals, with Uranium being a very small percentage of this combination.
It's worth reading between the lines and interpreting the hints of a coming shortfall in the supply of Uranium that may trigger a rapid rise in the price of Uranium, which may force prices of Uranium stocks to move up very quickly.
If we see fresh demand from China, Korea, India, and the Middle East, miners will be forced to reject new near-term supply contracts, as they do not have the capacity to produce the Uranium in the short term. Most Uranium deposits will take at least 10 years to be converted to a producing mine, if not more. Cigar lake was discovered in 1981. It's yet to produce a single pound of Uranium. The permitting and political issues of Uranium mines will see the shortfall accentuated. In such events the interest in Uranium based on spot prices moving up will increase.
There are many companies in the United states that are mining Uranium, unfortunately none of these has a single deposit that would be considered significant enough to make an impact on the markets. The largest deposits to date remain in Canada, Kazakhstan, Australia, and Africa. One cannot ignore companies that are concentrating on these deposits despite the potential of political upheaval, especially the ones in Africa. The options to generate electricity are rapidly diminishing and eventually the markets will force the politicians to look seriously at Nuclear power. Cameco remains the most significant of these stocks, which, has both the resources and finance to be able to develop these deposits in the medium term.
Disclosure: I am long OTC:SXRZF, DNN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.