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Melt-down Time For Uranium Stocks?

James West
jwest@midasletter.com
www.midasletter.com
February 12, 2008


The market has been unkind to junior resource stocks for the last several months, but it has reserved special treatment for uranium juniors, whose management are sounding increasingly depressed and suicidal.

The reason is plain to see - the price of uranium is heading south in a hurry, and that has many investors asking, "What exactly is the condition of uranium fundamentals now?"

Cameco, perhaps the best corporate bell-weather of the uranium business, has seen its shares fall 18% so far in 2008, and 26% in the past year.

Ian Howat, senior National Bank Financial mining analyst, has dropped his forecast price for uranium in 2008 to $110 a pound from $120. It gets worse - by 2012, he says it will drop to $75 a pound.

So what happened to the "Nuclear Renaissance" that was supposed to lead the world out of Greenhouse Gas purgatory and into a low cost, low emissions energy future?

It just hasn't happened quite as fast as some would have had you believe.

The reasons for that reality are numerous, and here's just a few:

1. Supply is ample to meet anticipated demand, given existing operating mines' ability to increase current high grade production;
   
   
2. The problems associated with uranium mine tailings are not easily solved, so public backlash against new uranium mine permitting will be commensurate with the proposed mine's proximity to population. The greater the density, the stronger will be the opposition.
   
   
3. The sheer volume of junior resource companies who have been falling all over themselves to hoist the uranium flag suggest an eventual surplus of global inventory that will make the arms race surplus puny in comparison.
   
   
4. There is increasing evidence to support the fact that hydrogen is going to power the infrastructure of the future, along with wind, solar and other greener fuels that don't come with the radioactive baggage of spent nuclear fuel.
   
   
5. The biggest consumer - well actually the ONLY consumer of uranium - is nuclear power plants. If you think resistance to new uranium mines is substantial, just imagine if you received word that "they" wanted to build a nuclear facility next to your house. Though there are 34 under construction worldwide presently, the permitting process is probably the most cumbersome.
   
   
6. The other problem with new nuclear plants is they are notorious for being delayed again and again and again, and in the meantime, other power sources fill the gap. The only thing outstripping the rate of new nuclear power permitting is the rate at which these plants are being decommissioned around the world.

There is a also major disconnect between the "spot" price for uranium, and the price uranium miners are receiving for their output. In its most recent report, Cameco, Canada's largest miner of yellowcake, said it received an average of US$38.92 a pound, while in Australia, Energy Resources only got an average of US$25.06.

That's because while there is a spot price for uranium, there is no substantial spot market. You can't go to the local coin dealer and buy a 1, 10, or 400 ounce bar of U3O8.

This represents a huge discrepancy. In the gold market, miners receive much closer to the spot price for their product, because there is far more liquid market for gold.

Gold, after all, is the only true global currency, and every day people convert paper currencies into gold to protect their wealth.

So is it time to dump your uranium juniors and forget about them?

Not so fast. The run-up in uranium prices can be likened to tech stocks in 1999. Nobody knew how to evaluate the demand, and but the internet was so new, the hype induced the "fear of missing out" part of the herd mentality, and the stampede was under way.

After the crash, the stampede went in the other direction, and even companies with value in the form of earnings and dividends were sold down to fractions of their values. Now, internet technologies are better understood, and its much harder to hype the reality.

The current uranium phenomenon is in the second phase of the same sort of cycle, where everybody panics and indiscriminate dumping is the result.

There are a lot factors that yet point to a sustained growth in the importance uranium will play in our energy future.

Consider:

• The French company Areva, the world's largest builder of nuclear reactors, forecasts that 150 to 300 nuclear reactors will be built in the world from now to 2030. At least 50 of them will be built in China and India.
  
  
• In a move to secure energy supplies and tackle climate change, the U.K. government sanctioned the construction of six nuclear reactors set to be operational by 2020, that would replace an aging fleet of 19 power stations that supply around 18 percent of Britain's electricity needs.
  
  
• The South African government has declared nuclear energy to be a big part of its new power-generation capacity build programme, with 25 000 MW additional nuclear power-generation capacity to come on stream by 2025.
  
  
• So no. Its not the end of the game for junior uranium explorers by any stretch. If anything, it's a buying opportunity for the quality deals with good grades and pounds in the ground, been-there, done-that management, and close to infrastructure but away from populations with a tradition of eco-opposition.
  
  
Its really just bad luck that spot uranium prices are dropping at the same time the sub-prime foofooraw beats on everything with the ugly stick.

James West
jwest@midasletter.com
www.midasletter.com
February 12, 2008