Build long-term positions
in Uranium stocks
By Adrian Day
Adrian Day Asset Mgt.
Uranium has some of the best supply/demand fundamentals of any resource; despite the strength in prices of both the commodity itself and uranium stocks during the past couple years, the long-term trend will see much higher prices yet.
Uranium has been one of the strongest of all resources recently, with the price almost tripling in the past two years. After a few months of consolidation, the price has started to move again as we approach a more active purchasing season, with the spot price up to $30.50 a pound.
Uranium is also a very thin market, dominated by a handful of suppliers and not many more buyers; many months, total trades number in the single digits. The spot market, in fact, accounts for only about 20 percent of uranium traded. The current term price is $32, a premium as consumers attempt to lock in today’s prices for long periods.
Uranium moves in long cycles; the last boom was more than 20 years ago, and it’s only recently come off a period of de-stocking after the Cold War, which saw extraordinary secondary supplies hit the market. During that period, there were few new nuclear facilities to boost demand, so the price declined, and little exploration or development was undertaken.
All that has changed, with demand from new nuclear facilities boosting demand, even as supplies, from mine production and secondary sources, decline. Nuclear power plants are most likely the energy wave of the future; relatively low-cost on the operating side, environmentally friendly, notwithstanding the waste disposal problem, and reliable.
Governments and the public are beginning to recognize this. Opposition to new facilities is likely to be much more subdued going forward.
Many environmentalists have also publicly recognized that nuclear power is the cleanest of available economic sources, and they’re supporting nuclear power over coal and fossil fuels, though vociferous opposition remains. Governments also are supporting nuclear production.
Australia is allowing new mines in the Northern Territories and has urged state governments to review the ban on uranium mining; it has scrapped the ban on exports to China.
In Canada, several provinces have moved to push the industry forward; Ontario is reopening select shuttered nuclear plants and British Columbia has lifted the ban on uranium exploration and development.
In the US, President Bush has urged development of the nuclear industry; 15 plants have received extended license renewals; two companies (Entergy and Constellation) are planning the first new nuclear power stations in 30 years; and the government has lifted restrictions on nuclear power in India.
The British government likewise has called for development of the faltering nuclear industry; there’s an active debate in Germany; France is planning new facilities; and Finland is now building the first new plant in Europe since 1986.
In all, 30 reactors are under construction in 11 countries, and some 130 new reactors are expected during the next 15 years. Looking ahead, China alone has plans for up to 40 plants, while Japan, India, South Korea and France have announced plans for new facilities.
Nuclear plants have large capital costs, but once running are lower cost than alternatives. And once operating, they’re relatively insensitive to the cost of uranium itself and certainly can’t substitute another fuel.
The result is a huge gap in the next 10 to 15 years between expected requirements and production from existing sources, plus anticipated secondary sources. Currently, approximately half of supply come from mining, with the balance from stockpiles and tailings.
The World Nuclear Association estimates that by 2020, total supply will be only half the expected demand, 40,000 tons versus 70,000 to 80,000 tons of demand.
The enormous gap arises from an over-reliance on inventories and secondary sources in the past decade, and the long lead times required to permit new mines and bring them into production.
It’s only recently that exploration has picked up. Other than Cigar Lake in western Canada, there are no major projects moving to the development phase. Meanwhile Russia is likely to export less going forward as it holds back material for its own generating needs.
To meet his new demand, there will have to be fresh supplies and higher prices; many of the properties being explored now will have to come into production.
Significantly, China isn’t even begun to tie up supplies for its own needs as it’s been doing with oil and many other resources. Any new supply will find ready buyers and development projects ready partners.
Many companies are looking at old projects explored in the last boom but never brought to production before the boom turned to a bust; most were abandoned or put way up on the shelf.
While tighter resource definitions mean historical numbers frequently overstated the known resources, technological improvements in exploration and development mean some of these can be brought forward more quickly than in the past.
For now, Canadian exchange officials are cracking down on the use by junior explorers of historical numbers, leading to some softness in stock prices and a buying opportunity.
Many of these properties are in the US. Though Canada is by far the world’s largest producer today, the US is the largest cumulative producer.
Yet there’s been little recent exploration. In 1979, at the peak of the last boom, there were more than 100,000 holes drilled looking for uranium; during the past 20 years, annual drilling has never exceeded 10,000. This equates to a rich hunting ground.
This, then, is a good time to be building long-term positions in uranium investments, but also time to be selective. All legitimate uranium stocks are trading at significantly higher prices than a year or two ago.
In addition, given the commodity price strength in the last year or two and the market hype, there’s been a huge increase in exploration companies with “uranium” in their name.
Pick stocks that will definitely respond to any move in the sector, but which also have relatively low downside. The ideal are low-maintenance stocks that don’t need constant watching and are unlikely to deliver negative surprises.
This means emphasizing balance sheets and management. In this sector you can miss out on some of the best stock rewards that might come from more speculative investments because even conservative stocks will reward investors handsomely if we get the broad sector right.
We’re focusing on four main areas: Major producers will benefit from higher prices Cameco Corp. (NYSE: CCJ) is the world leader, management would have to try very hard not to benefit from higher uranium prices. Buy Cameco below USD55.
World service leaders will benefit from increased demand and market activity. Areva (Paris: CEI) is a world leader in nuclear plant construction and management. It has lots of projects in the pipeline – including some in China – and a strong balance sheet.
The company is also a major recycler. To be privatized by the French government, it currently trades on a “when-issued” basis. Other global leaders in nuclear plant construction (notably GE and Siemens) aren’t “pure” nuclear plays. Areva is a buy up to EUR451.
Top exploration companies have the goods and are likely to bring properties into production. Strathmore Minerals (TSX.V: STM), with technically strong management, lots of properties, and a strong balance sheet, is arguably the best of these. It has many projects in the US that were actively explored in the last boom.
One, in New Mexico, is currently under permitting, while a couple more should be moving toward permitting soon. The current price is attractive, the stock having declined recently as low-priced warrants expired (leading, as always, to some selling). And the company revamped its historical resource numbers. This clearly is more speculative than the first two picks. Strathmore is a buy below CD1.70.
Select exploration companies. We like three exploration companies, active in a range of metals, but with some uranium projects: Virginia Gold Mines (TSX: VIA), one of our top picks for an exciting new gold discovery, with great management and a solid balance sheet; Altius Minerals (TSX.V: ALS), with numerous joint ventures in Newfoundland, as well as a royalty on Inco’s Voisey’s Bay nickel mine; and Bitterroot Resources (TSX.V: BTT) – the most speculative of the three – partners in a joint venture with Cameco.
Drilling will begin this fall, and any success would reward shareholders well, but this one clearly requires watching for exploration developments; don’t chase the stock. Buy Virginia below CD7.75, Altius below CD4.25, and Bitterroot below CD0.39.
A basket of these stocks, combining the senior producer and service company, with one or two exploration companies, will reward the investor very well, both in the short term and during the next five to 10 years.
Editor’s Note: Adrian Day’s article appears in Personal Finance newsletter, P.O. Box 3808, McLean, VA 22103, 1 year, 24 issues, $97. Adrian Day is president of Adrian Day Asset Management, which manages money for individuals and small institutions and publishes a premium email advisory service, Adrian Day’s Global Analyst; contact Adrian at GlobalAnalyst@AdrianDay.com or visit www.AdrianDay.com.
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