Uranium Funds Points to Near-Term Price Decline

By: James_Finch

Nuclear Market Review (NMR) editor Treva Klingbiel reported in this week's issue, “Two sellers that were evaluating bids in response to their auctions have concluded their evaluations and have decided not to sell at this time.” She added, “Both sellers preferred to make delivery in June while most bidders were seeking delivery for several months out.” The U3O8 Weekly Spot Price Indicator, as published in NMR, remained unchanged at US$138/pound.

While spot U3O8 transactions could remain in the $130 to $150/pound range for a while longer, it appears that increased supply in proportion to market demand could lead to a temporary price hiccup. We cautioned of this possibility in early January of this year.

According to the NUEXCO/TradeTech Exchange Value for monthly uranium spot, the last U3O8 spot price decline took place in May 2003.

Traders have backed off the past few weeks. General discontent through the utility industry suggests spot U3O8 needs to take a breather.

In an April 12th interview with Yellowcake Mining director Dr. Robert Rich, he warned of a ‘price adjustment.' But, he also told us at the time, “The minute buyers see things go down, they are going to flock back into the market, and say, ‘Okay, we knew this was going to happen. Now, we buy.' The utility consumers will come back into the market like lemmings, and buy up anything available. The next thing you know, there's another spike.”

Is the Blended Fuel Value Pointing to a Uranium Price Decline?

In an interview with Joe McCourt on May 21st, we learned about his company's proprietary Blended Fuel Value (BFV). McCourt told us, “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.”

Until this past April, the BFV has traded well above the weekly spot uranium price indicators, published by either TradeTech or Ux Consulting. For the week, the BFV has traded a whopping $19/pound BELOW the price indicators.

According to Joe McCourt, who writes in this week's FreshFUEL, “The value of the BFV should be about $6 higher than spot U3O8 to account for the cost of underwriting and distributing the shares of the fund. Currently, the BFV is about triple that amount lower than the spot price.”

McCourt refers to his BFV as “a measure of plebian wisdom.” He concluded, “Currently, that wisdom is indicating that the legacy prices have moved too high, too quickly.”

After the Price Hiccup?

If Uranium Participation Corp is a proxy for the spot uranium price, then we might see the ‘price hiccup' we forecast to take place between Memorial Day and Labor Day.

What would precipitate the temporary price decline?

In a news release issued last week, United Steelworkers International (USW) president Leo W. Gerard called upon the U.S. Department of Commerce to continue including SWU (Separative Work Units) contracts in the 15-year-old suspension agreement with Russia's Rosatom.

Gerard wrote, “There has been evidence the agreement falls short of covering both forms of imported uranium (LEU and SWU), potentially flooding the American market with imports.” He added, “It could also force the shutdown of domestic production – making the U.S. totally dependent on foreign sources.”

At this time, the U.S. imports about 90 percent of the enriched uranium used to power the country's 103 nuclear reactors. Only U.S. Enrichment Corporation converts and enriches uranium in the United States.

If through some loophole, Russia does flood the market – or if speculators perceive this is possible, then this event could begin a price decline.

Or does this have something to with the major Australian uranium producers in concert with the large Canadian producers?

This claim was brought forward to us by Michael D. Campbell, chairman of the American Association of Petroleum Geologists' Uranium Committee, in a news release he sent to StockInterview.com.

Campbell suggests that recent statements made by Australia's Macquarie Bank about falling uranium prices are meant “for the purpose of inhibiting investment in new uranium production, which in turn would tend to protect the large producers and support higher prices over the long term.” Campbell asserts, “This would be a return to cartel conditions exerted by major Canadian and Australian producers while the prices were low during the 1980s through 2005…”

In a June 22nd Metals Morning Note, Salman Partners' Raymond Goldie wrote, “If you're holding a junior uranium company thinking that Cameco will take it over – think again!” Goldie explained in his desk note, “Yesterday, Cameco Corporation held meetings in Saskatchewan with the investment community… Cameco believes that the juniors are being valued at prices that would not create value for Cameco's shareholders. Management implied that it is waiting for a dip in uranium prices and a resulting much sharper drop in the prices of the juniors.”

In any case, we do not believe in a sustained price decline of either spot or long-term uranium. For quite some time, we have been concerned about the chasm between the spot and long-term uranium price. A US$40-plus divergence between spot U3O8 and long-term pricing is not sustainable.

Based upon weakened buying in the spot market, the stalled spot uranium price and the divergence, we anticipate a near-term decline in the spot market.

In our CD-ROM publication, “Uranium Outlook 2007 – 2008,” we explained that a short-term uranium price decline would most greatly impact those junior uranium companies who have not yet delineated an asset. This appears to be the gospel Cameco is now espousing. The field is crowded and unlikely to continue further expansion.

For the long-term, Michael Campbell foresees uranium prices fluctuating between US$80 and $100/pound. He believes the high price should stay that way past 2020, unless there were a serious nuclear accident, a number of large uranium discoveries, a series of large-capacity uranium mines online or the broad utilization of international fuel recycling.

We disagree with uranium price peaks forecast by 2009 suggested by Lehman and Macquarie. Over the past year, we found a comparable price scenario in molybdenum. Although numerous analysts were forecasting US$10 to $15/pound in this silvery-white metal, we insisted the molybdenum price would rise beyond US$30/pound in 2007 and rally higher during 2008 and later. Ferromolybdenum was recently offered at US$37/pound while molybdenum oxide remains well above US$30.

The problem with metals, U3O8 and other natural resource pricing forecasts is China's metals and energy consumption. We covered this in our recent publication, “Investing in China's Energy Crisis.”

Take Alcoa as a case in point.

This past Thursday, Alcoa Australia director of projects Craig Walkemeyer warned that the company's Australian operations might have a problem with expansion plans because of natural gas prices. “In the last year, (gas) prices have doubled and it's becoming increasingly difficult to secure competitively priced long-term contracts.”

Three Western Australia refineries supply 13 percent of the world's alumina requirements. A natural gas shortage could impact Australian alumina production. Western Australia's bauxite deposits are lower grade than elsewhere in the world, but low-cost energy has kept the region competitive. This edge has been eroded by the energy crisis of Australia's largest consumer of its alumina – China.

In the past year, China's natural gas consumption jumped by 20 percent.

In May 2006, the first liquefied natural gas (LNG) cargo was loaded for delivery to China's Guandong LNG terminal. This commenced the 25-year trade relationship Australia's Woodside and a Chinese LNG company. Four years earlier, China had signed to buy 3.3 million tonnes of LNG annually over 25 years from Australia's largest natural gas deposit, North West Shelf. This was Australia's largest single trade deal.

The key points for making this comparison are:

• China can and will consume far more energy and metals than most analysts are willing to admit

• Beliefs in sustained price corrections for energy components, such as oil, natural gas and uranium, are based in fantasy

• There is a remarkable inter-connection between China's energy crisis and any metal or energy component, which this country will consume in order to maintain its double-digit GDP growth.

• Whether it is alumina, natural gas, uranium, molybdenum, manganese or nickel, price declines represent buying opportunities in those commodities

With regards to Alcoa, China will likely pay the piper and pay a higher price for alumina, after having helped double the gas prices in Western Australia.

Another concern expressed by Alcoa's Australian director was labor shortages.

Labor shortages and environmentalists should continue to sustain the uranium price over the longer term. Short-term declines might come about because of a loss in speculator frenzy – but not for fundamental reasons.

And environmentalists should also include terrorists. These should be regarded as an extreme form of environmentalism. But, they are generally arguing about the same problem.

In the western United States and in southern Australia, there are worries about availability of groundwater. Environmentalists in those areas argue that new uranium mines ‘must not' be put into production because of water issues. In Darfur (Sudan, Africa), scarcity of water was the trigger for extreme violence and the ongoing genocide.

In Niger – one of the top five uranium producing countries, water supply is an issue. Recent attacks by rebels in Niger were precipitated by broken promises about water. In April, Tuareng rebels were suspected of attacking the Imouraren uranium mine, owned by an Areva subsidiary.

One of the drivers sustaining the Nigerian rebels who wish to ‘emancipate' the Niger River Delta is the pollution taking place in ‘ljawland,' as the delta is called by the 43 clans residing in this region. Threats to blow up the pipeline are baseless because they do not wish to further pollute the delta.

All three regions we selected are in Africa – a continent which could conceivably become the world's largest uranium producer before 2020. The continent is also a major source of other energy supplies and metals (coal, manganese, chromium, crude oil and natural gas).

We have closely monitored many of the global developments in uranium production. There are problems with nearly every forecast we have reviewed by any and all current and near-term uranium producers. Forecasts are forward-looking statements, which are protected by Safe Harbor disclaimers. Mining a deposit is something else, and it is heavily regulated. Enforcing regulations takes time, and the greater the number of projects which proceed to mines will create additional ‘labor shortage stresses' for not only the uranium mining space but the regulators who oversee and approve these projects.

And then there is the unexpected, as we have witnessed over the past year with Cameco's Cigar Lake or ERA's flooding. These won't be the last.

Collectively, ongoing issues with uranium mining, and in every step of the nuclear fuel cycle, should prevent a return to the uranium price some analysts have begun to forecast over the foreseeable future.

By James Finch
http://www.stockinterview.com

COPYRIGHT © 2007 by StockInterview, Inc. ALL RIGHTS RESERVED

James Finch contributes to StockInterview.com and other publications. His recent work, “Investing in China's Energy Crisis,” is now available at http://bookstore.stockinterview.com/CBM-ebook.html

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