Tuesday, September 12, 2006

"Macroeconomic" Uranium Trends

Ever since I started writing about uranium investing nine months ago, I have witnessed multiple corrections in the markets where resource stocks have very quickly slipped and mass panic ensues. Although the supply and demand fundamentals of uranium are different than many other base or precious metals, uranium stocks have always been lumped together with their resource counterparts during times of panached selling. Of course, it does not help that only a tiny fraction of the 140 Canadian uranium stocks listed on PreciousMetalResources are actual current uranium producers; they are clearly not immune to the fickleness of speculators.

However, it is also true that if one takes the long view and chart uranium stocks over the last year or so, there is no doubt that uranium stocks have benefited from the long-term bullish uranium outlook. It is during this difficult time in the Canadian stock markets that I want to reinforce the positive outlook for uranium as encouragement to be patient and wait for this storm to blow over.

Deutsche Bank Initiates Uranium Coverage

A week ago, Deutsche Bank came out with a 21-page article announcing to the world that it too, believed in the future of uranium oxide and its associated investing opportunities. The benefit here is two-pronged: first, a major investment bank lending credence to uranium investing is a joy to behold for all uranium stock enthusiasts. And secondly, the article itself is a very good summary of the current uranium cycle and is a valid analysis on what to expect in the near future in terms of supply and demand, with corresponding implications to uranium investors everywhere.

While it is impossible to summarize 21 pages, here are Deutsche Bank's main points on uranium:

(1) Concern over the availability of supplies has led to a surge in long term contracting in 2005 and 2006, resulting in increased competition and higher spot and term contract U3O8 prices.
(2) These concerns are expected to persist through to the end of 2009 before a significant increase in planned mine production results in a temporarily oversupplied market.
(3) Renewed supply concerns are expected to emerge from 2013 onwards as the US-Russian HEU agreement expires and removes a considerable amount of supply from the market.
(4) As a result, Deutsche Bank is forecasting spot price increases through to the end of 2008. Thereafter, prices are expected to decline until 2013 when the termination of the US-Russian HEU agreement is expected to put renewed upward pressure on prices.
(5) We are forecasting a continued rise in spot uranium prices in the second half of 2006, bringing the annual average U3O8 price to $US45.92/lb in 2006, US$59.00/lb in 2007 and US$63.00/lb in 2008.

CIBC World Markets: Uranium to $70/lb by 2007 End

Hot on the heels of CIBC's Chief Economist Jeffrey Rubin's implication that uranium stocks as viable investments during the coming economic slowdown and initiation of uranium coverage with bullish sentiment by investment giant Deustche Bank, CIBC World Markets came out with a view the uranium oxide might hit $70/lb by the end of 2007.

Rubin states: "Just like we have seen with oil, the appetite for uranium to feed the rapidly growing energy needs of the burgeoning Chinese and Indian economies is straining supply and driving prices up.

Mine production supplies only 62 per cent of the uranium used today. The rest comes from a variety of other sources such as natural and enriched uranium inventories and the reprocessing of spent reactor fuels — and supplies from these secondary sources are steadily declining. Increased demand from Asia will continue to put pressure on prices and the need for more rapid mine development."

Analysis:
As most uranium investors know, it has been most profitable in the last two years or so to put money into uranim stocks. However, uranium has not been talked about too much outside of a very small circle. It has been only in the last few months that I've seen more and more coverage initiated by such popularity indicators as Report on Business TV (RoBTV). Sprott has been heavily invested in uranium but the company cannot be considered a giant in the financial world. With Deustche Bank and CIBC World Markets now weighing in on the bullish side of uranium, you can bet that your ordinary Joe and Jane will eventually get to know uranium oxide and the benefits of investing in U3O8 stocks.
 

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