Sunday, September 17, 2006

Sep 17 Uranium Stocks Update: Uranium Participation Corporation (TSE:U)

Originally recommended in early-March, Uranium Participation Corporation (U.TO) has since climbed from $7.30 to $8.80Cdn on the strength of the ever-increasing uranium spot price. The company, if you remember, basically buys up uranium oxide and holds it in hopes that the price of U3O8 will appreciate. So far it's been a very successful strategy: it's NAV has increased steadily and investors are paying a premium to invest in the company.

In the last few months, others have crowded into buying physical uranium for investment gain, including Nufcor International, a joint-venture between AngloGold Ashanti Limited and FirstRand Limited, which holds over 1,000 tonnes of uranium and trades at around 30 percent above its NAV. Nufcor recently announced it planned to raise another $50-million or so in the next several months to buy more uranium oxide.

This is in addition to around half a dozen hedge funds who own physical uranium as well, including the newly brandished Solios Uranium Fund, consisting of 75% physical uranium and 25% uranium equities, with the equities being used to hedge or enhance returns.

All in all, this secondary uranium demand IS undeniably having an impact on the overall uranium landscape. Of the spot market volume for uranium this year, only about 1/5th of the uranium oxide is being bought out by utilities. You can guess where the other 80% is going.

As uranium production from the ground is still expected to lag behind demand, I predict that the secondary uranium demand created by these funds will serve to benefit every uranium stock out there by drawing attention to its remarkable rise in prices. However, I did note a few months ago the potential danger of this artificial/financial/investment demand secondary to the actual physical demand of uranium oxide. Any mass selling of these uranium stores could potentially wreak havoc on the uranium market and collapse the price of U3O8. It would be highly unlikely for the next several years, but could potentially happen once supply ramps up to challenge uranium demand. After all, the exit strategy for all of these funds is to SELL the uranium oxide back at a profit.


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