Cameco's Disaster Fuels Uranium Boom (Part 3)

Yesterday, Neal Froneman, president and CEO, sxr Uranium One was on RoBTV educating the general masses about the impact of Cameco's Cigar Lake disaster. Let’s first take a look at what he says..

(Uranium) price rise driven by constraints of supply. One of the best miners have very significant problems. Lots of new producers with very aggressive targets. We're very much on track, probably a quarter ahead in terms of commissioning. We have held off entering into any forms of sales contract. Clearly as demand as robust as it is and the disruption at Cigar Lake, nice time to negotiate. In 6-18 months we expect to exit out of gold vehicle to become focused uranium company. Before incident at Cigar Lake, I said we would say before the end of the year $60 and $70 by the end of next year. I daresay now $65 by the end of the year, long-term require at least $55-60 for industry to come into supply-demand balance..I think there's a window of opportunity for new producers like ourselves where supply-demand not in balance..that window probably 5-10 years..if you’re a new uranium company, need to establish in that time frame.

Personally I agree with what Mr. Froneman is saying. The long-term uranium stocks worth holding on to are the ones who have feasible assets that can be produced within 5-10 years, preferably closer to 5. Because, who here really can predict beyond these five years anyway? There are too many variables here at play and I'm much more comfortable investing for the here and now, with an eye on the next few years to come.

Others, of course, like to make money in the absolute here and now. Certainly, every uranium stock has received a bounce as we enter day 3 post-Cameco meltdown. Major mid-tiers reversed course today in trading as profits were taken. Some of the smaller uranium microcaps, meanwhile, ascended double-digits; many of these small exploration plays have been languishing for months in their 52-week lows. Fast money can definitely be made, but only if you are willing to take on substantial risk as double digits in the opposite direction can happen just as quickly.

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Cameco's Disaster Fuels Uranium Boom (Part 2)

Yesterday's gains by uranium juniors not named Cameco continued today as all but two of the twenty uranium companies posted green figures. SXR and Ur-Energy continued their double-digit ascent while Paladin traded a staggering 30 million shares.

These are all good and well, but since I touched on the same thread yesterday, I will attempt to place my observations in another context.

Word amongst uranium investors first circulated several days ago about a uranium story that broke on Marketwatch. Myra Saefong wrote what basically amounts to a uranium primer, mainly for those investors curious, but with little or no prior knowledge of the sector. The only companies mentioned were, of course, Cameco, and Uranium Participation Corporation.

Similarly, on RoBTV today, Cameco's water problems put the immediate spotlight on uranium. Lunch Money did a brief segment detailing Paladin as a more speculative, but possible alternative to Cameco. A chart of five uranium stocks was shown, comprising of UEX, Paladin, Denison, IUC, and SXR Uranium One.

Finally, the Canadian Press released an article entitled 'Uranium Stocks Surge' and detailed the rise of Paladin, SXR Uranium One, Forsys, Urasia, Denison and IUC.

The point that I'm trying to get at is this: money is pouring into uranium, but disproportionately so towards the "large caps" of uranium, the mid-tier junior producers/near-producers. Whether it is from institutional investors bailing out of Cameco or Norther American investors who have just started to notice uranium, the publicity and the attention are on a select group of stocks, the ones that I have observed being spewed over and over again.

And when one thinks about it, why not? Seriously, what are the alternatives to Cameco? If you wanted to invest in uranium, but wanted a stock at least, if not roughly equal in market cap (nobody is remotely close), or even just a TSX-listed stock, the choices are few and far between. One of my picks Forsys Minerals was mentioned in the same breath as Paladin and SXR. Why? Well, how many other uranium companies are TSX-listed?

I will not talk about uranium price forecasts at this point, but from what I'm observing, uranium investing education is still only in its infancy and savvy investors will do well to keep this consideration in mind.

Cameco's Disaster Fuels Uranium Boom (Part 1)

Cameco (NYSE:CCJ TSE:CCO) today shocked the uranium world with news that its massive Cigar Lake would be delayed at least a year because of uncontrollable flooding. This was the second such delay and markets were swift to punish the company, sending it down almost 10%. Conversely, stocks of ALL other uranium mid-tier juniors shot up in reaction. Case in point, take a look at these companies (in descending order of market capitalization):

Paladin Resources (TSE:PDN) up 14.8%
Urasia Energy up (CVE:UUU) up 14.5%
sxr Uranium One (TSE:SXR) up 16.1%
UEX Corp (TSE:UEX) up 9.61%
Aurora Energy (TSE: AXU) up 13.7%
International Uranium Corporation (TSE:IUC) up 5.36%
Uranium Participation Corporation (TSE:U) up 12.8%
Mega Uranium (TSE:MGA) up 8.2%
Fronteer Develoment Group (TSE:FRG AMEX:FRG) up 9.9%
Energy Metals Corp (TSE:EMC) up 23.5%
Laramide Resources (TSE:LAM) up 4.7%
Tournigan Gold (CVE:TVC) up 7.7%
Ur-Energy (TSE:URE) up 14.0%
Altius Minerals (CVE:ALS): up 5.1%
Alberta Star (CVE:ASX) up 3.55%
Western Prospector Group (CVE:WNP) up 7.7%
Strathmore Minerals (CVE:STM) up 2.1%

Now, if an existing uranium investor who had listened to certain analysts in Canada and the United States (Jim Cramer anyone?) say that Cameco is the ONLY uranium stock to buy, I imagine you might be feeling slightly queasy right about now. Yes, Cameco is the uranium giant, but no, it is not the best uranium stock to own at the moment, even without this major announcement today.

As I have stressed in the past, due diligence is an absolute must in the uranium stock field, because there are just so many companies to choose from. As it is foolhardy in my opinion to ignore solid promising mid-tier juniors, it is also foolhardy to lay all your money down in extremely risky, speculative uranium microcaps. I challenge all my readers to do their own due diligence. Avoid the easy play and lay money on a uranium stock just because a bunch of analysts said so. People who did essentially shot themselves in the foot twice, by buying one, and not buying any others..

Doug Casey on RoBTV Oct18

Mr. Casey was on Market Call with Jim O'Connell for a full hour today talking about energy, metals, and resources. Let's see what he had to say about our little world of uranium.

ON URANIUM:

still lots of misconception..nuclear power is way to fly for mass energy generation..by far the safest, by far the cheapest..440 active nuclear plants..Chinese putting up 2 plants/year..India, rest of the world..tremendous deficit of uranium..since it takes about 10 years from time to discover economically uranium deposit to time to production, permitting being as onerous as it is..there will be a uranium deficit for some time..not surprised to see uranium $100-150/lb..several years ago only 4-5 uranium companies..now more than 200..grown like poison mushrooms after rainstorm..how many competent uranium teams are there? not a lot of expertise for mining in general, uranium in particular..out of those 200 or so companies, how many have competent teams? half a dozen? a dozen? odds not good..having said that, there will be a uranium boom..

Analysis:

This is one of the reasons why I chose to be an affiliate of Casey Research (as evidenced by the promotional banner on the right sidebar). Doug is amongst the biggest uranium bulls out there, but he will not unabashedly prop up any and every single uranium stock. He, like I, preaches caution and the need to find good quality companies with feasible assets and strong management. Although he might have not been the most traditional guest on RoBTV (literally refusing to talk about individual stocks and mixing in history and philosophy into his points), Doug really knows his stuff.

Ux Price Ready to Vault in 2007

by Garth Theunissen

The uranium price has been tipped to average $53/lb in 2007, representing a 14.5% year-on-year increase, said the Australian Bureau of Agriculture and Resource Economics (ABARE). It forecasts price strength for uranium for at least two more years.

Analysis: 2 years is a good conservative number. I would be hesitant to believe ABARE if they had the ability to forecast beyond 2 years.

An expected decline in secondary uranium supplies is one the factors behind good prices, particularly from the Russian Federation, Abare said.

Secondary supplies have predominantly been sourced from the conversion of highly enriched uranium from disarmed nuclear weapons, government inventories and reprocessing. ABARE expects the supply from secondary sources to decline only marginally in 2006 and 2007. It foresees "substantial reductions" beyond 2013.

Analysis: beyond 2013 is when the HEU agreement runs out to melt Russian warheads into uranium.

A further supply constraint is that world uranium consumption currently outstrips supply by more than 28,000 tons/year.

With the growing acceptance of nuclear power generation as an energy source - the only significant commercial use for uranium - ABARE predicts plenty of demand-side support for uranium in the near to mid-term future.

For 2007, ABARE sees a minimum 4% increase in consumption to 80,500 tons as a number of new nuclear reactors start production in India, China and Romania.

Analysis: see my latest sxr Uranium One (TSE:SXR) update for more validation of this fact

However ABARE's average spot price forecast of $53/lb for 2007 seems conservative.

Gary Stoker, marketing manager at Nufcor International, is far more bullish and reckons the average uranium price will be even higher given. At $55.75/lb, the current spot price it is already higher than the ABARE prediction.

We are optimistic that the uranium price will continue to increase over the medium term, and anticipate an average price in 2007 of well over $60/lb, says Stoker.

Fundamentals are driving uranium prices rather than investor speculation, he says. Although there has been a lot of talk of speculators driving up the price, if you look at the volumes they take up in the market it is very small, he says.

Although there are a lot of initiatives around the world to increase production, we're of the view that not a great deal can be achieved to boost supply in the short term. As such we see continued upside support for the uranium price at least in the short to medium term.

Says Neal Froneman, CEO of sxr Uranium One: I believe that the constraints on the supply side are grossly underestimated. I also think Gary is one-hundred percent correct in that a lot of the predicted new supply will not come on as forecast. My estimate will be that we will see $60/lb by the end of this year and that by the end of next year we will see at least $75/lb. This will put the average at about $68/lb. These estimates I believe are conservative.

Incidentally, according to the website UXC, investors and hedge funds accounted for just over 24% of the total spot trading volumes in the uranium market for 2005. In the year to date, UXC says around 34% of overall uranium trading volumes have been purchased by the investment community, which suggests that speculators are exerting some degree of upward pressure on prices.

Analysis: good writing..instead of regurgitating calming sentiments about this increasing secondary/investment uranium demand, the author has actually done a little research. In my opinion, not only is the absolute number 34% somewhat alarming but the rise from 24% to 35% in a year, coupled with my coverage of new hedge funds coming into the uranium sector makes me wary. As a uranium investor, I want to monitor these numbers very closely, however unpopular the notion that uranium prices are to an extent being artificially inflated.

Not to toot my own horn, but check back to what I wrote over half a year ago in mid to end-March:

http://uraniumstockinvesting.blogspot.com/2006/03/mar-23-uranium-stocks-update-paladin.html

http://uraniumstockinvesting.blogspot.com/2006/03/mar-29-uranium-stocks-update-sxr.html

I was wary of speculators back then, and I'm wary of speculators now. Don't get me wrong, I love uranium (why else would I write a uranium blog), but it never hurts to be cognizant of where you're putting your money into..

Oct 17 Uranium Stocks Update: sxr Uranium One (TSE:SXR)

sxr Uranium One is considering discussing the sale of future uranium production to China. Their imminent production from the Dominion project that ramps up to 4 million pounds of uranium oxide a year by 2010 would be tempting for China, which needs to add two reactors a year to meet the target of generating 4 percent of its power from nuclear plants by 2020. China has already stated that it was seeking out uranium supply from multiple sources to diminish risk: it lists Canada, South Africa, Namibia and Kazakhstan as potential sources and is in known discussions with BHP Billiton (NYSE:BHP) and Rio Tinto Group (NYSE:RTP) to import uranium.

In addition, sxr announced a few days ago that they were going to issue 18,100,000 Common Shares to sell to the public at a price of C$8.30/Common Share, representing an aggregate amount of C$150,230,000 with closing is expected on or about October 31, 2006. As of today, sxr closed at $8.88.

Oct 16 Uranium Stocks Update: Uranium Participation Corporation (TSE:U)

Add John Zechner, chairman, J. Zechner Associates and Peter Brieger, chairman and chief investment officer, GlobeInvest Capital Management to the list of uranium bulls. Both were on hour-long RoBTV segments today and both gave a positive outlook on uranium.

Zechner stated: uranium's got its own story..clearly supply tightness there..buyers much less sensitive to price (versus oil)..in uranium there's not much else you can get running a nuclear reactor right now..as long as these things are growing and demand is there..plus not the biggest cost input in running a reactor..can see uranium @ $80-100

Analysis: Uranium Participation Corporation was one of Zechner's top picks today and, as such, predicates his bullish views on the spot price of uranium oxide has UPC is really the ETF or proxy of U3O8, although its stock chart is nowhere as pristine as yellowcake prices have been in its upward ascent.

Brieger followed with: we've owned UPC since the initial issue..between now until May we will exercise warrants..like long-term outlook for uranium..one of the great solutions to American energy crisis..have to take 3-5 year view..in order of priority..a) continue to hold UPC..b) exercise warrants if you can take 3-5 year view..there are a ton of people exploring for uranium..and at some point if some of the explorations prove successful, you can have an excess of supply..make take is if you take on all the proposed construction of nuclear facilities..there is a genuine shortfall..I don't know where supply is coming from

Analysis: Brieger's latter comments were in response to host Michael Hainsworth's probing as to why Paul van Eeden had such bearish sentiments against uranium investing. Brieger and Zechner do not immediately make me think uranium, not nearly as much as people like Dines and Taylor for example. To me they are part of the uranium bandwagon, believing in the supply and demand fundamentals of uranium without wanting to delve too deeply into analyzing and parsing through hundreds of uranium juniors. Nevertheless, this represents another victory for uranium supporters in the battle to draw investors into the uranium field and furthering uranium away from the likes of base metals.

The Case AGAINST Uranium?

I've heard few analysts in recent days who, upon talking about uranium, are nothing but bullish. Jim Dines, Doug Casey, Jeff Rubin, anybody from Sprott Asset Management, all look favorably upon yellowcake. However, there is one notable dissenter: Paul van Eeden. As bullish as he is on gold, van Eeden is staying away from investing in uranium stocks.

His reasons are as follows:

(1) based on available data, uranium supply will match or even exceed demand until ~2012
(2) as uranium prices soar, you can get more uranium just by enriching it longer
(3) this enrichment process skews the fundamental supply crunch that uranium bulls rely on as the keystone for their favorable uranium sentiments
(4) furthermore, the price escalation of uranium is largely the fault of speculators entering the market: for example, Uranium Participation Corporation (TSE:U), Nuclor, and numerous small hedge funds who buy and hold physical uranium, thus taking it out of the market and squeezing supply
(5) however, at some point, since they can't use the uranium, they must sell to make a profit..then, the excess supply will drive uranium prices down
(6) since van Eeden cannot see how uranium prices will react, he stays away from uranium investing: the only stock he owns with uranium exposure is Strateco (TSE:RSC)

My own view on uranium lies somewhere in-between van Eeden and the uranium bulls. As I have made clear on this blog in the past, I do favor uranium because of its importance to the nuclear renaissance. Countries like China are scrambling to secure future uranium supplies. Why else would they sign that agreement with Australia in full knowledge that Australia has some of the tightest regulations on uranium mining? Why would Chinese companies JV in Canada (see CanAlaska Ventures CVE:CVV) and in other places around the world with small uranium juniors? Why is Russia not going to renew the HEU agreement to melt down more nuclear weapons into uranium after the current one expires? Why is Kazakhstan so eager to exponentially increase their uranium production? Why is BHP Billiton (NYSE:BHP) spending billions on Olympic Dam to increase uranium production? See Cameco's (NYSE:CCJ TSE:CCO) Cigar Lake project for another example. Japanese companies have a part in Cigar Lake, as well as signing agreements with Kazakhstan's Kazatomprom.

I'm being rhetorical, but you get the point..there is a very real demand for physical uranium, and it stems from all the nuclear power plants that will be built in the next two decades or so. The question is: will we overcompensate a few years down the line when uranium production finally kicks in? Remember, uranium itself is hardly a rare metal; it is quite abundant. Problem is to mine it out of the ground in a timely fashion. That's why there are so many uranium EXPLORERS but so few uranium PRODUCERS currently. This scenario might, however, not be the same in several years.

The other question is: how much is this secondary/artificial demand for physical uranium from UPC, Nuclor, and other hedge funds masking the real supply-demand fundamentals? I agree with van Eeden that speculators, indeed, have entered the uranium market, thus adding a level of inherent volatility.

Personally, I like to invest in high-quality uranium stocks and my recommendations have reflected such. In general, however, I would simultaneously encourage new investors to give a hard look at uranium stock investing while urging necessary due diligence and employing diversification strategies to minimize volatility risk.

RoBTV Commodities Report on Uranium

RoBTV Commodities Report on Uranium

Jean-Francois Tardif, portfolio manager, Sprott Asset Management was on RoBTV last Thursday giving an introduction to uranium fundamentals and tips on investing in uranium stocks

On Uranium
-supply-demand imbalance
-price of uranium has not gone down 1 month in 3 years
-energy consumption growing, push for nuclear power in China and India
-French company AREVA (85% government owned) need uranium to sell reactors

On Investing in Uranium Stocks
it's very hard for small investor..look for established reserves..if you want to take more risk, look at companies with resources..depends on grade, how deep it is, which country it's in, management..you need to do a lot of research..find out what experts are saying..look at grade and say..how much is it worth per ton?

On Specific Uranium Stocks

you can buy URANIUM PARTICIPATION CORP. (TSE:U) which owns raw uranium

PALADIN RESOURCES (TSE:PDN): Paladin is next company that will produce uranium..decided to build mine..will produce ~11 million lbs in 5-6 years..not cheap but after CAMECO (NYSE:CCJ TSE:CCO), next one on the list to build high quality uranium stock portfolio

SXR URANIUM ONE (TSE:SXR): very aggressive company, bought two mills in US..I think they will continue to buy uranium assets and become a large company..assets in South Africa to take to production, produce ~4 million lbs..

DENISON MINES (TSE:DEN): just merged with TSE:IUC..must look at combined entity..both will be producing uranium..expectation 4-5 million lbs/year starting 2010..has definite upside

TOP PICK WESTERN PROSPECTOR (CVE:WNP): high risk in Mongolia..tax situation hopefully will be rectified..intrinsic value north of $10, lots of risk..do have assets..government asked for too much..think they will do the right thing down the road

URASIA ENERGY (CVE:UUU): exposure to Kazakhstan..lack of news and understanding make people worried..easier to buy other companies that people understand better

TOP PICK TOURNIGAN GOLD (CVE:TVC): have gold assets, Slovakia, hopefully spin out next year..John Embry of Sprott loves it..uranium asset 40 million lbs..doing pre-feasibility study..as a firm we like that company very much

ENERGY METALS CORPORATION (TSE:EMC): very smart management..got database and figured out where uranium was in US..ownership in lots of resources..not proven but potentially 200 million lbs uranium..now starting to work on 3 properties..will take a long time but this company down the road will produce uranium

TOP PICK UR-ENERGY (TSE:URE): will produce uranium expectation between 2008-2009..have 20 million proven lbs with 43-101..some people speculate that they could be bought out..SXR, Paladin, EMC maybe..