Sunday, October 15, 2006

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.


Blogger John said...

He's been singing the same tune for a couple of years now. When he turns bullish I will know it is the top. Also he isn't too bearish on uranium as he was on RobTv last week recommending Altius Minerals, who are deeply involved in the CMB in Labrador.

1:30 PM  
Blogger Spelunca said...

i believe he said on RoBTV that he won't invest because he can't see where the price of uranium will go..not necessarily bearish, i agree, but cause for some thought

1:55 PM  

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