Energy Strategist Elliott Gue on Uranium
Source: The Gold Report (1/3/07)
The Gold Report caught up with Elliott Gue, Editor of The Energy Strategist, after a recent conference. Here Elliott shares his thoughts with us about uranium, which has skyrocketed in the past few months.
TGR: In your newsletter you said "2008 is the year the dam will break and up until then we have enough supplies of uranium." Tell me what that's all about.
GUE: It’s actually been a year that some of the producers, particularly Cameco (CCO:TSX ), have been saying that after 2008 a lot of the utilities haven’t contracted for supplies. Up until that point, they still have contracts they had signed a few years back, mainly from the late 90s, at much lower prices. And then after 2008 they don’t really have any contracted supply, and their inventories are already running a little bit low. Actually 2008 is going to prove even more interesting year than we thought because Cameco’s Cigar Lake mine flooded.
TGR: So the flooding of Cigar Lake is going have a big impact?
GUE: It’s huge. And it’s just going to accelerate because a lot of the utilities contracted for production from Cigar Lake. We know now that at the very least that is going to be delayed to sometime in the middle of 2009. Cameco, I believe, is due out in mid-February with an additional statement on that. It could well be a lot longer than that – it will be at least a year. You never know with the mining business how long it’s going to be to clean up something like that. If it turns out to be two years or three years, you could have an even bigger problem.
TGR: It was October 23rd when the Cigar Lake flooding was announced, and in your earlier writings you had brought up the possibility that something like this could happen. And now that it has happened it’s made the price of uranium go sky high.
GUE: Definitely. That has been the number-one driver since this announcement was made. They actually had a problem at that same mine maybe about eight or nine months ago when they had some flooding; it was not as major or widespread, but that caused a three- to six-month delay. And this additional year [delay] was on top of that. And so it has been an ongoing issue at all of these underground mines like that, where there are a lot of moving parts and a lot of things can go wrong.
That’s really exacerbating what was already a problem. If you look at the amount of production that was going to come out of that mine eventually when it peaked out, say two to three years after it started producing, that was going to account for something like 10% of global production, which is roughly the same in importance as Saudi Arabia is to the oil market. I think that’s just huge. Think what would happen if Saudi Arabia went down for just a week or two – it would be very, very difficult. The uranium market is a little different because a lot of it is under long-term contracts, and it’s probably not as visible in terms of daily supply and demand compared to oil or gas, but it has a similar effect. Basically there’s not enough—even the utilities who thought they had contracted enough to supply 2008 or 2009, are going to find that Cameco won’t just be able to deliver that supply until a year or two or even longer after they thought they could. And it may well be that Cigar Lake isn’t the only problematic mine out there.
TGR: You think this could be a problem with other mines?
GUE: Sure, this could happen at other places, too. I wouldn’t be surprised to see it either. But I do think that one effect that this has is that it makes the near-producers a lot more valuable. A company that’s very close to production could potentially ramp up production a little bit faster and bring up a little bit more marginal supply on line before 2009 and fill in some of the gaps left by Cigar Lake. I think that makes them a whole lot more valuable. Paladin (PDN), for example, has a mine in Africa that will be coming on line this year and should have even more production over the next few years or so. I really don’t see how the smaller companies are going to fill in all the gaps, but at least some of the gaps left by Cigar Lake could be filled in by some of these companies.
TGR: Can you talk about more of these smaller companies?
GUE: There are several good exploratory companies out there. Actually you will find that Cameco, COGEMA, or one of the big producers somewhere in the world will have a stake in these small explorers, which is a nice thing to see. Because when a big company like Cameco owns a stake in an exploration firm they have some confidence in it.
TGR: Like UNOR (UNI:TSX.V), formerly Hornby Bay, which Cameco has taken a stake in. That's on one of your recommended lists, correct?
GUE: Yes, I picked up on it by listening to the Cameco conference calls. They were talking about buying more of a stake in it. They know that area very well from an exploration standpoint. And Cameco has done this with several other companies as well; they did it with a company called UEX (UEX:TSX). They bought a sizable stake in the company and are sort of joint venturing or partnering with them for any uranium they end up ultimately producing. And for me, when you have got the biggest dedicated uranium company in the world with the smartest, and the highest paid engineers buying a stake in a small company like that, it’s at least a vote of confidence. They know the geology where they operate very, very well.
The way I played it in my newsletter is that I have what I call a "uranium field bet, where I took six, seven or eight companies that I like, and I told people that you don't have to go out and back up the truck and buy a major position in any of them. If you have even a small stake in some of these things. . .I am not looking for UNOR to go to $1; I am looking for it to go to $10. That’s an example of a stock that could go up 10 or 20 times, just as UEX did, if they’re ever able to find anything or get some positive drilling results, which gets people interested. Holding them in a basket—where you own a number of these stocks—is really the best way. You never know which mining firms are going to work out. It’s always a high-risk situation when you’re talking about exploration companies like this.
TGR: Of course.
GUE: But if you own ten of them, and if you buy them for a logical reason, you could have one or two really big winners, 10 or 20 times winners, and of course, you might have a few losers. But I certainly think that again, the key thing for me is Cameco’s stake in that company.
TGR: Can you talk about any other juniors that are particularly well-positioned?
GUE: I tell people to really concentrate more on those juniors and companies such as Exelon (NYSE:EXC) and Electricite de France (Paris: EDF)—those are the most conservative way to play it; those are basically utilities that have a lot of nuclear stake. But other explorers such as Pitchstone Exploration (PXP:TSX.V) and UNOR and UEX—those would be my favorite explorers. I really chose them for one of two reasons—either a company like Cameco had a large stake or they’re ones that are very close to production like Paladin. And the old Southern Cross, which is now called SXR Uranium One (SXR:TSX) —that’s another one that is quite close to production.
And the final sort of play that I would mention is the ability to own physical uranium by purchasing Uranium Participation Corporation (Toronto:U). As you said, you can’t just buy bars of it, and tuck it under your bed or in a safe deposit box. So, that company actually buys and holds physical quantities of uranium. I think they have upwards of 4 million pounds now, which is obviously a lot. So as that becomes more valuable, that stock tends to increase in price.
The only problem with it is, of course, is the price of the stock is capitalized a lot higher than the price of the uranium they own. I’m talking as much as a 20% premium, but you have to consider that is the only way right now to buy physical uranium, so it does have a uniqueness premium to it. Nufcor Uranium Plc, listed in London a couple of months ago, does the same exact thing.
TGR: Any more comments on where you think the big excitement is in this sector right now? The Cigar Lake situation seems to be the biggest development, and the juniors near production getting the benefit of that seems to be where a lot of the movement is.
GUE: I think that’s exactly the right take on it. I think that prior to this whole thing with Cigar Lake, a lot of people said, “I like the uranium story; I think it’s compelling; I like the nuclear power idea.” And then, what would they then go out and buy? Well, they would go out and buy one of two things, at least the people I have spoken to, anyway. They would go and buy Cameco because it’s big and it trades on the New York Stock Exchange. Or they would buy maybe BHP or one of those companies in Australia that sort of does it as part of their broader business of metal, metal mining. That would be one of the two ways they would go: either buy BHP Billiton (BHP:NYSE), which is not a pure play, or buy Cameco.
But with Cameco’s problem, people are saying, “Okay, well, that not only exposed the problem at Cigar Lake, but it also exposed more widely to the public their problem with these legacy contracts, which they signed four to five years ago, and the fact that in a $60 market, or $63 market, they’re still earning $21, $23 on a lot of these contracts on an average.
TGR: And these contracts go out how much longer?
GUE: That’s kind of unclear. The way management describes it they have had a long-term policy, which was born in that era of really falling uranium prices, where they would contract about half of their production, and the way they would do it is they would roll contracts over time. So, they would sign a few contracts in one year and in the next year they would sign a few more, so there’s going to be a gradual process when these contracts sort of roll off. I know it will probably take about five years for them to start clearing out, but the problem is that the contracts they signed two years ago were in the upper $20s, and would have been considered a premium contract at the time. That’s now less than half the market, so even contracts that are two years old that maybe lasted for five to seven years; those are still going to be well under the marketplace unless the price starts to drop, which I just don’t see happening. So, it’s going to take a long time for some of these contracts to roll off over time.
The other thing that bothered me in listening to their last couple of calls is that the utilities are requesting longer-term contracts. Now, they want to go out and sign a 10, 15 or 20-year contract for supply. I don’t think that they have done a lot of that yet. Typically when they sign these long-term contracts because they’re the biggest producer up there, they were able to get a price that is a premium to the spot price. And I think what’s happening is that these utilities are offering them levels of premiums that are much, much larger, to try and induce them to sign a 10- to 15-year supply contract. And so the worry is if they sign something like that and uranium prices do go to $110, then they’re left selling uranium at $50 or $60.
And it just seems to me that is one problem with Cameco, whereas the smaller companies that are just coming out; oftentimes, they’ve only contracted a portion of their production, which means maybe they’re going to sell some of it on the spot or they’re going to use short-term contracts. And I think they will end up getting a realized price much closer to the current price. So, I think that the Cigar Lake flood has brought all these problems with Cameco much more into focus.
The other interesting trend I notice was from late November is that one of the companies to recommend is a company called EMC Energy Metals (EMU:NYSE). They just listed on the New York Stock Exchange under the symbol EMU. They are a junior as well, fairly close to production. That's another thing to bring into the curve where more U.S. investors can get involved; that’s going to help out a lot of these stocks.
TGR: The fact that they listed on the New York.
GUE: Right. Most of my subscribers I have trained pretty well, but sometimes they have to go to Canada to get the best deal, but to the wider public, oftentimes I’ve found that they just don’t want to hear about it unless they can buy it easily in the U.S. One of the only ones that traded in the U.S. before that I have also recommended a few times is a Bulletin Board stock—Uranium Resources (URRE). Since it's a bulletin board stock, and that scares a lot of people. They’re actually a producer, out of the Southwest—Texas and New Mexico, not particularly low cost producer. I don’t know how they’ve managed to survive all these years when uranium prices were so depressed. But somehow they’ve managed it; the stock has been very, very volatile. They had problems with one of their mines; they did a reverse split earlier this year. So, there have been some issues with them, but the fact is they do produce and deliver uranium in a market that is very attractive. So ultimately I think if they’re able to go through with some of the expansion projects that they’ve outlined, there is a potential for them to increase their production over the next few years even higher. It’s a domestic source of uranium, which has some benefits. So I think that’s another interesting, if high risk, play.
TGR: Right. I think people would go into this knowing that there’s a certain risk element to show in the basket and so spread the risk.
GUE: Exactly. I would put companies such as Paladin and SXR as the least risky of the juniors because they’re more established, and I would put companies like UNOR and Pitchstone and other companies that are more exploration oriented at the riskier edge of it, but basically, with any small mining company, not much has to go wrong before you have a problem.
TGR: Yes, the repercussions can be severe.
GUE: And with that you get a lot higher potential.
TGR: Hence the risk/reward dilemma. Thank you Elliott, for your time.