Hedging Their Bets

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It’s still too early to tell exactly what impact the newly launched NYMEX uranium futures exchange will have on the industry. While the volume of trading on NYMEX is low, there’s a huge volume of speculation from industry observers and participants on what lies ahead.

It’s still too early to tell exactly what impact the newly launched NYMEX uranium futures exchange will have on the industry. While the volume of trading on NYMEX is low, there’s a huge volume of speculation from industry observers and participants on what lies ahead.

George Bell, President and CEO of UNOR, Inc., a uranium exploration and development company, is unequivocal in his belief that NYMEX will “increase prices at a faster rate. The future quoted price on the NYMEX for uranium gives the producers and buyers plus financiers a good indication of tomorrow’s value… Since the NYMEX will raise the uranium price, it will make it easier for our company to raise capital for exploration and development.”

Bell reflects one of the most widely held views of the new financial instrument. “It (NYMEX) is very positive, the uranium market has ‘come of age’ on pricing. Pricing is now out in the open.”

Doug Casey, author of Casey’s International Speculator, expressed enthusiasm for NYMEX while cautioning that “…it’s important to note that volume and open interest are still so trivial that that price indication is not a reliable measure of the future…the contract is still far too young for anybody except commercial players, as the volume is almost non-existent at only 84 contracts.”

According to a recent Mineweb article, Chief Executive Gordon Miller of Simmer and Jack Mines (Simmers) said the average uranium stock climbed by 20% since December and this compared modestly to the large increase in the uranium price over this period. Meanwhile, the uranium price climbed from $60/lb from December last year to $135/lb on Friday, June 15th. Gordon added that “it was still early days for the futures contracts that were trading thin volumes at this point.”

Bob Lillie, Director of Investor Relations, Cameco Corporation also considers trading volumes too light to reveal emerging patterns or trends. “We are watching the trading to see how it develops over time. The volume is obviously very low at this point but if it should develop into a more active market, it is possible we could use it as a risk mitigation tool in the future. In the meantime, we are just observing market activity and getting more familiar with how the market works.”

The current volume of activity is right in line with expectations according to Randy Warsager, Vice President of Marketing for NYMEX. Warsager says that NYMEX is engaged in an intensive effort to educate the market, which in turn should boost trading volume. In a recent interview with The Gold Report, he explained: “We thought it was a reasonably healthy, modest beginning. Right now we are in the thick of a very aggressive educational campaign aimed at those on the commercial side…We expect to see more commercial participation over the next six months to a year as the players on that side learn more and more about hedging.”

One of the big questions looming over NYMEX is whether or not producers or utilities will buy these contracts in order to hedge the price. E. Peter Farmer, Chief Executive Officer of Denison Mines Corp. and President of the Uranium Participation Corporation, speaking with The Gold Report pointed out that that story is yet to be told. “Remember, this is a pure derivative play. There is no uranium backing any of the contracts that are written. It is a pure bet on where the price is going to be at a given time...It’s basically a financial guy sitting at a table deciding what his bets are going to be and whether another financial guy wants to buy that contract or not.”

Even if it’s too early to be sure how NYMEX will affect pricing, Peter Grandich, author of The Grandich Letter, sees nothing keeping uranium from hitting $200/lb. As recently noted in the Financial Trading Desk Blog, “Mr. Grandich expected that a hedge fund or Uranium Participation Corp., which buys physical uranium, might have taken some profits by now and actually sold some uranium. But they haven’t. ‘By them not doing that yet,’ said Grandich, ‘it convinces me that the US$200 target is more reasonable than we could even have imagined just six months ago,’ adding that some of these players got into the uranium play early at US$30 or US$40 or less. ‘It’s very hard to pass up on 300% and 400% gains, and they are doing that at the moment.’”

Macquarie Bank Ltd., Australia's biggest securities firm sees eye to eye with Grandich. “Uranium spot prices may reach $200 a pound within the next two years, buoyed by a shortfall in supply and increasing investment in the nuclear fuel by speculators. Bloomberg reports that Macquarie's price forecast is less bullish than that of Neal Froneman, chief executive officer of Toronto-based SXR Uranium One, who said the spot price may more than double to $250 a pound next year as demand outpaces production.

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