“Energy Stategist” Elliott Gue Takes the Long View on Uranium

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Elliott Gue, Editor of “The Energy Strategist,” talks with The Uranium Report (UR) about some of the biggest forces shaping the uranium market.

Elliott Gue, Editor of “The Energy Strategist,” talks with The Uranium Report (UR) about some of the biggest forces shaping the uranium market.

UR: You maintain that “the supply/demand balance for uranium is tighter than for just about any other major commodity and that “demand for uranium is only going to rise.” Could you elaborate?

EG: The world is consuming about 180-185 million pounds of uranium per year. Mine production globally is about 110 million pounds per year. You’re talking about a 60% deficit. Over the past few years that’s been filled by existing inventories of uranium in storage, also the de-enriched uranium in Russia from nuclear warheads.

Over the next several years a number of new nuclear plants are slated to start up. For two decades there were no licenses registered to build new nuclear power plants in the U.S. Now there are about 30. We currently have about 104 plants running in the U.S. France plans to go ahead with their advanced reactor. Finland is building a new reactor. Some countries, mainly Germany and the UK, that have been anti-nuclear, are softening those positions a lot. China plans to build 30 to 40 new nuclear reactors over next 30 years. Russia wants to build 40.

Demand for uranium is likely to tick higher each and every year by a little bit as these new plants come online. Producers will not only be trying to make up the 65 million pounds deficit that exists now but also to satisfy the additional demand.

UR: The slight fall off in the price of uranium in the past few weeks has set off speculation that the bull run is over. Does this downtick signal any big change?

EG: We’ve seen the spot uranium price pull back a tiny amount last week but for the first time in four years. So from November to July it went from $40 to $140—without even a weekly drop. A lot of people are making a big deal about it. But to me if oil prices went up every week for four years, it’s a sign that the market may have gotten ahead of itself in the short term.

Some of the big buyers in the spot market have sort of stepped away over the last couple of weeks. Probably because short-term they have had their fill. But I think they are still going to come back because of that global supply/demand balance and not a whole lot of production coming on in the next few years. Cameco has had to delay the Cigar Lake project. ERA had to delay one of their projects. Juniors are ramping up slower than expected. No one has really put together a new mining project in a long time (at least not many of them), so it takes awhile for these companies to gain the experience. It’s very difficult to forecast what your production from a particular mine will be over a very short timeframe. It is impossible to estimate how a particular mine will produce.

Most of the uranium mining and exploration companies have actually pulled back quite a bit in May and June. But if you look at the charts, it really isn’t that atypical. Pretty much every summer over the last three years we have seen these junior uranium companies pull back anywhere from 15% to 35%. We saw a very dramatic run from October to February to April this year. A lot of them tripled or more. Whenever you see a run like that over a very short period of time, you’re bound to see some profit taking. The coming excitement is going to be as this profit taking subsides and people begin to refocus again on the longer-term supply/demand balance. To me you are really setting up a pretty good buying opportunity again this summer for those juniors.

UR: How high do you see the price of uranium going?

EG: Right after the Cameco mine accident in early November I predicted prices would be over $100 by the end of the decade. That was when uranium was trading in the $40 range. A lot of people e-mailed me and said my forecast was too aggressive.

My target now is about $200 for between now and the end of the decade. Last week SXR Uranium One (Toronto: SXR) said that they see the uranium market remaining pretty much in deficit on the supply/demand balance through 2015. That’s a pretty bullish statement. I will be very interested to see what Cameco says in their conference call at the end of the month. That’s always an important one since sometimes this can give you a pretty good idea of how bullish they are on uranium prices. You could see a pullback short term but utlimately I expect to see $200 plus.

UR: How do think NYMEX will impact the uranium market and who are the most likely beneficiaries?

EG: Volumes being traded are still very low. My guess is that if this really takes off, and it will probably be a few years before we’ll know, NYMEX itself would benefit in the sense that they would see a lot more trading volume. NYMEX also brings a little better price transparency than we have seen in the past. We can look at the spot price but that is a very illiquid market, in that it makes up less than 10% of the volume of uranium traded annually. The numbers aren’t updated that frequently, it’s very difficult to know what the real spot price is. Certainly, as the volumes build, NYMEX will make it much more obvious what the actual supply/demand situation for uranium is and I think that likely is going to be better for the miners as well because it allows them to hedge their production a little bit better.

UR: Some analysts speculate that NYMEX could bring a stampede of Wall Street players into the uranium market pushing the prices to $500 a pound in the blink of an eye.

EG: We have seen a lot of funds go into the physical uranium market here over the last few years buying up some hedge funds and also some publicly traded vehicles like Uranium Participation Corporation in Canada and Nufcor ( a London-based nuclear fuel trading company). And we’ve seen a lot of hedge funds that have actually secured physical uranium which is stored in government approved warehouses. So they have entered the market through the spot market. But again, that’s still a pretty illiquid market. To the extent that NYMEX futures raises the profile of uranium as a commodity just like crude oil and natural gas, it is quite likely that you will see more major Wall Street firms get interested in the market and trade more aggressively. A lot of them are looking at it right now and waiting to see how the volumes build and how the contract trades. I do think the volumes will build over time.

UR: You advocate a “uranium field bet” approach toward investing in junior mining and exploration companies, that is, investing in five to 10 promising companies as opposed to one or two hot ones to spread the risk.

EG: In the mining industry so much can go wrong on these mines between the time that you site them and the time that they are ultimately approved and start producing. There is the potential for blow ups in individual companies. It just happens. Rather than putting all your eggs into one very promising story, it’s better to pick five or ten from the 300 plus or more uranium companies of size that are out there and spread the bet that way.

It’s difficult even with all the information on the drilling to know whether a particular company has great prospects or just average prospects. But it gives me a lot more confidence to see a companies like Cameco owning a big stake. The two kinds of companies I look for are either those companies that are very close to production or already producing. Or, those explorers that are owned in a large degree by one of the majors.

UR: How significant do you think Australia’s removal of the ban on uranium mining will be?

EG: Short term it’s a little less clear than a lot of people had hoped. The Labor Party hasn’t exactly mandated that the individual provincial governors allow mining; they just said they aren’t going to ban it at the national level. Some of the provincial governors appear to be teetering on the edge as though they might go in favor of uranium mining. Others have been pretty stridently opposed to it. The removal of the ban is clearly a movement in the right direction toward maybe allowing more of these projects.

UR: How do you factor in the political risk in your assessment of mining companies?

EG: Even for a developing country, Australia’s policy is pretty hard to get your arms around. Interestingly, several African countries have actually proved quite amenable to mining. There’s Namibia, one of the sixth biggest uranium producers in the world. There is also Gabon, South Africa, Niger and Malawi that have approved mining or exploratory work and are pretty reasonable on the tax front. You do have to take the political risk into account. Of the companies I really recommend, they are mainly in the U.S. and Canada and some have African exposure. They are primarily in countries that are pretty open to mining.

The Energy Strategist is a premier financial advisory exclusively dedicated to covering the complex energy markets. Elliott Gue is also the editor of two free e-newsletters The Energy Letter, which provides regular updates on energy market conditions, and Trader's Talk, which informs readers of investment opportunities using technical analysis.

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