Who's Got the Goods in the Uranium Market?
Source: The Uranium Report (8/15/07)
A pioneer in global investing, with a reputation for discovering big winners, Adrian Day, President of Adrian Day Asset Management, which manages portfolios in resource and global equities, and the editor of Adrian Day's Global Analyst, pulls no punches as he tells how to mine for value in the uranium sector.
UR: You've been quoted as saying that "this is a great time to be building long-term positions in key uranium investments." Some would argue that the recent price corrections indicate a high risk of another downturn.
DAY: It's a good time for a couple of reasons. Obviously no one's getting in on the ground floor now. Anybody who does not already have uranium exposure knows that. But the long-term outlook is very, very strong in my view. We've had a bit of a pullback in most of the stocks, particularly the juniors, and in some of them we've had significant pullbacks. For people who are underinvested, I'm not sure they are going to get a better time to invest than now.
UR: As someone who has a track record for picking superstars in a number of different sectors, what investment strategy do you think works best in this market?
DAY: My outlook tends to be as a long-term value investor. I certainly take my hat off to people who have bought a lot earlier than this with a much more diversified approach. My sense is that, going forward, one wants to be rather more selective in what one buys. My style is to be a lot more selective and try to pick the very best even if it's only two or three stocks. We have already had that first major move in the sector when everything went up whether the companies were good or bad. Now, I have no doubt that if we see uranium reach $200 or $250, as I suspect we will in the not too distant future, virtually everything that has anything to do with uranium, even if it's only in the company's name, will go up. By focusing on only a handful of companies and getting to know them, however, one is in a much better position to know how to deal with those stocks if things go wrong. If the price shoots up a lot—does it mean something good is happening or does it mean I should be taking my profits. If you are taking the basket approach, you tend not to know so much about individual stocks and you are really at the mercy of the broader market.
UR: Do you have any favorites among the junior explorers?
DAY: We are looking at three types of stocks right now. The first ones are the big boys. If uranium goes to $200 or $250, it's pretty difficult to imagine that stocks like the Cameco Corporation (CCO) won't do well. Among the juniors, I am looking for two types of stocks. First, I look at those that represent good value to some degree or another. I also look at those that have upcoming drill programs that are not yet fully reflected in the stock price. Western Uranium Corporation (WUC.V) does have good value right now—$70 million market cap Canadian, trading at around $2.00 per share with $50 million in cash. So you are not paying an awful lot for some reasonably attractive properties and one or two high potential properties. Cameco has taken a 10% stake in this company. Western Uranium is a good company with competent people and a strong balance sheet—and it's not really been discovered yet.
My style is to really look at companies as opposed to looking at stocks. I think there are some companies that don't really have a lot of experience in uranium and really don't have a lot of knowledge or high odds of finding anything. Now we all know that lightening can strike anywhere.
UR: You say you look for value companies that will perform over the long term—how patient are you?
Day: When I say long term, I am looking at two, three, or four years. Something that you could hold so as long as the uranium price is still essentially going up. But let's take Western Uranium. They are about to start a new drill program on their primary property in Nevada in September. You could easily see a good move in the next six months.
UR: Given the boom in the price of uranium and the volatility associated with such a rapid ascent, do you expect the uranium price to remain solid over the next five years?
Day: Oh yes. If you look at the market now—at $135 on the spot [as of 8/15, it's $110] — and then look at the long-term market, there's a huge discrepancy. There's a shortage of product for immediate delivery so that's bullish, however, once the end users have enough stockpile, they are going to back away from chasing prices upwards. Some of the long-term contracts out to 2015 are down to under $40. Of course, those contracts were signed before the price shot up. But even if you look out to 2010, 2011, we are in the $70 to $80 range. If I were an end user, I can understand saying, two months ago, three months, four months ago: "Man, the price keeps going up, I better get some stockpile." But once end users have a little bit of supply, they will back off chasing the price upwards. So it wouldn't surprise me at all if the spot market came off over the next couple of months.
UR: If the prices do come down, just how far down do you think they might drop?
Day: I don't think it's going to be much—maybe another $20 or $30, and that isn't a lot when you consider that the price was $95 just a few months ago. If I'm a utility and I've got a bit of a stockpile, I'm not going to say to myself "Wow, I'd better take advantage of this one dollar drop in price before it zooms back." I'm going to hold off until I see whether the price comes back.
UR: How do you think NYMEX will influence this market? Many observers believe that it's too early to project the impact NYMEX will have since it just launched in early May.
DAY: I think you will get a fair degree of activity on that market. Uranium is still relatively unknown among the broader investing public, and so most of the people investing in it seem to be speculator types who are very comfortable with stocks though perhaps less comfortable with futures contracts. As the uranium story spreads, it will reach more and more investors who are more comfortable with futures. The futures market is the obvious the way to go for certain investors because uranium is not a product most people want to buy and take delivery of. I think NYMEX is going to be as big a factor in the uranium market over the next year or two as the silver ETF was for silver.
UR: Do you think it is possible, as some are speculating, that when Wall Street enters the market it could quickly drive the price up over $500?
DAY: That may well happen but we are not there yet. Futures are the best vehicle for most uranium investors. I think it's going to push the price up, but it's difficult to say by how much.
UR: Given the various players in the uranium market, who do you think stands to gain the most from NYMEX?
DAY: I would say it would be investors. But it will also enable some of the hedge funds that did buy the product to hedge their exposure on spikes rather than selling what they have. That could stabilize the price to some extent.
UR: Do you see any potential threat to nuclear as the preferred energy source that might change the dynamics of the uranium market?
Day: The biggest threat I can see would be another nuclear accident like Three Mile Island or Chernobyl. It would get the public very skittish and could put a brake on things. The recent accident in Japan is one factor that has pushed down the price this summer. People everywhere of all types are coming around to the view that nuclear energy is the way to go and that includes conservatives, liberals, and greens. You get another Three Mile Island and the typical Congressman that doesn't know much about nuclear power is suddenly going to say he doesn't like it. And, of course, nobody is going to want it in their backyard.
UR: What about an alternative energy source. Do you think it's possible that something might soon develop that could replace nuclear power?
Day: No. Over 50 years perhaps — possibly over the next 20 years. But I certainly don't see solutions of any significance in wind, ethanol, or solar. These are all highly marginal in the terms of the amounts of power they produce and they all have problems.
UR: What will the ramifications of Australia's release of the ban on uranium mining be?
Day: We all know that Australia has the goods. When and if Western Australia lifts the ban, that will be even more significant. There are some real projects there. But it will not fundamentally change the uranium story. If all states were to remove the ban tomorrow and allow uranium exploration and production with no restrictions, there would be a psychological impact on the market I'm sure, more so on the stocks than on the price of uranium.
UR: Do you have any advice for investors approaching this market?
DAY: I am not an expert on uranium. I don't pretend to be. I am a generalist. You have to take a position because it is a real story but you have to be a little bit careful about chasing prices too much, particularly with companies that don't necessarily have the goods. Something like one tenth of the companies account for over half of the drilling. My point is that a lot of companies really don't have the goods.
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