Uranium, Beryllium and Germanium: James Passin on What Investors Need to Know


James Passin of Firebird Management LLC, which manages $3.5 billion in eight funds, gives us his thoughts on where he thinks the opportunities are now in nuclear power plant construction and the nuclear fuel cycle. "It's as exciting to me now as the uranium exploration and production story was five years ago," he says. Passin recognized the powerful drivers behind the nuclear renaissance early on, and has made considerable investments in the areas of uranium, fluorine, and germanium.

The Gold Report sat down recently with James Passin of Firebird Management LLC. Firebird manages $3.5 billion in eight funds dedicated to equity investment in emerging markets, with an emphasis on the former Soviet Union and emerging Eastern Europe, and exotic sectors worldwide. James, who joined Firebird in 1999, is the co-founder and portfolio manager of Firebird Global Master Fund, Ltd. and Firebird Global Master Fund II, Ltd., and has made considerable investments in the areas of uranium, fluorine, and germanium.

UR: Can you give us some background on when and why you became interested in uranium as an investment?

PASSIN: I started investing in uranium stocks in 2001 when uranium was trading at a record low of $7 a pound. I made it the core focus of my hedge fund, and subsequently invested in physical uranium in 2005, paying approximately $21 a pound. These investments were based on my very clear understanding of the powerful supply-and-demand fundamentals that would support a higher uranium price, and my absolute belief in the inevitability of the nuclear renaissance. I was fortunate enough to be invested in the right stocks and the right area. These stocks proved to be very successful.

UR: Can you talk a bit more about those "powerful supply-and-demand fundamentals"? What do you see as the primary drivers for uranium?

PASSIN: The drivers of the nuclear renaissance are very clear. Society has an unending need for energy, and this need is not going to diminish even if there is a temporary setback in the Chinese stock market. China will continue to lead the world in building new nuclear power-generating capacity. It’s hard to see in the short term the level of tension in Iran and throughout the Middle East diminishing, which will put a geopolitical bid underneath the oil price and make alternative energy attractive.

There seems finally to be a growing consensus to reduce carbon emissions in order to combat global warming, and the only way to do that economically is to increase nuclear power’s share of electricity generation — and that means building new nuclear reactors. There are 350 nuclear in various stages of planning and permitting. The first licenses have been submitted in the United States. There are over 25 nuclear power plants that are being planned in the U.S., and the total number of nuclear power reactors producing electricity globally is about 450. The significance for the uranium price is pretty clear because there is going to have to be more fuel in order to supply these new nuclear reactors.

UR: The drivers are compelling, and the price has skyrocketed. Are you still as heavily invested?

PASSIN: I did monetize many of my uranium positions during what I would characterize as the uranium bubble. I sold my physical uranium at $135 per pound, which was one of the highest recorded prices in the history of uranium trading.

UR: So you got out?

PASSIN: I took a lot of money off the table. What I recognized during the final phase of the uranium bubble was that hedge funds and other speculators were responsible for most of the trading. I didn’t think it was a sustainable price level. Uranium subsequently stabilized around $80. Given the quantity of stock that was issued through secondary offerings, IPOs, and reverse takeovers from investment bankers, promoters, and financiers, it seems unlikely that the uranium story by itself is going to deliver the kind of returns that a lot of momentum investors were getting used to.

While the nuclear story is very real, the uranium story itself is a little tired. Now, with that said, I still own a few uranium stocks, a few uranium juniors that I consider high quality.

UR: Do you want to give us a few names of uranium stocks you still own?

PASSIN: One uranium stock that I still own is UEX Corporation (UEX:TO). What I like about it is that it’s well funded. The largest shareholder is Cameco Corp. (CCO:TSX), the world’s largest uranium producer. UEX, through its joint venture with AREVA (Paris:CEI.PA), has made a spectacular discovery on the Shea Creek exploration project. The scope of the project, based on the width and the extent of the mineralization, suggests to me that Shea Creek has the potential to a world-class uranium mine.

UR: What opportunities do you see in the industry these days?

PASSIN: I am finding a lot of opportunities in those companies involved in nuclear power plant construction and the nuclear fuel cycle. It's as exciting to me now as the uranium exploration and production story was five years ago.

The materials needed to build these nuclear reactors are going to be very important, and one of the most important materials is beryllium. Beryllium has a very high melting point, is an efficient heat conductor, and also does not generally absorb radiation. It's lightweight, strong, and resistant to corrosion. And because of these unique physical properties, it is used in certain critical components inside nuclear reactors.

Beryllium is also used in other military, industrial, telecommunications, and electronics applications, and is a critical material used in all spacecraft and satellites.

Space is an area that I have been spending a lot of time investigating. Last year, China shot down one of its old satellites with a missile — an interesting test of China’s military capabilities. The militarization of space is something that is happening very rapidly. At the same time, we are seeing the commercialization of space travel. It’s almost economic for wealthy civilians to go up into space. The key to spacecraft is beryllium.

Beryllium is fairly rare in terms of the raw material, but more importantly it’s toxic to turn beryllium into a commercial product. Beryllium lung disease is a well-documented health problem that afflicts certain people who have worked in beryllium facilities.

There is very limited capacity for beryllium processing globally. The world has lived off of secondary stockpiles that were built by the United States and the Soviet Union during the Cold War, because beryllium is also needed to build nuclear weapons.

Without investing in any sort of exploration, mining, or processing, the world has been able to continue to consume beryllium from Cold War stockpiles. Since the U.S. Defense Department has sold off the entire stockpile, I don’t know where the beryllium is going to come from to meet the needs of the nuclear renaissance, let alone other industrial applications.

This is creating a really interesting situation for beryllium. There is one company that has emerged as a de facto beryllium monopoly, which is Brush Engineered Materials (BW:NYSE). Brush controls 60% of the global production of beryllium from mines, and they control a lot of the processing.

Another interesting beryllium stock is International Beryllium Corporation (TSX.V:IB) (IBC). IBC is independently building up a vertically integrated beryllium business. I am very excited by the exploration team and about the prospects for the company. IBC has acquired an exploration project adjacent to the world’s largest beryllium mine. I think that IBC stands to play a unique role in consolidating the beryllium industry.

I should also mention Vangold Resources (TSX.V:VAN), a development-stage mineral exploration and oil and gas production company, which has a confusing number of unrelated projects, including a strategic 26 percent stake in International Beryllium Corp. I think the value of the stake is going to be worth multiples of Vangold’s current market capitalization.

The value of Vangold’s oil exploration portfolio is hidden within the company and probably masked by the concealing number of investments Vangold has made in a number of companies. Vangold is a resource incubator that has successfully incubated and spun out a number of resource companies, such as IBC.

UR: Any other companies in this arena that interest you?

PASSIN: There is a company with a long history, based in Idaho Falls (the heart of nuclear fuel research in the U.S.), that controls the intellectual property around a technology called the Fluorine Extraction Process. This company, International Isotopes (OTC:INIS), has successfully tested the technology at its plant, which I have visited. It has begun to commercialize the technology.

International Isotopes takes depleted uranium and converts it into a high value fluorine-based industrial gas. The remaining depleted uranium dioxide can be disposed of or even reused in MOX nuclear reactors, completely eliminating the environmental problem of depleted uranium.

The economics are very compelling because the fluorine industrial gasses are valuable. The only other way that you can produce industrial fluorine gasses is by mining fluorspar and converting it to hydrochloric acid. China has just imposed a tax and quota system on fluorspar, causing a fluorspar shortage; fluorspar prices are starting to rise.

The primary use of fluorine-based gasses is to create certain types of coolants, which are used in air conditioners and refrigerators. And everyone in China wants air conditioning and refrigeration. There is a surging demand for coolants, and therefore a surging demand for fluorine gasses. All of this setting up for a very interesting situation for International Isotopes, where they can take depleted uranium, which nobody wants, and take it and convert it into a high value industrial gas. The fluorine extraction process is the key to winning broad public acceptance for large-scale investment in the nuclear fuel cycle.

In terms of valuation, the only comparable company is Silex (ASX:SLX), which has a market cap of about three times higher than International Isotopes. There is tremendous upside in terms of valuation once the public begins to understand the significance of International Isotope’s business model.

UR: Any other metals you'd like to talk about?

PASSIN: Germanium has unique physical properties and is used in fiber-optics and night vision equipment. In a profound way, germanium is tied into U.S. military dominance. It is also used in LED lighting; LED lighting will benefit from the new U.S. bill phasing out the light bulb.

Germanium is usually produced as a byproduct of zinc; the principal source of germanium is Chinese zinc smelters. But China has just imposed a tax and quota system on a number of minerals and metals, including germanium. A trader was just quoted as saying that there really is no germanium in the spot market at any price.

 The Defense Department, oddly enough, is one of the world’s principal suppliers of germanium. For the same inexplicable, and indefensible, reason that the U. S. military sold the beryllium stockpile, the U.S. military is selling the germanium stockpile. The Pentagon is currently reevaluating its metal stockpile strategy, which could eliminate or reverse Defense Department sales.

 There’s one company that has represents an interesting play on germanium —  War Eagle Mining (TSX.V:WAR). It is developing the Tres Marias Zinc and Germanium Mine in Chihuahua, Mexico. The management is focused on tying up germanium when nobody is really thinking about the metal’s importance.

UR: James, thanks so much for sharing all this with us. We appreciate your time. (1/29/08)

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