Death of the Uranium Bear

Uranium markets have turned bullish, the more than three-year downtrend has finally broken! As can be seen from the graph provided by www.infomine.com the uranium price went parabolic from September 2006 until July 2007 before declining and settling at a base price of $40/lb. We have been monitoring pricing levels closely, (hence our buy signal last month) and have patiently waited for a sustained breakout on the charts supported by fundamental catalysts (all of which have been seen over the past month). The three years of negative/flat action now looks to be broken and the bulls are off waving the entry flag.

We expect the price move may have been caused by a combination of factors including an article highlighting that Chinese companies have been stockpiling the yellow cake, the news out of the National Department and Reform Commission and the AREVA deal.

Combine the three factors mentioned above and the leaked word out of World Nuclear Association Symposium in London that uranium producers have quietly been purchasing physical uranium throughout the year and we have the catalyst for the resurrection of the uranium markets. . .If you subscribe to my view that uranium prices will retest the previous high ($138 at least), then all we are really seeing is some bargain-basement shopping as early bullish money takes advantage of depressed prices.

Excuse the basic lesson in uranium: Uranium is a key ingredient to the formation of nuclear power. The same story that has driven commodity markets for the past decade also applies to uranium—the emerging markets and the middle-class story. Just as the newly emerging middle class seeks milk, chocolate, more modern housing, they also seek air conditioning, fridges, iPhones chargers and many other devices, which require ELECTRICITY. Nuclear power is one of the cheapest forms of electricity and is actually one of the cleanest. Oh the irony for the greenies, the most effective means to reducing carbon emissions from power sources comes from what has always been regarded as toxic electricity.

Nuclear energy is comparable with wind, solar and hydro in carbon emission output and although not perfect is much safer than 1986 when the Chernobyl disaster struck.

Currently, nuclear reactors supply c.16% of the world's electricity.

In early November, news came from the National Department and Reform Commission that China has increased their target for nuclear power for 2020 to 112GW, this is up 60% over their previous guidance of 70GW. This increase is significant and if it comes to fruition will be a key catalyst for the re-emergence of the uranium and nuclear industry. This increase translates to China depending on c.7% of their 2020 electricity generation from nuclear sources—this will require a substantial accumulation of uranium. Currently the Western world accounts for the majority of nuclear reactors 264 of 431 worldwide (61%). There is an estimated additional 60 rectors globally under construction, 150 planned and 327 proposed.

This is a significant new demand in anybody's book. World demand today is about 75,000–80,000 tons of uranium per year. If new Chinese demand proves to be accurate, you can expect (estimate) 42, 1,000 MW stations. Each station requires a first fill of 500 tons uranium and c.200 tons per year thereafter. Therefore, it is possible reactors will need first fill total (500 tons x 42) 21,000 tons of uranium + (200 tons per year x 42) 8,400 tons per year thereafter—this is additional demand remember.

Some of the biggest mines in the world are lucky to produce 5,000 tons per year, so this is a material increase that will drive the price northward. The current Chinese uranium consumption is estimated around 1,700 tons per year. Recent articles have suggested that China will need to source over 8,500 tons (supports our number above) of uranium per year from other countries by 2020.

Other news suggests our Arab friends have been moving strongly back into the uranium market, Saudi Arabia and United Arab Emirates are already building nuclear reactors with Kuwait set to join the party next year. On November 4, AREVA announced that it signed a major long-term uranium contract with China Guangdong Nuclear Power Corporation (CGNPC). AREVA signed a long-term contract for the supply of 20,000 tons of uranium over a ten-year period. AREVA states the contract is worth around US$3.5 billion. This amounts to a purchase price of approximately US$67 per pound over the 10-year life of the contract. We do not see this a necessarily a good price for AREVA if our predictions are remotely close to the mark but it was still offered at a significant premium to the recent $40 floor and provides AREVA a strong platform to leverage additional funding requirements as they expand operations. We expect uranium to be in enormous demand over the coming decade and seeing many uranium companies double in price the past month shows some investors feel the same way. America is however not accumulating the yellow cake; they will simply have to purchase uranium at much higher prices (much like rare earths) in the future.

America was a founder of the nuclear scene and currently relies on nuclear power for more than 20% of their electricity. The Russians (who are the fourth biggest producers) are building nuclear reactors around the globe as quick as they can for willing buyers. The Russians have been winning contracts because they have been prepared to take the waste back (which has value) from the clients. The company Rosatom is estimated to be building 15 of the 60 reactors currently under construction in the world. A smart move from our Russian friends!

If our stock selection is correct, uranium stocks should move into a consolidation pattern before the next move up. Uranium remains an underappreciated and under-owned asset and there are not too many assets 58% cheaper than they were in 2007. Canada, Australia and Kazakhstan are the three main uranium-producing countries. In terms of dependence on foreign sources for energy, the U.S. must surely sleep easier with security of supply coming from Australia and Canada rather than the Middle East.

George Rolleston
Midas Letter