Red-Hot Resources

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Thursday, June 14, 2007

So What Continues to Weigh on Uranium Prices?

We've seen oil prices head higher, and gold appears poised to rebound from its long-term uptrend (see my post yesterday about that). Gold and oil stocks are now catching the wave. But uranium stocks, while generally rallying today, are still deep in the dumps.

What's weighing on them? Well, it might be news like the item I found on Bloomberg News (UPDATE: Story reprinted HERE). The article quotes Energy Resources of Australia (ERA), which provides more than a 10th of the world's mined uranium, as saying that it expects to receive a LOWER average price for the metal in the first half of 2007 than in 2006, even as spot prices rise to $135 or $138 per pound, depending on your source.

Australia-based ERA received an average of $15.57 a pound for uranium in the first half of 2006. That's less than the $17 it received on average for all of 2005, according to Bloomberg. Similarly, the average price this half of 2007 will be lower than the $18.36 received for the whole of 2006.

Now, it's true that contract prices, which are set by deals with utilities, lag spot prices, which are set by deals with speculators, by quite a bit. I've been hearing contract prices of between $60 and $95 per pound. $95 is the price quoted by Trade Tech in its June 1 Nuclear Market Review.

Still, this news from ERA is quit a shocker. The Bloomberg story references a news release that ERA put out yesterday. That press release is in PDF format on the ERA website. You can read it for yourself.

See page 9 for the pricing info.

However, Energy Resources says that the timing of sales this year 'will be heavily weighted in the second half.' The company's so-called legacy contracts, which were settled at lower prices, 'are being steadily replaced by higher-performing contracts.'

So if old contracts are being replaced by higher-priced contracts, tell me, why are prices going down again?

It's curiouser and curiouser with ERA. Two things: I'm glad my Red-Hot Asian Tigers subs took big gains on this stock when we did. Look at it now ...

Red-Hot Asian Tigers subs, aren't you glad we bagged gains on this one on in March? Whew!

Secondly, this lower pricing may be just a problem for ERA. I haven't heard complaints of contract price weakness from other miners. It is true that ERA supplies 10% of the world's uranium. But it's also experienced a major setback this year with the flooding of its Ranger Mine. Is its lower pricing partly to keep customers happy?
And another thing: SXR's Neal Froneman recently told reporters that his company is signing contract prices at $60 per pound. He also expects demand for nuclear fuel will continue to outstrip demand for the next eight years.

Meanwhile, Steve Kidd, Director of Research for the World Nuclear Association recently told
Resource Investor that "There will probably be a period from perhaps 2009 to 2015 when the market has sound supply. Thereafter with rising demand but diminishing secondary supplies it will become more challenging for the industry to meet demand."

To me it the future price of uranium sounds like anyone's guess. We do know this: There is a supply/demand squeeze in uranium right now, and it should continue for the short term. This SHOULD drive prices higher.

Which brings me to my next point ...

How High Can Prices Go?

My own personal target, set when uranium was at $120 per pound, was $298 in 12 to 18 months. That's based on the supply-demand squeeze that is expected by many analysts through 2009 (as you can see from Kidd and Froneman, opinions vary). So how much of a price rise can the industry absorb. Previously, I'd heard the cost of uranium oxide accounts for only 5% of the cost of electricity from a nuclear power plant. However, it turns out that's a myth.

According to the Nuclear Energy Institute, from mining the raw ore to converting it into pellets packed in fuel assemblies, uranium represents 18% of a typical nuclear plant's operating costs.

Nuclear power plant operators say it's even higher than that --
Dr. Haksoo Kim, Acting Director of Fuel Supply for Exelon Corp., says the cost of nuclear fuel is between 20% and 25% of the electricity cost. Then again, you'd expect utilities to put out a worst-case scenario.

Why? Because utilities are having a stare-down with uranium suppliers. As I told you in the
June 6 Money and Markets, In its annual uranium marketing report, the U.S. Energy Information Administration determined a total of 276 million pounds of unfilled uranium contracts exist for the period from now through 2016.

In other words, the utilities are banking that prices will go lower. They say they just can't afford higher costs.

Maybe so. After all, US utilities have to figure in fat profit margins to their bottom lines. So maybe we won't see a US nuclear Renaissance if prices continue to soar.

And that's a pity. Because you know who may not be deterred by higher prices? China, Russia, India, Japan, and South Korea -- in other words, the countries where nuclear power plant construction is already shifting into higher gear.

And remember, coal amounts to 78% of the cost of operating a coal-fired plant, and natural gas amounts to 94% of operating a gas-fired one, according to 2005 data. I don't know if you've noticed, but coal and natural gas prices are both heading higher.

I believe the world is on the cusp of not only peak oil, but also peak natural gas. In the context of a fossil fuel peak, $298 uranium becomes quite achievable. It just might take a little longer.

But maybe not too much longer. Take a look at this chart of uranium prices I snagged from the ERA PDF linked higher in this post ...

That looks like a rocket launch to me. Are we going to see prices pull back eventually? I should think so ... maybe now is the time. Maybe speculators will be spooked by the news out of ERA and sell some of that stuff they've been hoarding for years. Rising interest rates could have a hand in that, too. If you borrowed money at an adjustable rate to buy uranium, and interest rates rise, I think you would sell some uranium to cover your debts.
We'll have to see how that plays out. I think it would be the buying opportunity of a lifetime, if it hasn't already been priced in to uranium stocks.

Meanwhile, my subscribers keep bagging uranium gains. Red-Hot Canadian Small Caps subs recently bagged gains on Energy Metals (good timing on that one, too) and now we find out that Areva is in talks to take over UraMin! Give me some more of that luck!

Keep your powder dry and wait for my signal. It could be a wild ride.


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