Today’s teaser ad comes in from Nathan Slaughter, who’s trying to entice us to subscribe to his Scarcity & Real Wealth newsletter, a new offering from the StreetAuthority folks that’s focused, as you can probably guess, on investing in mining, energy and commodities.
And though the ad has been running for about two weeks as best I can tell, they started sending it out again this morning with this little intro from the publisher:
” As we wish Japan the best and pray that it avoids the worst with its terrifying nuclear situation…
“… we’ve got another serious nuclear incident headed our way that nobody is talking about.
“This one is coming out of Russia and it’s set to affect 31 million Americans.”
The ad itself hasn’t changed to reflect the abruptly changed (at least temporarily) world of nuclear energy, but since they’re still sending it out today and still pushing their investment theme, I guess we can assume that Slaughter still likes the picks he teased — which would mean, as we’ll see in a minute, that he thinks the uranium market is not going to fall off a cliff. Or, depending on what you call a cliff, that it won’t fall off another cliff.
And if that’s so, then perhaps the big price cut that all uranium and nuclear stocks got following news of the crisis in Japan is an overreaction, and maybe a big buying opportunity. I can’t tell you what will happen to global nuclear energy plans, or even what will happen in Japan this afternoon, though I can keep my fingers crossed (tough when typing, let me tell you) and identify the investment that they’re teasing in this ad.
The basic premise of the ad is that uranium demand has long outpaced mine supply, and that the source that has made up the difference and kept uranium prices artificially low for a long time — decommissioned Soviet warheads — is going to disappear with the expiration of the 20-year US/Russian agreement (commonly called Megatons to Megawatts or HEU-LEU, converting High-Enriched Uranium for weapons to Low-Enriched Uranium for energy) on that matter in 2013. Or, if you want the more florid version from Slaughter:
“Russian Nuclear Catastrophe to Hit the U.S. in 2013
“31 Million U.S. Citizens Will Be Affected
“Few people realize it, but in 2013, just 22 months from now, an event will take place in Russia that could devastate U.S. energy supplies.
“On that day, a 20-year nuclear warhead agreement between the United States and Russia will expire.
“Unless preventive steps are taken, 10% of America’s electric energy supply will dry up.”
So yes, the 31 million is just a match for the “10% of America” that relies on Russian-derived fuel for nuclear reactors (about half of US uranium comes from the Russian program now, and about 20% of US energy production is from nuclear plants, so the 10% at least has a basis in fact).
And the investment thesis, as you can imagine, is that once this uranium agreement expires this cheap and easy supply will be gone — and existing production can’t grow fast enough to meet the increased demand from current and planned reactors.
You do have to assume that there won’t be a huge wave of nuclear reactor shutdowns, or a scrapping of much of the planned base of new reactors, particularly in China and India, where you’ll find the largest numbers of new projects on the books or under construction. But if you do stay with that assumption, then supply will fail to meet demand over the next few years … which is, of course, the very basis for most speculation in commodities or any other sector.
As Slaughter puts it:
“What does this mean for investors? Once this uranium supply is disrupted, the price of uranium mining stocks could go through the roof. I’m talking about gains in the hundreds of percent.
“Uranium Supplies Are Running Out
“The spot price of uranium has already surged 71% since last September, marching from $40 per pound to almost $70.”
And he goes on to tell us that supply will fail to meet demand starting in 2012, with a dramatic deficit building in the years to follow. So miners should get rich, right? Here’s more from the ad:
“According to Morgan Stanley, 147 new nuclear reactors will come online worldwide over the next 10 years. But all those new reactors can’t deliver a single kilowatt without uranium.
“And they need a lot: an additional 80 million pounds per year. To meet demand, mines will need to double uranium output by 2020. That’s not going to happen, except at much higher prices.
“With most metals, you could just dig more up. But not uranium. New discoveries just aren’t happening. Greg Hall, a 30-year industry veteran and director of one of Australia’s top uranium explorers, recently said that he expects fewer than five significant new finds over the next decade. And it will take at least eight years to get them up and running.”
So we’re told that new demand coming online from China and India over the next decade, along with the loss of the Megatons to Megawatts supply from Russia, will cause a price war. It’s probably worth noting that Uranium has seen extraordinarily volatile pricing over the last few decades anyway, in part because it’s not really a liquid or transparent market — prices have gotten as high as $138 a pound in recent years during the uranium mania of 2007, and as low as about $7 a pound in the 1990s when weapon demand collapsed and no one was building new reactors (and not surprisingly, when prices were low we went for a decade or two without anyone really looking to find or build a new uranium mine, either). There isn’t really a fair “spot price” like we see for commodities that trade on the futures markets, but there is an industry consultant that publishes a price that most folks seem to rely on — you can see that here from UXC, note that although prices did spike to about $70 at the end of February the reactor crisis has dropped them down to at least $60 … and that’s still 50% above where uranium traded a year ago. The point is: the possible range for uranium pricing is huge, even without a disaster like we’re seeing in Japan.
And the investment case from Slaughter is that we might see uranium prices climb well over the old highs, past $100 to $200 or even $1,000 a pound — and since nuclear power plants have huge embedded capital costs and operating costs, the actual price of the nuclear fuel isn’t the largest determinant of whether or not they’ll be profitable, so high prices won’t deter them much, or cut demand like it might for coal or gas generating plants (nuclear plants cost at least a couple billion dollars to build, even the cheapest ones in China, US nuclear reactors can cost more still, and the fuel cost is generally far less than half of operating costs after that — the biggest cost for nuclear reactors is not usually fuel, it’s financing).
So given that basic argument, what does Slaughter think we should do?
“How to Profit Best
“Right now, only one uranium miner in the world can ramp up production enough to satisfy demand.
“This single firm produced almost 20% of the world’s uranium mined last year. And it is aggressively expanding into remote Kazakhstan to exploit that nation’s huge untapped uranium reserves.
“No other company is in a better position to cash in on rising uranium prices. The company pockets an extra $40 million in profits for every $5 uptick in uranium prices.
“If uranium goes up another $30, which could happen in a flash once the news about the Russian supply breakdown gets out, it would add $240 million to its bottom line. The stock would probably double.”
Sounds pretty good, right? How about a few more hints?
“Management has posted record revenues for seven straight years. And they’re sitting on 10.4 million acres of promising land from Australia to Mongolia to Peru that could all soon be in the development pipeline. That’s almost four times the size of Connecticut.
“Annual production should double from 20 million pounds today to 40 million pounds by 2018. That sharp increase will send revenues and cash flow soaring — even if uranium prices don’t budge a penny.
“So much cash is already flowing in that it just raised its dividend by a whopping 43%.
“If this sounds like the sort of stock I’m urging my readers to buy, you’re right. I’ve already bought a bunch for myself and I suggest you do the same.”
So what do we have here? Toss all those goodies into the Mighty, Mighty Thinkolator and our answer comes crawling out the other end … Cameco (CCJ)
I know, boring — right? It’s been pretty much the same for years: You say uranium, I say “Cameco.” For good reason, of course, Cameco is the biggest low-cost, high-grade uranium miner in the world, and by far the biggest pure play investment on uranium production.
There are a bunch of other large mining companies that produce uranium, including Rio Tinto and BHP Billiton, but uranium is not a huge part of their diversified businesses, and there are a pretty good crop of junior uranium explorers and producers that survived the price bust a few years ago, but Cameco stands at the top of the pack, largely because of its huge position in the Athabasca region in northern Saskatchewan, where we can apparently find the highest grade uranium ore in the world.
And yes, they do have plans to double their production — they’re around 20 million pounds now, and are aiming for 40 million by 2018. Part of that will come from further development in Canada, but they are also relying on a big investment in Kazakhstan, and trying to further diversify with investments around the world. Their investments in Peru and Mongolia that are teased above are small and they’re through joint venture partners, but they are there, along with small projects in — the other significant area or operation outside of North America and Kazakhstan (in addition to the core Canadian mines, they’re also the biggest US producer) is in Australia, the world’s second largest uranium-producing country after Canada and, according to Cameco, the one with the largest reserves.
There are some other pure play uranium stocks that you might consider if you’re researching a contrarian investment during this time of turmoil, including most prominently Denison Mines (DNN), which achieves low-cost uranium production by virtue of significant vanadium production as a by-product, Uranium One (UUU in Toronto, SXRZF on the pinks), which has seen the Japan crisis hurt its plan to sell some assets to a Russian group, or the smaller Paladin Energy (PDN in Australia or Canada, PALAF on the pinks) which mines in Africa, or Uranium Energy Corp (UEC), which just opened its first mine last fall in the U.S. Those are the ones that I’m aware of as prominent investor targets in uranium, and they’re all producing miners, but there are certainly many other uranium companies, particularly junior explorers, out there if you’re interested in digging deeper — and there are probably some other significant producers that I’ve failed to mention above.
There’s also, in the realm of uranium enrichment, the huge teaser target from years ago USEC (USU — which is probably more of a pure play on the Megatons to Megawatts program, and famously got Porter Stansberry into the SEC’s crosshairs), and another old teaser target from years ago that hasn’t quite gotten anyone excited just yet, Silex Systems(SLX in Australia, SILXF on the pinks) … and if you want to actually own refined uranium, not just invest in mining it, you can also look at Uranium Participation (U in Toronto, URPTF on the pinks), which is an investment fund that owns refined uranium (managed by from Denison Mines — they publish a net asset value for the fund each month, though the latest number is obviously very out of date given the big hit the price has taken this week).
And yes, all of those stocks are far cheaper now than they were a week ago. Does that mean they’re a bargain? Well, you’ll have to see past the current Japanese reactor problems and decide for yourself: will the world be terrified of nuclear energy again and shelve plans for new reactors, or even mothball some of the existing plants? Or will the long-term growth in nuclear energy, led by emerging nuclear powers, continue apace and keep demand for new uranium mines strong? I suspect that nuclear power will remain a key part of the global energy marketplace, though I don’t think we’ll see new reactors in the US, Europe or Japan anytime soon — but whether that means uranium should be at $20 or $100 or somewhere far above or below those numbers requires a better guess than I can give.
If the market remains more or less functional, then Cameco should certainly continue to be stalwart given their large size and great assets — though that works both ways, as a large and established player they theoretically shouldn’t take quite as huge a hit when prices drop (though the Japanese reactor crisis has hit most of the uranium stocks more or less equally on the initial sentiment trade sell-off, they’re all down about 25% or so), but they also don’t have the huge leverage on the upside that we’ve seen in past years from emerging explorer/producers like UEC, so if you’re convinced that uranium is going to $1,000 a pound perhaps you’d get more leverage elsewhere. And for a large cap stock, thanks to the fact that CCJ is the most liquid investment in uranium it’s not surprising to see it get most of the attention when prices change dramatically, as they did in climbing last Fall and falling this week — Cameco, despite the sharp drop this week, is still priced a good 30% above where it traded last Summer.
I don’t own any of these stocks and don’t have any plans to buy them in the near future, but if you’ve got an opinion on investing in uranium now I’m sure we’d all like to hear it — just use the friendly little comment box below.