“The Nuclear Problem You’re Not Hearing About”

Uranium shortage teaser from Scarcity & Real Wealth

By Travis Johnson, Stock Gumshoe, March 17, 2011

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.


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29 Comments on "“The Nuclear Problem You’re Not Hearing About”"

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Michael
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Michael
March 17, 2011 1:55 pm

If you can stomach the termoil, and you think Uranium is safe, then URG is getting ready to go into production and took a massive hit as well. I took the opportunity to increase my position. At last check, they are up today.

Chuck
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Chuck
March 17, 2011 2:01 pm

I believe Cameco has most of its sales on long term contracts, so despite the current Japan situation (only about 3% of its sales are to Japan), they shold do fine for years regardless. If we see plants shutting down for other alternatives, then perhps there will be a problem down the road, but China and India, as well as smaller nations are planning to build a lot of plants in the future and/or are building them now.

hedy1234
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hedy1234
March 17, 2011 2:02 pm

BHP is considering a $30 Billion expansion of its Olympic Dam, the single largest Uranium mine in the world. It also is the fourth largest copper and fifth largest gold mine in the world. Quite a find……

bill
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bill
March 17, 2011 3:40 pm

oskao gas,kunlun energy,enn energy,and EPB maybe toss gail gas from india

mpch
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mpch
March 17, 2011 5:52 pm

Who knows which company produces thorium? I remember reading that thorium was a safe replacement for uranium. Can the Gumshoe help out, as he always does? This could become something big.

John Sloan
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March 17, 2011 8:45 pm

HI Travis and everyone
well I owned some Cameco years ago and then their main mine flooded and the stock tanked – I dumped it and don’t think I will bite again
but I do own some BHP which I think is a more diversified play hence less subject to this kind of problem – although it was hit by flooding also. Outstanding Investments had Cameco in their list for many years.

Clopi
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Clopi
March 17, 2011 8:58 pm

Thorium: LBTR

Tom t
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Tom t
March 17, 2011 9:15 pm
Over reaction , yes but it is grounded in the array of politicos who have called their nuclear plans in for review- and will delay reaffirming their commitments. Long term resource bet- yes. Short term pop- likely but not back to pre crisis levels until politicos reaffirm. The US is not really a player in new reactor builds, so US policy and emotions do not drive this market. Noteworthy: 1 Financing a reactor generally requires fuel contracts to be in place, so Fuel contract buying is already occurring for those far off start-up dates. 2. The troubled reactor site in… Read more »
alex
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alex
March 17, 2011 9:46 pm

Ironically, Nuclear Power is the Greenest of all Energy Sources today.

blackjack
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blackjack
March 17, 2011 10:19 pm

thorium is a by product of rare earths mining

BHP unfortunatly locked itself into forward Uranium prices years ago and so is currently selling at the lowest contracted prices
however when Olympic Dam is up and running it will be another story

LPG seems to be the next best thing and will get Japan up and running soon

Gary W
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Gary W
March 18, 2011 4:00 am
Regarding Thorium power, from the Wikipedia: "India's Kakrapar-1 reactor is the world's first reactor which uses thorium rather than depleted uranium to achieve power flattening across the reactor core.[27] India, which has about 25% of the world's thorium reserves, is developing a 300 MW prototype of a thorium-based Advanced Heavy Water Reactor (AHWR). The prototype is expected to be fully operational by 2011, following which five more reactors will be constructed.[28] Considered to be a global leader in thorium-based fuel, India's new thorium reactor is a fast-breeder reactor and uses a plutonium core rather than an accelerator to produce neutrons"
Jeff Haugen
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Jeff Haugen
March 19, 2011 2:06 pm

Great Western Minerals(Rare earth company) has thorium, they just aquired the Steenskampstal mine in South Africa. The mine will be in production by 2013 or before.

Check them out.

Pete Kneeland
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Pete Kneeland
March 19, 2011 8:31 pm

As was noted in this article, every disaster makes the feint of heart panic …and sell. After careful consideration and a lot of fact checking, I went with a position on Cameco (CCJ). Worldwide production can't keep up with demand and demand will definitely increase in the years ahead.

Jim Marx
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Jim Marx
March 19, 2011 9:48 pm

I was researching uranium prior to the earthquake in Japan, but found it too pricey. I was able to get CCJ, DNN, UEC, and HTHXF (Hathor Exploration) for 33%-50% off highs for the year, CCJ is up the least Friday at 4.63%, DNN 7.85%, UEC 11.46, and HTHXF 25.43%. It took everything I could muster to calm the shaking hand to push the buy button.
Not a large position, just some diversification in the energy sector. I expect triple digit gains on three of the four.

5hau9
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5hau9
March 19, 2011 11:21 pm

Teaser ad in Trade of the Week,(Editors@tradeoftheweek.com)"Is this the scariest drawing you've ever seen and what's Porter Stansberry 's one asset to own, and how much credence do you give his doom predictions

Mark
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Mark
March 21, 2011 12:52 am
Hi folks. I own some uranium stocks and have no idea what will happen to them. Also, I'm not strongly pro or anti nuclear; I view it as an investment. That said, I don't know whether to sell and eat losses or "hang in there." My reasoning is that I in general hope stocks act in a reasonably logical way (is that vague enough?). But that sentiment raises two big problems; one in my humble opinion begins when strong emotion becomes part of the formula. The effect on stocks of emotion is so unpredictable that all reasoning goes out the… Read more »
C. Faulkner
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C. Faulkner
March 21, 2011 10:38 pm

The investment advisory letter "Currency Capitalist" sent out a teaser on Mar.19 touting 4 "Pools of Funds of untapped dividends" that they claim a number of our legislators have tapped into and that ordinary individuals can as well. The publisher is Sean Hyman. Can you sniff out what he is referring to? If you can it would be much appreciated!

james moylan
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March 22, 2011 12:01 pm

I have a web site where I research stocks under five dollars. I have many years of experience with these type of stocks. I do not agree with the notion that their will be a shortage of uranium caused by so kind of disruption in supply. their is an abundance of uranium not a shortage.

ambazone
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ambazone
April 11, 2011 5:54 am
As the wild price swings should tell you, uranium is not in any way an economics-driven market. It's driven, instead, by politics. The politics-driven outlook, now and for the foreseeable future, is that nuclear power is a liability. How long did it take for the NIMBY outrcry to die down in the USA after TMI (by all accounts, a much smaller accident)? Hint: it never did. Germany has already shut down its reactors. They will probably not come back online, ever, so there's a lot of fuel that will go to the French reprocessing plant so it can be stuck… Read more »
TIm
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TIm
July 4, 2011 6:51 am
I subscribed to the Slaughter rag. The guy is a fat face bag of wind. This week he is pushing fertilizers. I already owned CRBA and SOIL which had both of these new picks in the top ten holdings. Basically this guy waits for news driven events to drive down some commoditiers sector than picks out a couple ideas with strong market cap, strong relative strength and then reports his reasons for expecting that part of the commodities sector to have a rebound. comodities are in a secular bulll market. Any one cab do what this guy claims he is… Read more »
David Allenson
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David Allenson
July 12, 2012 12:36 pm
I have been watching this sector for years now. CCJ and DNN are the ONLY companies that have the management and financial “savvy” to survive. Folks who take a slow and steady position of buying DNN below $1.25 and CCJ below $20.00 stand to make a lot of money! It is going to happen folks- this sector is so beat down, that when this all pop’s and it will- those that have taken advantage of this massive down turn stand to be the last one’s standing. But this is not a “INVEST QUICK” to get “Rich quick” scenario, It is… Read more »
Gravity Switch
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March 17, 2011 4:36 pm

I think Cameco has historically targeted about 60 percent spot pricing/40 percent long term contracts, though I don't know if that's still true or if it reflects their current order book. Like every other uranium company, they've been putting up some reaction on their website and in press releases this week so there are probably more details about their expected "real" business impact from them there.

Dave
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Dave
March 17, 2011 7:57 pm

Thorium is not a fissile element, but it can be converted to the fissile isotope of uranium by putting a thorium "blanket" around an operating reactor. The neutrons from the reactor bombard the thorium blanket, creating U235, which can then be used as fuel in the reactor. I wouldn't say it's a safer process, but it creates a whole new supply of fuel from a substance that was not usable.

buny
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buny
March 18, 2011 4:09 pm

lightbridge corp. Nasdaq L

Gary W
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Gary W
March 18, 2011 3:54 am

India has large deposits of sands containing Thorium and it has been their plan for years to convert it to fuel once they have enough Uranium reactors going. I don't think that's going to affect Uranium demand for a couple of decades.

GARman
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GARman
March 24, 2011 1:23 pm

Here’s what Patrick Cox says about thorium – Lightbridge (LTBR-Q) in Breakthrough Technology Alert: Thorium-based nuclear fuel designs are optimized to address key concerns typically attributed to traditional nuclear power, such as proliferation and waste. The result is an advanced fuel cycle which offers enhanced proliferation resistance, significantly reduced volume, weight and long-term radio-toxicity of used fuel, and improved fuel cycle economics.
"Its competitive advantage over other nuclear technologies will also significantly lower power costs. Buy it and ignore it. Your children will thank you.”

TDB
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TDB
March 20, 2011 1:24 am

URRE is another one that ran very hard on Friday.

whatshot123
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whatshot123
March 20, 2011 8:30 pm

Here’s Jim Berkland’s video, where he predicts massive earthquake to hit california between march 19 to 26! http://tinyurl.com/4upfcwm

Pass it along. It could be a matter of life and death, especially if he turns out to be right again.

GARman
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GARman
March 24, 2011 11:58 am
Here's am intermediate uranium play that's diversified and growth-oriented: Outstanding Investments also has had Denison Mines Corp. (TSX: DML) (NYSE AMEX: DNN) in their portfolio since May 2005. It is an intermediate uranium producer with three active mines in the United States. Denison’s assets include an interest in two of the four uranium mills in North America, with its 100% ownership of the White Mesa mill in Utah and its 22.5% ownership of the McClean Lake mill in Saskatchewan. Denison has a portfolio of world-class exploration projects, including its 60% interest in the Wheeler River project, and a range of… Read more »
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