Buy on Strength of Uranium Buy on Strength of Uranium
The spot uranium price is now $45 USD and has been dropping for over a year; it rose to $140 in 2007, but it will be a while before we get back to the $80 range, I believe. However, I view uranium as a core, L/T holding in view of the fact that there is steady demand, not many providers, and it makes a lot of sense as a baseload electric fuel. The global excess of processed uranium is being drawn down, and annual global demand for nuke fuel runs about double the amount of currently produced new supply, so that dynamic seems to point to sharply rising prices over time, as a lot of new reactors will come online soon.
We in the U.S. have fretted nonsensically over safety issues and waste disposal, while the French have provided over 75% of their electric power from nukes, and the Chinese, Indians, Russians, Japanese and Koreans all seem to think it’s definitely the way to go for the future. The IAEA, or International Atomic Energy Agency, lists 44 reactors currently under construction, as well as 436 in operation and producing power around the world. Perhaps as many as 100 more are in the planning phase. Korea, a fairly small country, is currently building five new, massive reactors with a capacity of 5 Gigawatts.
The total global capacity right now is about 370 Gw. That may grow very rapidly, as just a few years ago both China and India got less than 3% of their total electricity from nukes! Most people don’t realize the huge potential of this industry, not to mention the steady demand for processed uranium. According to CCJ’s website, Korea gets 37%, Japan 30% and the EU 32% of electricity from uranium reactors. The global growth for processed uranium demand over the next ten years is pegged at 33% to 40%, despite the current downturn. And by the way, the incidence of accidents is extremely low – only Chernobyl caused deaths, and the safety record of the industry is stellar around the world.
Which brings me to the two companies featured today – Cameco (CCJ) which is now a 2.36% position in the Portfolio, and Paladin Mining (PALAF.PK), an Australian uranium company that has great management, solid properties and a strong future once we get past the banking mess that is restraining growth around the world.
Cameco, on the other hand, has outstanding properties and is currently the world’s largest publicly-traded processor and producer of enriched uranium, with a 19% global share. CCJ is based in Saskatchewan and basically provides the nuclear fuel for Canada’s “Candu” reactors as well as exporting to several other countries, including the U.S. and other large users of nuclear fuel. CCJ has massive processing capability but has been plagued by a series of bad management missteps, especially the embarrassing and extremely costly fiasco at Cigar Lake. It is beyond the scope of this report to chronicle the blunders, failed promises, and apparent lack of management wherewithal that have created this godawful mess at CCJ and destroyed confidence in a once-solid enterprise. CCJ was pegged at a CA $47 NAV by RBC Capital Markets in a huge industry-wide report in March 2007. It now sells for CA $18.70 or about 40% of the RBC valuation, which was calculated after the initial breach at Cigar Lake.
Cameco is blessed with the richest uranium ore in the world in Northern SA, some of it at 100 times the uranium concentration of the world average. Cigar Lake is a large new resource for CCJ, but the mining is tricky, and their first attempt to access the ore resulted in a disastrous October 2006 breakthrough in the mine wall and a totally flooded mine, destroying millions of dollars worth of equipment and leading to what now appears to be an indefinite delay of years before Cigar Lake can be produced.