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Sunday, April 01, 2007

uranium observation

StockInterview.com just keeps coming out with new articles. This time it seems like they don't have much news.

There are two interesting things here. The first is that buyers are avoiding paying high prices for uranium by borrowing the supplies that investors have purchased. The second is about mining companies purchasing uranium to fulfill contracts when they aren't able to mine enough uranium (Cigar Lake, Ranger Mine).
How much strength remains in the uranium price momentum? In a not-yet published interview with Dr. Robert Rich, he told StockInterview that this depends upon whether major mining companies will continue buying, among other factors. During our interview, Dr. Rich discussed his recent role in obtaining material on behalf of an unnamed major mining company to honor clauses in its uranium sales contracts with utilities.
Over time, none of these things will make the slightest difference. What does it matter whether the mining company goes out to buy uranium to fill the shortfall or whether the end buyer does it? And in the end, it doesn't matter whether investors loan out their uranium now and allow the end buyers buy it back later or the end buyers buy it now. On a large scale and over a reasonable time frame, the only difference is who pays and when. The same uranium ends up in the same places.

That wouldn't be true if there was no uranium shortage. When the investors who snapped up all that uranium (which supposedly was responsible for driving prices up) loan out the uranium to the end buyers, that would relieve the buying pressure and uranium prices would go back down again because the supply is now being dumped back into the market. When mining companies buy up uranium now to honor their contracts, they're the ones paying the high prices now, but the prices would go back down again when the dust settles.

We've been told that this is what the buyers believe, and with the loaning out of investors' uranium inventory, this adds a lot of evidence. If buyers believed the price was going higher and higher only to stay there for perhaps 20 years, they'd be buying uranium, not borrowing it. The lack of buying on the spot market also supports this notion of buyers not believing the prices are "real". (It's also a good reason to sell the stuff at auction.)

This reminds me of the endless message board discussions for stocks whose prices have been in a long term decline. People always, and I mean always, believe that the price is being manipulated by powerful people bent on causing them grief. And it's amazing how twisted the logic can be to support the argument. On the ETLT message board, there was at least one person arguing repeatedly that someone was selling lots of shares over a long time period to push the price down so they could buy up even more shares at a lower price. I don't think any of those people have ever tried to manipulate the markets because it's extremely difficult to do and extremely dangerous. Even the oil cartel is only able to keep oil prices high about once every two decades, which is probably when supply and demand would have pushed up prices anyway.

The buyers probably see this huge influx of people more interested in money than in the uranium industry. They see these new people buying uranium and they see the prices go up to levels not seen since the Disco Epoch. They assume the new people caused the big imbalance and not vice versa. After all, consumption has exceeded production since the 1980s, and prices stayed ridiculously low all that time.

The answer is simple calculus. Looking at this chart, imagine taking the integral of the blue curve minus the yellow curve from 1945 until time "t". The red curve represents uranium that is essentially stockpiled as HEU within nuclear weapons. Some of that will always remain within a certain minimum number of weapons. We'll call that amount "M" for permanent military stockpile. So if at any time "t" the (integral of (blue minus red )) minus M ever equals zero, then the world has run out of uranium. If that calculation even gets close to zero, you're going to have some serious increases in prices, especially with aggressive new buyers like China, Russia, and India which, combined, account for about a third of the people on earth; people who want to join the middle class with its refrigerators, televisions, air conditioning, and other energy eating things (and who quickly get tired of the pollution from coal). The new buyers are not going to be part of the chummy club that's been static for the last 25 years.

There's simply no way that investors buying a small percentage of uranium would cause a 10x jump in price. Buyers being in denial of that has no impact on how this all plays out.

UPDATE early next day:
Energy Resources is now reporting that because of the Ranger mine flood, total 2007 production for the company will be at 2006 levels and 2008 production will be 25% to 35% lower. Ranger mine production in 2006 was down 19.7% due to flooding as well.

UPDATE April 3, 2007:
senor_blanco left a comment in this post about Sprott Securities being totally different from Sprott Asset Management (which owns a big chunk of Strathmore).

UPDATE April 6, 2007:
Supreme Court Goes Nuclear
The irony is that the beneficiary of Monday's ruling won't be wind power, solar power, or any of the other renewable technologies favored by the Green establishment. Their economic and technological limitations are too severe for them ever to occupy more than a small niche in the American energy economy. Instead, one of the winners from Massachusetts v. EPA just may be something that many of the environmentalists who brought the suit have long abhorred: nuclear power.
Nuclear power is on the verge of making a comeback in the United States. Thanks to several favorable provisions in the 2005 Energy Policy Act, as well as a streamlined licensing process, it is possible we could see the construction of new plants start within several years. The economics for new plant construction are still being worked out, particularly with regard to financing and federal loan guarantees. But there can be no doubt that federal efforts to hamstring coal can only help nuclear.
If you think the nuclear industry is happy with the ruling, think again. That's because the nuclear "industry," such as it is, consists of investor-owned utilities that own coal-fired power plants in addition to nuclear plants.

But it is good for the uranium industry. It's like the perfect storm tipping point paradigm shift....

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