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Time to think about uranium. The news is funny. The spot price was at $29 when I first started buying Strathmore Minerals and it shot all the way up to $138 without a single down week. Now it drops twice in a row to $133 and everyone is pronouncing the uranium bull market over. The funny thing is that if the price had simply hovered at $72 where it started the year, it would still be a serious bull market for the metal. My guess is that the spot market jumped the shark this year by going all the way to $138 and industry people on both sides know it. I figure anything could happen in the near term from here, but it will signify nothing.

SeekingAlpha has an interesting article from Boris Sobolev: Uranium Bull Market Far From Over. The key argument is that uranium investors are generally paying about 12% of the spot price for resources in the ground. Of course this is a dangerous way to view things because the cost of mining varies enormously. The gold mining industry stocks are generally selling for a much higher percentage of the spot price.

Neal Froneman of Uranium one says:

"There is a bit of poker being played between the utilities and producers," said Froneman, suggesting the development of a standoff price wise.

The spot price for uranium is $134 a pound but "I would suggest that utilities are willing to pay $60 a pound at the moment," he said.

However, he believes the long term price will be substantially higher.

My approach to uranium investing is to look at the really big picture and the long term story. The supply/demand imbalance will play out over a long term. I believe it will be far bigger than what people are thinking today. It's extremely likely that nuclear energy (i.e. demand) will not only continue to grow, but will accelerate more rapidly than what is being predicted. On the supply side, it's true that uranium is not rare, but it's difficult to increase supply very fast because the places which have roads and utilities and property rights don't want big uranium mines in the neighborhood, and places which welcome uranium mines either don't have access and utilities and property rights and political stability.

There has been an extremely long period of neglect in the supply industry. Those who have experience and have spent years doing the right things before this boom started will do well. StockInterview has a great article on the troubles with milling uranium in Colorado. "He who owns the uranium mill makes the rules."

Although [operating the only uranium mill within a 500-mile radius] could become a cash cow for Denison Mines, two junior uranium mining companies we interviewed sounded like they had been smacked between the eyes with the back end of a billiard stick.

and worth noting:

In June 2006, Strathmore Minerals began the process to develop its proposed uranium mill near Grants, New Mexico, less than 300 miles from Blanding. This past November, the company announced the purchase of land for the mill site and initiated the first step required by the U.S. Nuclear Regulatory Commission as part of the license application package.

Seems to me that the most salient fact is how little the uranium stock prices actually dropped so far. They might drop more, I don't know. But this chart of Strathmore says something about how much this stock normally wiggles around.

The price of uranium has gone up an amazing amount since $29. People seem to be way too obsessed with relative changes rather than absolute numbers. And they're focused on the spot prices and long term prices (roughly $95) today rather than the forces that would be needed to keep the prices at these extremely high levels. You figure that Strathmore realistically intends to ramp up to 8 million pounds per year and their costs of mining are probably down in the mid 30s range and lower. If the long term uranium price held at $75, that would result in perhaps US$2 per share per year after adjusting for joint venture interests and the stock closed at US$4.05 today.

UPDATE same day: A potential new investment blog, valuevista.

UPDATE Friday July 13: I see that the Cigar Lake mine won't be coming online until 2011. No surprise there. They also need to get regulatory approval to dewater the mine (the water would need to go somewhere and the stuff is going to be polluted with all sorts of nasty stuff). Here's another view.