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Are Uranium Suppliers And Buyers Signaling A Bottom?

Posted: Apr 15, 2009 15:08 PM by Eugene Bukoveczky

Tickers in this Article: EGRAF, PALAF, URPTF, JPM, GS, LEHMQ, RTP, CCJ

After soaring to a high of more than $136 a pound in 2007, the price of uranium-oxide concentrate, or yellowcake, recently hit a low of $40 in trading between broker-dealers. Financial investors - who once scrambled to accumulate inventories of the physical commodity and were largely reponsible for the price spike two years ago - are now scrambling to off-load sizable inventories of the radioactive material.

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Lehman's Other "Toxic" Assets
One noteworthy example of this was the recent disclosure that now-bankrupt investment banker Lehman Brothers (OTC:LEHMQ) could be holding an investment position of as much as 500,000 pounds of uranium, easily enough to produce its own nuclear bomb. It's hard not to be struck by the irony of the situation - a firm brought down by so-called "financial weapons of mass destruction" could hypothetically be in a position to produce the real thing.

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Uranium Price Bottom In Sight?
While the fallout from all the dumping of positions has been a crash in uranium prices, there are indications that a bottom may be near. For starters, analyst sentiment about the prospects for uranium is decidedly gloomy. Recently issued reports by Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM) predict that uranium prices could remain well under $50 per pound through 2011. Such overwhelming bearishness sometimes signals a bottom. (Certain indicators can give an overall sense of bull and bear forces; learn more in Investors Intelligence Sentiment Index.)

Producers Are Moving To Expand Capacity
While prices could trend sideways for the next couple of years, that hasn't prevented the major producers from moving ahead with plans to up their production to meet the increase in demand resulting from a projected doubling in global reactor capacity by 2030.

Potential Acquisitions
Recently, Canada's Cameco (NYSE:CCJ), a giant low-cost operator that produces about 18% of the world's supply, indicated that market values of other uranium players had fallen sufficiently for the company to consider going on a $2 billion acquisition spree. Among potential targets cited by market observers are Uranium Participation Corp. (OTC:URPTF), which currently holds about 9 million pounds of yellowcake in inventory for financial investors, and Australian miner Paladin Energy (OTC:PALAF). A move to acquire the former company could eliminate or limit further dumping of yellowcake into the spot markets, thus placing a floor on prices.

Australian miner Energy Resources of Australia (OTC:EGRAF), a 68% owned subsidiary of mining giant Rio Tinto (NYSE:RTP) and producer of 11% of the global supply, recently filed applications to significantly expand production from its Ranger mine.

Chinese Begin Stockpiling
Major buyers have also been moving in a manner that suggests uranium prices may be at or near lows. China's National Energy Administration recently announced that it would stockpile uranium and buy overseas uranium “resources”, or direct stakes in miners, to secure uranium supplies to meet its recently nearly-doubled target of 75 million kilowatts of nuclear generation capacity by 2020.

The Bottom Line
Global mine production still only meets about 63% of current demand. The rest consists of the downblending of material from former Soviet nukes in a deal that ends in 2013. The recent actions by both major producers and buyers suggest that they're betting the Russians may neither be willing nor able to meet the uranium supply gap beyond 2013. Investors looking to buy any of the producers at this point would be obliged to take a similar long-term view.

Get a little more background information in Strike Gold With Junior Mining and How To Invest In Commodities.

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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