Uranium Supply Crisis Anticipated for the Next Decade, According to Canadian Experts

Uranium Supply Crisis Anticipated for the Next Decade, According to Canadian Experts

Is Uranium Going to Cross the $500/pound Mark?

An Exploration Sector Consolidation Driven by Rising Uranium Prices Could Intensify Takeover Activity

James Dines, a legendary stock picker, recently drew a comparison between uranium stocks and the booming net stocks of the golden age of the Internet's expansion. The Y2K scare was overblown and didn't happen, but the energy crisis in the United States over uranium has been building for almost 20 years. Some are claiming a "renaissance in nuclear energy," and investors are reaping triple-digit returns despite the fact that the current bullish uranium cycle is still in its early stages.

Worldwide, around 2 billion people do not have access to power. Nuclear power has the potential to lessen the reliance on fossil fuels in meeting the increased demand for electricity, according to the World Nuclear Association (WNA). According to the World Nuclear Association, global electricity demand is expected to increase by 40% in the next five years. China and India, the two most populous countries in the world, are making history by giving birth to the most energy-hungry generation ever. Both have ambitious plans to increase the use of nuclear power. A number of less developed nations, including Venezuela, Vietnam, and Turkey, have declared their willingness to engage in civilian nuclear policies in order to meet the power demands of their growing middle classes.

If the projected proliferation of nuclear power plants over the next two decades materializes, uranium will be an essential commodity for the world's utilities. The supply of uranium for civilian energy consumption is currently at an all-time low. Experts estimate that utilities will purchase known uranium inventories throughout the next decade, driving spot uranium prices to historic highs, due to the ongoing shortage of supply compared to demand. Several uranium exploration and production firms have seen their stock values spike during this launch phase as investors have taken notice.

Potentially "Unbelievable Highs" in Uranium Prices

"There is a good possibility of a supply crunch that could drive uranium prices to unbelievable highs," said Kevin Bambrough, a research analyst at Sprott Asset Management in Toronto, as reported by STOCKINTERVIEW.COM. Several experts are projecting that spot uranium prices will rise above $40 in the near future. Dave Mason, managing director of Augen Capital Corp in Canada, made the following prediction: "$100 (US) a pound is within reason within the next year or two." A less optimistic outlook is offered by Resource Capital Research of Sydney, which predicts that spot uranium prices would rise by another 40% by 2007 due to "end users in the power generation market which is urgently trying to secure supply into the future."

Is there a ceiling on how much uranium could cost on the spot market? In a hypothetical scenario, Kevin Bambrough argued that uranium prices should rise above $500. "It's an absurd amount," Bambrough spoke candidly. "It's difficult to predict whether this will actually take place." Bambrough raises an intriguing point regarding the worries of the utility firms responsible for supplying us with power, even if he concedes that the price would not be sustainable. Speculating on a potential future when uranium cannot be obtained, Bambrough stated, "There's a chance that some facilities will have to choose shutting down their nuclear plants." Based on it, Bambrough compared the operational costs of a nuclear power plant with those of an alternative fuel. Natural gas was valued at $5 in Bambrough's hypothetical model.

"Considering the coal-fired plant's operational capacity, prior to essentially shutting down a nuclear facility, you would be evaluating it against what you would need to bring on, which is natural gas," Bambrough explained. What would the price have to be for me to be willing to shut down my nuclear reactor in the event of a natural gas shortage? Turning down nuclear power and ramping up gas production to make up the difference would drive gas prices through the roof. Not to mention the enormous expense of decommissioning a nuclear power plant. In response to the following question: "How much would people pay before they shut it (a nuclear plant) down if there is a shortage of uranium?" the analyst arrived at his estimate of "north of $500/pound" for spot uranium, in the context of an unusual emergency supply bottleneck.

Uranium prices may remain elevated for a number of years above $40/pound, a level supported by historical cycles. There was a huge spike in uranium prices between February 1975 and April 1976, and the present cycle is very similar. Uranium spot prices surged from $16/pound to $40/pound in that fifteen-month span. Uranium prices increased during the 1970s cycle, reaching a high of $43.40/pound in July 1978 from an initial level of $6.75/pound in November 1973. Spot uranium prices have been climbing at a rate comparable to that of thirty years ago since the end of last year. If past trends are any indication, spot uranium prices should rise beyond $40/pound this year and remain there for at least the remainder of this decade, if not longer.

The number of new nuclear power plants being built or planned is the primary indicator of the future increase in uranium prices. "When we initially began investing in uranium a few years ago," Bambrough clarified. Very few plants were suggested. The amount of projected amenities has increased by 100%. And for every one that makes headlines, there are plenty more in the works. Uranium miners are in a very advantageous position because of that. A utility's fuel supply must be guaranteed for a period of up to six years after the decision to construct a nuclear reactor is made, according to Bambrough. The supply is simply not there, Bambrough cautioned.

U.S. utilities may soon be in a mad dash to stock up on uranium for their nuclear reactor fuel, as warned about by research analyst Kevin Bambrough, who predicted "ridiculous price(s)" if they don't. An excerpt from The International Atomic Energy Agency’s pamphlet, Analysis of Uranium Supply to 2050, bears out Bambrough’s thesis, “As we look to the future, presently known resources fall short of demand.” Over the last decade, there has been a cannibalization of existing inventories of around 40 million pounds per year due to the disparity between reactor demand and newly produced uranium. The imbalance between supply and demand has reached a critical stage as we start 2006.

Who Will Provide the Uranium?

"The net result of nearly twenty years of inventory liquidation is that existing higher-cost suppliers were driven out of business, new mines were discovered from starting, and exploration was neglected," asserted Thomas L. Neff of MIT's Center for International Studies in a September 2004 presentation to the World Nuclear Association. Ahead of the expanding requirements horizon, Neff cautioned, "The problem is the one to two decades that will be needed to expand (production) capacity and build the flow of nuclear fuel."

Utilities were able to swiftly ramp up production from existing uranium mines, limiting the uranium price increase of the 1970s. Despite current conditions, Neff warned that "a longer period of high prices could prevail." Uranium prices, according to Neff's calculations, would have surpassed $100/pound in the mid-1970s if the US dollar had remained steady from 2004. So, it's not out of the question that Bambrough's hypothetical prediction above $500/pound could come true. "We are currently facing the consequences of what may be the largest sustained divergence between expectations and reality in the 60 year history of uranium," Neff highlighted the problem's crucial stage.

According to Bambrough, "it's very difficult to do that" for those who wish to contract for the construction of new nuclear reactors. "To attempt to contract supply, you must travel to mines that are not even there yet." Junior uranium firms, who acquired proven uranium resources during the previous down cycle and had its operators sell off such properties due to poor prices, seem to have the best chance of capitalizing on this opportunity.

In What Ways Can Investors Make Money?

In 2003, Bambrough brought to mind the process of developing a global list of only 25 corporations engaged in uranium exploration and mining. After much deliberation, Bambrough narrowed the field down to eleven candidates who showed promise. "Considering the enormous shift the industry has undergone, I'd estimate that fewer than 30 uranium companies offer a reasonable reward-to-risk ratio as of right now." There are now around 200 firms involved in uranium mining or exploration, depending on whose list you believe. The most of them are stock market traders in Australia or Canada.

Sprott Asset Management has invested in what kinds of companies? "We have preferred to invest in companies that have acquired properties that were once owned and were actively being worked by majors at the end of the 70's bull market," Bambrough said. "Many of these properties have substantial value due to the high cost of uranium exploration," he continued. In particular, certain assets have undergone data collection and drilling projects valued at millions of dollars. Rehabilitating existing mine shafts can save a lot of money compared to beginning from scratch with a green fields project.

A handful of Bambrough's preferred uranium stocks were disclosed. Strathmore Minerals (TSX: STM; Other OTC: STHJF) is the company in which Bambrough and his family have the largest percentage ownership, he added. They have some fantastic properties, in our opinion. They were early adopters of the game and possess the same uranium industry knowledge as Strathmore Minerals' president and COO, David Miller. And like Energy Metals Corporation, they have a massive database that helps a great deal in understanding the qualities. New Mexico and Wyoming are home to properties owned by Energy Metals and Strathmore Minerals, respectively. According to Bambrough, "ISLs in Texas and Wyoming, as well as New Mexico, have a very bright future." Sprott Asset Management also has a preference for Tournigan Gold Corp (TSX: TVC). "You are looking at an area that has produced in the past," Bambrough noted. "They acquired older mines." Previously dug by the Russians, Tournigan has drilled Slovakia's historic Jahodna uranium deposit.

The Center of Everything

The uranium industry's continuing consolidation may be the source of the most daring price action. "It seems like there are a handful of ambitious junior uranium firms that are making headway in their efforts to establish a'major' company," Bambrough noted. Energy Metals Corporation (TSX: EMC), a uranium exploration firm, initiated takeover operations in November to purchase Standard Uranium (TSX: URN) and Quincy (TSX: QUI), two other uranium juniors. Since then, the price of standard uranium has risen by almost 70%. Bambrough suggested that those with adjacent properties work together because it would be in their best interest to do so.

Strathmore Minerals (TSX: STM; Other OTC: STHJF), another uranium company that Bambrough likes, said at the end of December that it had "engaged National Bank Financial as its exclusive financial adviser to review transaction alternatives to maximize shareholder value from its uranium assets." "National Bank has the best technical team and will help us reach the right decision to maximize the benefit to our shareholders," added CEO Dev Randhawa in response to a question regarding this news release, as reported by StockInterview.com. Cohen Independent Research Group projected that Strathmore Minerals' share price would reach C$4.29 in 2005, using the then-current spot uranium price as their basis.

Since major fund managers now have only Cameco (NYSE: CCJ) and Energy Resources of Australia (ASX: ERA) to invest in when it comes to the uranium industry, Bambrough believes that there should be more large cap uranium businesses in the market. "Many smaller uranium companies could benefit from merging into larger ones. This would allow them to pool their highly skilled employees, cut down on the astronomical costs of exploration and permits, and take advantage of other economies of scale." When a bigger business acquires some of these potential juniors, how long until they become listed on the New York exchange? An NYSE listing, according to Bambrough's estimation, might not occur until 2007 or 2008.

"I expect that we will see a great out performance by quality uranium companies as they move their projects forward," Bambrough concluded his remarks, expressing his continued enthusiasm for the uranium sector. We continue to see tremendous opportunity in the space and are aggressively investing there. The current uranium bull market is in its infancy.