An expert in Canadian research predicts a severe uranium supply crunch in the next decade.

 An expert in Canadian research predicts a severe uranium supply crunch in the next decade.

Will the Price of Uranium Exceed $500/pound?

A Possible Consolidation of the Exploration Sector Driven by Rising Uranium Prices, Leading to Intense Takeover Activity

Famous stock analyst James Dines has drew parallels between uranium stocks and the booming nett stocks of the dot-com boom. 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. Investors are reaping triple-digit gains on what some are referring to as a "renaissance in nuclear energy," even though the current bullish uranium cycle is still in its early stages.

Almost 2 billion people on Earth 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). Over the next five years, the World Nuclear Association predicts that global electricity demand will increase by 40 percent. China and India, the two most populous countries in the world, are currently giving birth to the greatest energy-consuming generation that the planet has ever seen. They are both planning ambitious programmes to increase nuclear power. Turkey, Indonesia, Vietnam, and Venezuela are just a few of the less developed nations that have declared their intention to launch civilian nuclear programmes in order to meet the growing demand for electricity in their expanding middle classes.

To sum up, uranium will be required by worldwide utilities to fuel the anticipated proliferation of nuclear power plants in the coming two decades. The supply of uranium for civilian energy consumption is currently at an all-time low. Spot uranium prices are expected to reach record highs over the next decade as analysts believe that utilities would purchase known uranium reserves due to the ongoing shortage of supply. Several uranium exploration and production firms have seen their stock values spike during this launch phase as investors have taken notice.

"Unbelievable Highs" Could Be Achieved by Uranium Prices

Kevin Bambrough, a research analyst at Sprott Asset Management in Toronto, stated to STOCKINTERVIEW.COM, "There is a good possibility of a supply crunch that could drive uranium prices to unbelievable highs." Several experts are projecting that spot uranium prices will rise above $40 in the near future. With "$100 (US) a pound is within reason within the next year or two," Canadian Augen Capital Corp managing director David Mason speculated. With an estimate of $50/pound by 2007, Resource Capital Research of Sydney is half as optimistic. They attribute the additional 40% increase in spot uranium prices to "end users in the power generation market which is urgently trying to secure supply into the future."

Could the price of uranium on the spot market go as high as? A hypothetical case for uranium trading above $500 was put out by Kevin Bambrough. "It's an absurd amount," Bambrough said. "Determining the likelihood of this happening is quite challenging." 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. "Some facilities will have to choose shutting down their nuclear plants (if they can not obtain uranium to fuel the facility)." Bambrough speculated in his prospective scenario. To compare the operational expenses of nuclear power with those of alternative fuels, Bambrough used this information. Natural gas, valued at $5 per barrel, was utilised in Bambrough's hypothetical model.

It would be necessary to compare the coal-fired plant's operating capacity to that of the natural gas that would have to be brought on before a nuclear site could be effectively shut down, according to Bambrough. How much would the price of natural gas have to be before I would be ready to close my nuclear power plant if there was a 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. From January to March of that year, spot uranium prices surged from $16 to $40/pound. Starting at $6.75/pound in November 1973 and reaching a peak of $43.40/pound in July 1978, uranium prices grew consistently throughout the 1970s cycle. 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.

Keeping tabs on the number of new nuclear facilities being built or proposed is the primary indicator of how much higher uranium prices may soar. "In the beginning, when we began investing in uranium," Bambrough clarified. The number of plants being suggested was quite small. The projected facilities have seen a doubling of their population. There are a lot more in the works for every one that makes headlines. 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.

To sum up, research analyst Kevin Bambrough cautioned that U.S. utilities may soon be forced to scramble for uranium inventories to feed their nuclear reactors, or else they would face the "ridiculous price(s)" he mentioned. An passage from the pamphlet "Analysis of Uranium Supply to 2050" by the International Atomic Energy Agency supports Bambrough's argument, saying, "As we look to the future, presently known resources fall short of demand." Cannibalising current stocks, the difference between reactor demand and newly mined uranium has averaged around 40 million pounds per year over the previous decade. The supply-and-demand mismatch has reached a tipping point as 2006 begins.

Who Will Provide the Uranium?

"The nett 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," Thomas L. Neff of MIT's Centre for International Studies said in a September 2004 presentation to the World Nuclear Association. "The problem is the one to two decades that will be needed to expand (production) capacity and build the flow of nuclear fuel that meet the expanding requirements horizon," Neff said in his conclusion.

Existing uranium mines were rapidly scaled up to supply utilities with fuel, limiting the uranium price surge in the 1970s. A lengthier period of high prices could occur, as pointed out by Neff, "This is not the case today." If the US dollar had remained steady in 2004, uranium prices, according to Neff's calculations, would have soared to above $100/pound by the mid-1970s. That being the case, Bambrough's hypothetical prediction of a price above $500/pound would not be that far off. "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 summarised 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 try to secure supply, you'll have to visit mines that haven't even been built yet. Junior uranium firms, who acquired proven uranium resources during the previous down cycle and had its operators sell up such properties due to poor prices, seem to have the best chance of capitalising on this opportunity.

How Do Investors Stand to Gain?

In 2003, Bambrough brought to mind the process of developing a global list of only 25 corporations engaged in uranium exploration and mining. The list was narrowed down to perhaps ten that appeared promising, according to Bambrough. In light of the tremendous shift in the industry, I believe that fewer than 30 uranium companies offer a reasonable return on investment (ROI) at this time. An estimated 200 different companies are currently involved in some aspect of uranium mining or exploration. The most of them are stock market traders in Australia or Canada.

Sprott Asset Management has invested in what kinds of companies? This is what Bambrough had to say: "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." The enormous expense of uranium prospecting means that many of these sites are highly valuable, he continued. In particular, certain assets have undergone data collection and drilling projects valued at millions of dollars. At a fraction of the expense of beginning fresh with a green fields project, there are mining shafts that only require rehabilitation.

Bambrough recommended certain uranium equities that he thought were good. 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. These individuals were early adopters of the game and shared David Miller's (Strathmore Minerals' president and COO) expertise in the uranium industry. Along with Energy Metals Corporation, they own a vast database that is crucial for comprehending the characteristics. Strathmore Minerals and Energy Metals are two companies that own land in Wyoming and New Mexico, respectively. "New Mexico, along with ISLs in Texas and Wyoming, has what I believe to be a very bright future," Bambrough said. T.V.C. (Tournigan Gold Corp.) is another favourite of Sprott Asset Management's. "You are looking at an area that has produced in the past," Bambrough noted. "They hunted for abandoned mining sites." Previously dug by the Russians, Tournigan has drilled Slovakia's historic Jahodna uranium deposit.

The Centre of Everything

The continuing consolidation within the uranium sector might be the source of the more 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. The takeover operations to buy Quincy (TSX: QUI) and Standard Uranium (TSX: URN) were initiated in November by one uranium exploration firm, Energy Metals Corporation (TSX: EMC). A subsequent 70% increase has occurred in the price of standard uranium. Bambrough suggested that several individuals who own 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 maximise shareholder value from its uranium assets." "National Bank has the best technical team and will help us reach the right decision to maximise 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 established a price target of C$4.29/share for Strathmore Minerals in a 2005 research report, factoring in the current spot uranium price.

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. "To reduce the outrageous costs of permitting and exploration and to achieve other economies of scale, a number of smaller uranium companies should merge into larger ones, allowing them to pool their highly skilled employees." 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.

After expressing his continued optimism for the uranium industry, Bambrough concluded his remarks by predicting that excellent uranium businesses will demonstrate exceptional success in their ongoing initiatives. We continue to see tremendous opportunity in the space and are aggressively investing there. The uranium bull market has only just begun.

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