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Mickey Fulp: Bullish on Uranium and Rare Earths
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Source: Karen Roche of The Energy Report4/29/10
 Mercenary Geologist, Mickey Fulp feels that much of the uranium production in the world is under the auspices of regimes or countries that are unstable or unfriendly to the West, leaving supplies vulnerable. He prefers "companies operating in Wyoming, New Mexico and the Athabasca Basin because that's where the majority of uranium has been produced in the past and will be in the future." In this exclusive interview with The Energy Report, learn why his eyes are on uranium right now and why the unique niche rare earth market is heating up and still at early stages, providing potential investment upside.
The Energy Report: Mickey, do you see undervalued sectors that make you think, "Boy, the market just hasn't gotten this yet?"
Mickey Fulp: The only sector that I think is absolutely undervalued right now as a whole is uranium. It certainly has been beaten up since mid-2007.
TER: Are things improving, in your opinion?
MF: Absolutely not. Although I first started saying in January of '09 that the uranium sector was down and I expected uranium prices to rebound, they haven't done that. However, as opposed to last year, there is a lot of analyst consensus now that the uranium sector is undervalued. I've been bullish on uranium for quite a while based on supply/demand fundamentals and that bullishness still exists. So, from a contrarian point of view, I would say that most uranium stocks are undervalued right now and present buying opportunities.
TER: Some interesting agreements have been made surrounding the Washington Nuclear Security Summit regarding enriched uranium, specifically the agreement between the United States and Russia to disarm one-third of their nuclear arsenal. Ukraine has also agreed to dispose of their highly enriched uranium stockpile. Will these developments have a continued impact on uranium prices?
MF: I think that is unclear as of now. These highly enriched uranium agreements could certainly supplement supply but weapons-grade material has to be converted into low-enriched uranium for use in nuclear reactors. Highly enriched uranium used for nuclear weapons is about 85% U-235. The typical light-water reactor uses light enriched uranium that's typically 3% to 4% U-235. This could certainly overhang the market. The spot price is $42. Long-term is about $58. I don't think it's likely we will see major increases or decreases in these prices in the short to mid-term.
Certainly all the new mines coming onstream have increasing costs of production. There are very few new mines proposed or in development that are going to make money at a $40 spot price, but between 80% to 85% of the uranium yellowcake market is sold on long-term contracts. That's somewhere around $60 right now. The other thing to note is that fuel is only 10% of the cost of producing electricity in a nuclear power plant, which is very minor. We see sovereign nations, companies and utilities as some of the biggest buyers of uranium and often those sovereign entities are not concerned with the price.
In the uranium sector, supply security is the important thing. We do know that demand is increasing significantly year after year. Mine production is about two-thirds of the world's use. There are 59 new reactors in construction which will need initial startup feed. Utility companies that produce power through nuclear power plants historically have signed supply agreements for about three years. Those secure supplies right now are averaging about a year and a half. Based on that, I'm very bullish on the demand for uranium.
What we have to take into account is the geopolitical situation of uranium production. Forty-six percent of 2009 production came from countries that are not stable or very friendly to the western world. Most uranium is consumed by the West, especially the United States, which consumes about 30% of world production on a yearly basis, around 55 million pounds. Yet we produced less than four million pounds last year. So where does our uranium supply come from?
For the last few years, a significant amount has come from the Russian Megatons to Megawatts program; high-enriched uranium being reduced to low-enriched uranium. However, the number-one producer of uranium last year was the country of Kazakhstan, which is arguably one of the most corrupt regimes on the face of the planet. There were internal corruption issues in Kazakhstan last year with the government showing indications of increasing nationalization of its uranium industry. Nevertheless, production continued to increase significantly. The number-five mine producer last year was Russia, followed by Niger, which had a coup in February. There is every reason to think that a significant economic reason for the coup was that over 70% of Niger's exports are uranium. It supplies France with 40% of its uranium. The number-seven producer in the world is the country of Uzbekistan. Investing in the "Stans" is a huge geopolitical risk and has been since the Soviet Union dissolved in the early '90s.
TER: But is it an increased risk because they won't sell to the West, or because they may not produce uranium because of political and economic turmoil?
MF: I think it's combination of both. Kazakhstan has increased its uranium production astronomically just over the last three or four years. It has replaced Canada as the world's largest producer. Whether or not it can sustain that production remains debatable. As the shallow, easy-to-get, in-situ uranium is produced and depleted, it gets more difficult to go deeper and deeper. Not many people are aware of the fact that in-situ recovery uranium operations have very steep decline curves. In other words, you get the easily extractable uranium out first and then you have a continuing decay of production as the field matures. That happens very quickly. So in Kazakhstan, not only do you have geopolitical risk, but there's also the economic risk that they can't maintain their production. Certainly in Niger, I think it's strictly geopolitical risk. There are two big mines that produce there. There is a third huge mine coming onstream that will produce on the order of 11 million pounds a year, which would be about 7% of world production.
TER: Are you still bullish on rare earth elements (REEs)? Do you still see potential upside or has the market priced that in?
MF: I'm still bullish on rare earths. I've said more than once recently that this is a very early stage of a bubble supported by the U.S. government. Policies are being implemented by the government with a bill in Congress likely establishing a rare earth element stockpile. There is increasing demand for these metals that are completely controlled mine-to-market by China. There is an awareness and a mine-to-market philosophy developing in the U.S. I continue to be bullish on the sector as a whole and think it's still very early on.
I've used an analogy in the past of a nine-inning baseball game. I think we're somewhere at the bottom of the second or the top of the third in the rare earth element bubble. So there are still opportunities in the sector. Many of these companies have taken off with valuations that have increased anywhere between two to over 50 fold over the course of a year, but I see additional upside.
Over the last two weeks or so there has been a significant market correction of most of the rare earth element players. This is very much a junior exploration sector play within a niche or specialty metals market. The sector has not attracted major mining companies. If you look at the recent market correction, and if you look at the charts, these junior companies are building strong charts. When they build strong charts like that you can see additional upside. So once again, I may go in and buy on weakness. I want to caution your readers: I was in very early in this play so my cost basis is much lower than current valuations. As you know, we all talk our own books and that's what I'm doing here. But I see potentially higher valuations in the offing.
TER: How many years do you think this nine-inning game will last, to use your analogy? Are we looking at a decade of upside potential in the rare earths, or one to two?
MF: I would say somewhere in between. For U.S. and Canadian producers to come online and for the mine-to-market capability to be developed in this sector, we are looking at about five-plus years. Demand is increasing from phosphor and lighting, high-tech electronics, hybrid cars and wind turbine energy. These metals are also crucial to national defense and security. I think there will be a significant time period before this bubble is ends, unless there is another world economic meltdown.
TER: What do you see in the green alternative energy space with uranium?
MF: I see uranium as a proven green technology which is established, economic, and expanding. Now certainly the solar and wind industries will contribute to the green energy agenda that governments are propagating to reduce carbon emissions. However, I do not follow any companies in the solar and wind arenas and there is a logical reason for that. Uranium has a long history of production and profitability. The kilowatt-hour unit cost from a uranium power plant is much cheaper than natural gas- or coal-powered plants. The solar and wind sectors are not economic without direct government subsidies. I am reluctant to invest in entrepreneurial, venture capital companies that depend on government subsidies and the current whims of elected government officials.
TER: Anything else you'd like to advise our readers?
MF: It's incumbent to do your own due diligence because you and you alone are responsible for your investment decisions. Careful and diligent research will allow the lay investor to make better speculations in the high risk junior resource sector.
TER: Mickey, we appreciate your spending some time with us today.
The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has over 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst, writer and speaker, Mickey launched MercenaryGeologist.com in late April 2008 and can be reached at Contact@MercenaryGeologist.com.
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