Uranium Part II
October 01, 2004
In response to last week’s column on uranium
I received several emails asking which uranium stocks people should
invest in. I appreciate the emails but frankly, it’s quite
silly to think that I can give you specific investment advice for
your portfolio based on an email that says: “Which uranium
stocks should I buy?”
Answering that question would be irresponsible of
me as I don’t know anything about the requestor’s financial
position, age, employment, risk tolerance, etc. And even if I did
answer the question with a simple “XYZ Corp.”, it would
hardly be of any benefit without an explanation of why I like the
company.
I will say that there are very few high-quality uranium
companies out there today. Most of the so-called uranium companies
are nothing more than unsuccessful gold, or silver, or copper, or
nickel, or platinum, or palladium ambulance chasers that have found
a new ambulance to chase, and are therefore on their way to a crash-site.
That is not to say that one cannot make a lot of money
tagging along for the ride, but you have to know when to let go
and jump off; and such advice is not within the scope of this column.
As I have said many times in the past, you can read what I think
for free in this column; however, if you want to know what I do
with my own money, you will have to subscribe to my newsletter.
Details can be found at www.paulvaneeden.com.
What I will tell you is that the six-hundred-pound-gorilla
in the uranium business is Cameco Corporation* (CCO on the Toronto
Stock Exchange and CCJ on the New York Stock Exchange).
Cameco’s shares have risen more than sixty-seven
percent since May this year and the stock can hardly be called a
bargain. It was a bargain four years ago when I recommended it (a
copy of the article is on my website at www.paulvaneeden.com in
the Library Section) because it was trading for thirteen times earnings,
four times cash flow, fifty-five percent of book value and paying
a three percent dividend. Since then the stock has increased by
almost six hundred percent, so it’s fair to say that the easy
money has been made.
Nonetheless, I do think the uranium price will continue
to rise for the foreseeable future, barring any nuclear “accidents”.
And that implies that the share price of Cameco should continue
to do well. So if you want some exposure to the uranium market without
doing any more due diligence than the free advice you can get on
the Internet, which, by the way, is usually worth just about what
you pay for it, then Cameco might be all you need to know.
In addition to being the world’s second largest
uranium mining company it is also one of the few companies involved
with the downstream processing of uranium, which means that it will
not only benefit from a higher uranium price but also from the potential
increase in the beneficiation of uranium before it can be used by
utilities to generate electricity.
There is a growing global realization that it will
be impossible to meet the requirements of the Kyoto Agreement without
resorting to a major shift towards nuclear power generation. Nuclear
power is not only a clean source of energy, it is an abundant source
of energy. And it might be a more prevalent source of energy than
what many people realize.
There are four hundred and forty nuclear power plants
currently operating in thirty-one counties. Sixteen percent of global
electricity production comes from nuclear power plants and thirty
nuclear reactors are currently under construction in eleven countries.
In addition to these commercial reactors, there are
two hundred and eighty research nuclear reactors in fifty-six countries
with more under construction. And over one hundred and fifty ships
are being propelled by more than two hundred nuclear reactors. Indeed,
nuclear fuel is more prevalent than what most people realize. And
it just shows you that nuclear power generation is not only clean,
it is also a lot safer than what certain special interest groups
would like the world to believe.
The massive increase in the uranium price that we
saw during the Seventies was caused by fear that the market would
not be able to supply utilities with sufficient fuel to power their
commercial reactors. In response, the utility companies started
stockpiling uranium and this only added to the current demand, which
drove the spot price of uranium through the roof.
Current annual demand for uranium is approximately
one hundred and seventy million pounds while mine production is
only about seventy five million pounds. If utilities panic again,
and it is quite likely that they will since the cost of uranium
fuel is a very small part of the cost of running a nuclear power
plant, then we could easily see the current demand for uranium increase
dramatically.
Given the tight supplies, a further increase in demand
from the utilities would blow the lid off the uranium price and
we’ll see a replay of the Seventies, when the uranium price
exceeded forty dollars a pound.
But it would be dangerous to assume that the uranium
price will continue to rise without interspersed gut-wrenching corrections.
Keep that in mind, because the uranium price has increased almost
three-fold in less than four years without a correction -- one is
overdue.
As with any market, and all speculations, we have
to try to keep our wits about us. It’s not always easy: greed
and fear are both powerful motivators. But it is fun.
Paul van Eeden
*This is not a recommendation to buy or sell
any security. I don’t own Cameco Corporation nor do I intend
to buy or sell the stock in the foreseeable future. That does not
preclude me from doing so, however, should I change my mind. I am
not registered as a financial advisor and this article should not
be construed as giving you specific investment advice. It should
be specifically understood that it does not give you specific investment
advice. Paul van Eeden, Kitco, anyone associated either with Kitco
or Paul van Eeden will accept no responsibility or liability, legal
or otherwise, from any losses whatsoever that you may suffer if
you were to act on the information in this column. This column represents
the views of Paul van Eeden only and that is all it is represented
to be. Read it at your own peril.
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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