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
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
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
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or contact his publisher at (800) 528-0559 or (602) 252-4477.
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