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| Prices as of: October 29, 1998 |
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Gold: $293 |
30-yr Bond: 5.11% |
This Month
This is an extra-long issue, partially because it's extra-overdue. I've promised an in-depth report on uranium and the companies that produce it for a long time, and just haven't been able to get around to it, even though the shares of the companies discussed below have been on the recommended list for an equally long time.
An historic opportunity has been developing in uranium for several years, and uranium companies may be the most compelling single opportunity in the resource field right now. I delayed this article, in good part, because I wanted to recommend them not at just good prices, but at a panic bottom. And I believe this is it.
The next 14 pages are devoted exclusively to uranium and the companies that produce and explore for it. To get a complete grip on their prospects, however, it's also important to look at the electric power industry, since it's the end user of almost all uranium today, the fate of the nuclear power industry and that of uranium are inextricably related. But since this letter is already terribly over-long, I decided to give you my bottom line on nuclear power briefly, but make a separate, detailed report on it available free to those who ask for it. Call Rick Rule at 800-477-7853 for your free copy.
It's interesting how, when you look into almost any subject, one thing inevitably leads to another. I've long held that anyone can, and indeed everyone should, become something of a Renaissance Man, regardless of his daily station in life. A long-haired, tattooed, and greasy motorcycle mechanic, for instance, might not seem like he would have a chance at serious self improvement. But, if he wants to be a good mechanic, he'll learn something about metallurgy to avoid stripping the threads when he torques down a head. Looking into metallurgy would lead him naturally to chemistry, and then to physics. From which it's a short jump to astronomy. And from there to cosmology, then philosophy, literature, history... You get the idea. It took some discipline on my part to limit the discussion at hand to its essentials.
I actually covered electric utilities, and touched on uranium, in my book Strategic Investing (Simon & Schuster, 1982). Longtime readers will recall its top recommendation was the utilities, then typically yielding 15% - four to five times today's levels. The world's changed a lot since then. And I'm betting that the changes we'll see in the next few years will be even more dramatic.
The average guy, who's only gotten into the market in the last few years, after the mania was well under way, is going to get hammered. Right now the place with the most upside and least downside is natural resources, in general, and uranium, in particular.
Investing In Uranium
It's a certainty that global baseline demand for electricity will continue to grow rapidly. What is open to question is whether the amount of nuclear power generated over the medium term will more-or-less stay the same worldwide (the consensus opinion), or start increasing, which I believe. One of the reasons uranium prices are now low is a (false, in my opinion) perception that nuclear is an "also ran."
But suppose I'm wrong, and the consensus is right? Uranium prices are still headed higher, simply because current new supplies are only about 60% of current usage; the industry has been living on inventory since 1985, and inventory is now getting shore. For supplies to keep pace with demand, uranium prices must rise significantly.
Since its all-time high, in 1979, uranium has fallen from $43 per pound to a low of $7 in 1995, and now trades at $9.50. That's a 75% drop in dollar terms, but over 90% in real terms. A chart of the uranium price for the last 18 years looks like the side profile of a ski hill.
My argument is simple: global consumption of uranium is about 170 million pounds; new mine supply is about 100 million; so there's an annual deficit of about 70 million pounds. Total available world inventories appear to be somewhere between 175 million and 300 million pounds, which is theoretically enough to cover the deficit for as many as four more years; but most of that inventory is going to stay put. And under no circumstances will it be allowed to go under 18 months supply, for security reasons.
New production, therefore, is going to have to do more than double, and that's not going to happen except at much higher uranium prices.
That's an accurate sketch of the situation, but things are never that simple.
One frustrating problem is that it's hard to get accurate numbers; both the business and governments are notoriously secretive about uranium. If you read as many reports, from as many sources, as I have recently, you'll find it's hard to know whose numbers to believe. Most come from the Uranium Institute, in London, or the U.S. Dept. of Energy, but various other governments, trade groups, and companies put out their own numbers. There's often considerable variation. But the following accurately reflects the overall reality:
Lots of factors can radically affect the price of uranium.; The direction of nuclear power is probably the biggest single variable, but there are at least five other major factors that could have a big impact on uranium prices. The way I read it, most of them point to higher prices.
What else can affect the price?
If nothing else, the commodity production business is highly cyclical, moving like a pendulum from surplus to shortage. In the case of uranium, the erosion of above-ground stocks has been on-going for 13 years, and continues at an accelerating rate.
Paradoxically, although today's large above-ground supplies are keeping the price of uranium down, they're actually crucial to the growth of the nuclear energy. No right-thinking utility would build a new nuclear plant without a secure supply, and with demand levels nearly twice new supply levels from mining, it is only a substantial above-ground inventory that allows that security of supply.
There are, however, a number of special factors that complicate and accentuate the situation: unstable supply sources, weapons conversion, MOX/breeders, the U.S. Enrichment Corp., and utility stockpiles. At least the first three boil down to politics, which inevitable creates distortions in the market. But politically caused distortions are the very stuff of speculative opportunity.