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Long-Term Uranium Demand Will Continue Despite Japan Nuclear Crisis

Commodities / Uranium Apr 01, 2011 - 02:42 AM GMT

By: The_Energy_Report

Commodities

Best Financial Markets Analysis ArticleThe peripatetic Mercenary Geologist Mickey Fulp explains that even if all under-construction and planned nuclear facilities are suspended, not enough uranium is being mined currently to supply ongoing demand. In this exclusive interview with The Energy Report, Mickey reveals a number of companies poised to benefit from this long-term fundamental upside.


The Energy Report: What impact will the damage to the Fukushima nuclear facility in Japan have on the spot price and/or market valuations for uranium companies?

Mickey Fulp: Currently, it is unknown what the fallout (pun intended) from this nuclear incident will be both economically and geopolitically. At the very minimum, Japan has lost a significant portion of the energy output from one facility. Eleven nuclear reactors out of the country's 55 are shut down currently and at least two will never produce electricity again. That energy capacity will need to be replaced by other electrical sources.

Globally, this is the third nuclear plant incident in more than 30 years. The first was Three Mile Island. While nothing of real consequence happened, it did change the perception of nuclear safety. The second incident was Chernobyl where the reactor melted down, resulting in serious environmental and health impacts. That reactor was an obsolete and inadequate design with no containment vessel and was never used in the West. Although Japan's Fukushima plant was using some older technology and we still don't know what the full damage will be, it will not be anything near the Chernobyl disaster.

Anti-nuclear organizations will be emboldened by this situation while pro-nuclear concerns likely will remain so. Looking forward, who knows what the impact will be? Will we see some older reactors come offline? Probably, however, most countries can't afford to shut them down because electrical demand will not decrease. Will we see some reactors in the process of construction stop construction? Perhaps. Will we see nuclear facilities that are planned but not yet started be delayed or waylaid? That seems likely.

TER: If reactors under construction or planned are postponed or abandoned, how much will that impact the demand for uranium? Could we see a uranium price crash?

MF: It wouldn't surprise me if we saw a drop in the spot uranium price and stocks. I don't think it will diminish much uranium demand in the short or midterm, because the fundamentals haven't really changed. There is still a shortage of uranium. We haven't mined enough uranium for 25 years and our current mine supply deficit is 30% of total yearly demand. We've been operating on depleting private and sovereign stockpiles and the conversion of Russian warheads to nuclear fuel rods. The Russian program ends in 2013 and stockpiles are getting depleted to low levels. So, even if all the reactors under construction, planned and proposed, are scuttled, we'd still need more uranium for the reactors that are online currently than we are presently mining.

TER: Do you see any scenario in which the Japan incident will impact uranium prices significantly?

MF: We saw spot prices crater to a low of $49/lb. on March 16 before recovering to $60/lb. on March 21. There will be a price impact but, as for significant damage to the nuclear energy industry, it is way too early to tell. Frankly, I do not know. I do know that current reactors need to replenish stockpiles of uranium periodically and that we don't mine enough at this time. Demand, most likely, will still be there over the short, mid and long term.

TER: Will other energy commodities increase due to this nuclear scare? Specifically, I was thinking about natural gas, which is in abundance and really cheap.

MF: We have a mixed bag of energy prices now and lots of volatility. As the uranium stocks sold off, solar, wind and natural gas stocks took off briefly before reality set in. Solar cannot provide baseload electricity because of night and wind cannot because it does not blow constantly at the same velocity 24 hours a day, 7 days a week for 365 days a year. We don't have the natural gas transportation, storage and filling infrastructure to convert electrical plants or vehicles quickly.

Coal has been the real winner in 2011 with supply disruptions causing rapid rises in price, but it is our dirtiest form of energy and a major pollutant worldwide. Oil prices are high at over $100 a barrel and major volatility is likely to continue due to Middle East turmoil. We also have the ecofascists who preach "clean and green," but then launch lawsuits to stop solar plants in the Mojave Desert and offshore wind farms on the East Coast. What do the NIMBYs (not in my backyard) want, all of us to just freeze in the dark?

In my opinion, we desperately need a viable domestic uranium industry as we strive to reach energy independence in the U.S. I trust that the American people and its politicians and policymakers will continue to ensure that all forms of energy, including nuclear power, play a part in this mix.

TER: You have written that your two favorite uranium companies are Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF) and Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY). Let's talk about them. In your December Musing, "The Mercenary Geologist's Uranium Review Q410," you felt that Strathmore Minerals was the most-undervalued uranium developer listed on the North American exchange. You wrote, "Rest assured, given the current time and price that I am not selling." The stock chart shows it's been jumping around a bit since December. Can you give us an update?

MF: Strathmore is continuing to work toward a feasibility study at Roca Honda in New Mexico and a mine permit application in Gas Hills, Wyoming. The company likely will monetize some of its other seven non-core development assets in the next 12 months. I still expect the consolidation of uranium developers in New Mexico within the next year or two. A private European investment fund divested of its Strathmore holdings in early 2011, and that depressed the stock price. It took a while for the company to chew through this, and then it went as low as $0.63 in the four-day selling frenzy after the Fukushima incident. STM has recovered nicely in recent trading sessions and is now trading at about $0.75.

TER: You mentioned that your other favorite company in the uranium sector is Mawson Resources. You alerted readers about Mawson on November 17 and those who acted on your alert got more than a double in four days from $1 to over $2. What's in store for Mawson in 2011?

MF: Mawson had a phenomenally quick double based on project news, my BNN appearance, a Mercenary Musing alert and the San Francisco Hard Assets show that allowed the company to show off its wares. After the initial run-up to $2.68 and profit taking that took it back to about $2, it ranged between $1.75 and $2.25 before dropping to $1.16 in the aftermath of the Japan disaster. Mawson recently announced final 2010 surface sample results from the Rompas project in northern Finland. The results are impressive, with bonanza-grade gold and uranium values. The stock moved when the company received permits for shallow drilling and is once again in the $2.10 range. Rompas could be a major new discovery or perhaps just a curious surface anomaly; more likely, it will be something in between. Now, we will wait for results from the drilling and what the old truth tool will tell.

TER: Do you have any new ideas in uranium space?

MF: Of course, I am always looking for beaten-up stocks that have strong fundamentals and solid underlying value. My recent favorite is Uranium Energy Corp (NYSE.A:UEC), a new in-situ recovery (ISR) uranium producer in South Texas. Although still early on, its first quarter of production came in with cash costs of $18/lb. Given uranium's current spot price of $60, it looks like a potential winner to me. It is the one stock I am accumulating on sector weakness for long-term investment and anticipate a plan to grow this junior producer into something bigger in the near future.

TER: In your last Mercenary Musing, which is available to your free email subscribers, you wrote, "Putting in stink bids and patiently accumulating as the market rises and falls is always a legitimate strategy." In general, what constitutes a "stink" bid—20% from the recent price, 25% off the price?

MF: To me, a stink bid is a bid lower than the stock's normal or recent range that implies a lack of interest, a market correction, some sort of selloff, a dormant period with no news or, perhaps, breaking below the 50- or 200-day moving average. Rest assured, I am now closely watching the uranium space for contrarian opportunities.

Michael S. "Mickey" Fulp is the author of The Mercenary Geologist. He is a certified professional geologist with a B.Sc. in earth sciences with honors from the University of Tulsa and M.Sc. in geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 23 years, specializing in geological mapping, property evaluation and business development.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
DISCLOSURE:
1) Brian Sylvester and Karen Roche of The Energy Report conducted this interview. They personally and/or their families own shares of the companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: None.
3) Greg Gordon: See Morgan Stanley disclosure that follows.*

*The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary.

For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.

The ENERGY Report is Copyright © 2011 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The ENERGY Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.


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