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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Uranium Expert: Consolidation, But No ‘Price Crash’ Ahead

Commodities / Uranium Apr 12, 2007 - 10:57 AM GMT

By: James_Finch

Commodities

Soaring yellowcake prices have accelerated a greater number of uranium juniors rolling off the assembly line. As fast as stock promoters can revive old shells, joint venture a more serious uranium company's castaway property into the re-named shell, and then wheel a former ‘big name' out of retirement (or a nursing home), the company will announce they are in the ‘hunt' for uranium.

Nearly all are mining the stock market – that means you, specifically the investor. Very few, probably less than 10 percent, have any realistic chance of ever putting a shovel to the ground and coming up with uranium ore. Fewer still are likely to intersect sufficiently economic delineation holes which might someday become a uranium mine.


While we won't name any names, we are particularly amused by some efforts. We reward 90 percent of those companies contacting us by hitting delete on their ‘story pitches' for editorial coverage. Some of the newer schemes involve the more experienced uranium juniors who pawned off some of their bad real estate to the naïve newcomers, which in turn hope to milk the less experienced uranium investors.

Imagine the newbie junior uranium which plans to build an ISR uranium recovery operation in the middle of a lignite deposit (yes, uranium can commonly be found in coal formations). A few recently minted uranium juniors daydream of ISR-mining unsaturated uranium ore bodies or ore above the water table. (See recent interview for an expert opinion: http://www.stockinterview.com/News/04092007/Water-ISR-Uranium-Mining.html )

With this in mind we asked: Why should we believe the recent U.S. OTC Bulletin Board entry Yellowcake Mining is different? With now nearly 500 different shades of uranium hopefuls, is this one worth getting to know? On March 5th, the company announced a ‘big name' addition to its Board of Directors. While scanning through the first two paragraphs the third one woke us up. ( http://biz.yahoo.com/bw/070305/20070305005225.html?.v=1)

So we made a few inquiries. TradeTech's Gene Clark, whose consulting company recently announced the historic US$113/pound spot uranium price, gave us the thumbs-up. “I know Rob Rich, he's a really good guy,” he told us. Dr. Clark remembered one part of Rich's uranium marketing career with a well-known U.S. utility.

We talked to Dr. Robert Rich, a Harvard University PhD, long-time member of the Society of Economic Geologists, and formerly of BHP Billiton, Sumitomo Corp and Yankee Atomic Electric Company. On a government-funded Harvard post-doctoral fellowship, he spearheaded some of the earliest research on what are now called unconformity-type uranium deposits. One such unconformity deposit included the Athabasca Basin. Dr. Rich was part of the group which sold the first Olympic Dam U3O8 to U.S. and Canadian utilities. And so on. It appears he's well-thought of and well-liked by the uranium industry.

Naturally the first question we asked was a challenge about his becoming a director of Yellowcake Mining, to which Dr. Rich politely responded, “I wouldn't lend my name to a bogus junior, of which there are many.” He added, “I wouldn't in good conscience be able to work for an outfit that wasn't heading toward being an operating company. It's just not who I am.”

History Points to Consolidation

We talked about the industry, and he gave us an important history lesson. “There are just too many players,” Dr. Rich explained. “Even if all them are sincere, there's going to be a lot of consolidation. They are going to have to get together through joint ventures or mergers. This is what's happened in any mineral boom.” He brought up the Butte copper deposit discovery in Montana, during the late 1800s, “It was divided up into a million different little mining claims, and nobody could do anything with it.” Subsequently, Anaconda Copper was formed to assemble all the claims to mine the deposit.

In a similar example, he pointed to Pretoria, South Africa's diamond boom, also in the 1800s. “People couldn't do anything with their 20 acres or 100 square meters,” he explained. “In order to make economic sense, you have to pool things together. A lot of the little companies go out of business, and big companies either take them over or a big company is formed from scratch.”

Was he talking about Yellowcake Mining? “I think Yellowcake has the goal to become a producing company, a miner, not mining the stock market,” he said. “The more I learned about where Yellowcake Mining was heading, the more I liked it.”

But how is this one different from the other 200-hundred-plus lottery tickets in North America? Rich shot back, “What Yellowcake has that 90 percent of the other junior uranium companies worldwide don't have is the opportunity to earn into an 80-percent share of a land position, which is likely to lead to uranium production.” Then, he added, “I would say most juniors do not have that. Many don't have anything significant except maybe a good person with an idea.”

As an industry insider, how does he rate Yellowcake? “It's probably amongst the top 10 percent of juniors in that it actually has a project that is likely to become a producer,” Rich concluded. “I think the fact that it is a U.S. registered company with U.S. resources adds some retail stock market appeal in the U.S. It would appear the market does see the potential because the market cap is running close to a quarter-billion, and the company is less than three months old.”

Dr. Rich pointed out something which often arrives on our plate, ‘The Canadian Question.' He said, “If one looks at the overwhelming majority of juniors, they are not U.S. registered companies. They may have holdings in the U.S., but they are out of Canada, Australia and perhaps other nationalities.” What's the difference? “I think there is a market for a pure American uranium play,” he said. “People could fall in love with Wyoming uranium. People could love Juniper Ridge. There are people that like American-based energy sources.” Good point.

Will the Uranium Bull Continue Running?

Because of Dr. Rich's close industry ties, we talked shop. How does this bull market compare with the previous ones? “There are three things that have changed,” he told us. “One is the pretty strong expectation of new nuclear plant orders, and the fact that the U.S. utilities that are anticipating making new nuclear plant orders have already been purchasing material for first core. Demand has been stronger than expected from people who will be end users of it (material). In the nearer to mid-term, there's been an unexpectedly large amount of buying by both investors and by producers. They have either had bad luck with their operations in terms of getting out the expected uranium, or have had accidents.”

What started all this? “Cameco, ERA, Olympic Dam and Rossing were down for the first quarter 2003. There was a lot of stuff that was happening that brought the major producers into the market for millions of pounds a year, when before they were offering buyers free options for additional stuff,” Dr. Rich pointed out. “We went very quickly from an oversupply situation to a shortage. Producers were using up inventories and/or having to go to the market for material. I know that personally because I was involved in acquiring uranium for one of the major producers.”

Is this climate going to continue or lessen? “It should lessen,” Rich told us, “but that would be dependent upon there not being any more serious incidents. It would either delay a new producer like Cigar or impede a current major producer.”

What is on the minds of the utilities? “One big issue that I think overhangs the market, too, is: What's the future of Olympic Dam?” he pointed out. “They were soliciting for 15-year contracts to underwrite at least a portion of the expansion.” Can this become a problem? “Well, I hear them out marketing – I hear from the utilities, and I know the BHP Billiton marketers, so I hear from both that there is activity,” he said. “But if you look at the BHP Billiton quarterly reports, when you look at new projects or developments, or try to find out anything about Olympic Dam, there's nothing said. They give uranium really minor play as an odd sort of metal that they have to produce. Admittedly, uranium is only a few percent of their gross sales revenues, so maybe it's a wart on the elephant's back.”

So where is the price heading? “You are not going to see prices continue to go up the way they have been going up, because they are already well above the level required to produce more than enough uranium to satisfy expected demand,” Dr. Rich explained. “I think you'll see a flattening, if not a decline. I don't think that's going to happen until the wind goes out of the investors' sails and producer buying ceases.”

It's not just speculative buying then? “It's both,” he responded. “Sometimes, it's the utility looking to just round out their inventory, but more often than not, it's producers or investors They either need material to deliver under legacy contracts, so they are buying and reselling at a loss, or else it's investors who still see further upside.

Is Dr. Rich still bullish? “If I leaned my opinion to one side or the other, I would lean to the bear side,” he told us. “But what does the bear mean? In this market, it just means a weakening or a downturn or a flattening. I don't think you'll ever see the sort of crash that's going to send this back to US$20 to $30 prices again.”

How will utilities react to any significant downturn in the uranium price? “You are going to panic the market, and it's going to pop back up,” he quickly pointed out. “The minute buyers see things go down, they are going to flock back into the market, and say, ‘Okay, we knew this was going to happen. Now, we buy.' The utility consumers will come back into the market like lemmings, and buy up anything available. The next thing you know, there's another spike.”

Biography:

Dr. Robert Rich has consulted or worked directly for BHP Billiton, Sumitomo, Ontario Power and several U.S. utilities. He has been involved in nearly every step of the nuclear fuel cycle, including uranium projects development, marketing, conversion, enrichment, transportation and spent fuel disposal. He helped bring the first shipment of Russian-enriched uranium to the U.S. in the mid-1980s and helped host the first nuclear delegation to the U.S. from the People's Republic of China.

By James Finch

http://www.stockinterview.com

COPYRIGHT © 2007 by StockInterview, Inc. ALL RIGHTS RESERVED
James Finch contributes to StockInterview.com and other publications. His focus on the uranium mining and nuclear fuel sector resulted in the widely popular “Investing in the Great Uranium Bull Market,” which is now available on and on http://www.amazon.com The weekly spot uranium price is posted on the TradeTech website every weekend at http://www.uranium.info


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