Before we talk about the potential of uranium shortages and the steep price rise in that energy source, could you explain how you got started with this idea, and what is the philosophy behind Strathmore’s acquisition program of uranium properties?
Several years ago, Strathmore Minerals started with the idea of acquiring properties “out of the money” at very cheap prices in the belief that the uranium prices would recover so that our assets would be worth more. No one was paying attention to the commodity we chose: uranium. Strathmore Minerals is basically a call on the price of uranium. That’s how we started the company. This strategy is similar to what Lumina Copper (AMEX: LCC) used and what Silver Standard used. For example, the chairman of Silver Standard Resources (NASDAQ: SSRI) is on our board of directors. Our first step was to buy every pound we could for as cheaply as possible. The second step is to buy property that we think we can put into production. We are actively looking for those.
But uranium has a powerful environmental stigma. Why, then, are you enthusiastic about this type of energy source?
As with most people, when I began investigating uranium, I thought this was bad stuff. I thought of Three Mile Island and everything else. The more homework I did on this, the more I realized that nuclear power is clean and safe. That is primarily what uranium is used for now. It should be known that no one ever died at Three Mile Island. No one actually died at Chernobyl. Yes, people got sick. Compare that to coal or the oil spills in the fossil fuel sector, and the damage it has done to the environment. The problem is no one is championing nuclear energy. Frankly, the “greenies” have done a great job of burying the story. As I did homework, I found out France relies on nuclear power for about 78 to 80 percent of its electricity needs. I realized that somebody did a great job lobbying and built a very unhealthy picture toward uranium, when really it’s needed. We don’t talk about the cost of coal. We don’t talk about global warming. But, look at what coal has done. Global warming is a function of fossil fuels. That is why you are seeing a growing positive response to nuclear power. For example, one company has applied to put a new nuclear reactor into the US.
To what do you attribute the recent, steep price rise in uranium?
Since last year, the price of uranium (U3O8) has climbed back steeply back up. At one point, the price was moving up about $1/pound per month. Uranium’s price is more in line with the price of oil as opposed to other commodities. For a long time, we’ve only produced on the average about 90 million pounds, when we needed 140 (million pounds). There’s been an imbalance for a number of years. This extra came from foreign sources, or from internal US inventories. Since the 1980s, we’ve been using more uranium than we have been producing in the western world. As a result, the extra that we’ve needed has come from Russia, the US government or inventory that utilities had.
But most investors, let alone the consumer, don’t know that uranium’s spot price has nearly tripled, since bottoming three years ago. Why is that?
Uranium only makes up one percent of the cost of running a nuclear reactor. The biggest factor in why uranium prices can go up, even more rapidly than gold, is that uranium is insensitive to its use. Uranium prices can go much higher. In casual conversations with a few Toronto analysts, some believe it can go up to $80 or $100/pound. For example, if the price of gold tomorrow went to $800/ounce, it will affect someone’s purchasing decision. The guy might say, “I was going to buy this ring and now it’s up 70 percent because the price of gold is up. Maybe I will buy a silver ring instead.” The same occurs with other commodities. People may change their purchasing decision based on a commodity price doubling.
If the price of uranium went to $44/pound, the average consumer’s electricity bill might go up a few dollars. It is not going to force someone to turn off their power. However, if the price of oil doubled tomorrow, many of us would be driving smaller vehicles. It would make a fundamental difference in how we behave. That’s not going to happen with the price of uranium. It’s like buying pencils for your office. It’s not going to change the way you do business. Even if no nuclear reactors come onboard for the next few years, the ones already there will need the pounds (of uranium). We have a shortage coming up.
Why do you believe a uranium shortage is in the cards?
Bottom line is: the nuclear reactors are going to run out of fuel. You have to know that permitting takes a long time in the uranium industry. It’s not like finding a gold property tomorrow and maybe two years from now you are pouring gold. Typically, the permit takes at least three years out. Because nuclear reactors need it, that’s what is causing the price rise. Demand has kept going higher, but production has fallen off the chart. In this industry there are only about half a dozen companies exploring for uranium. At one time, back in the late 1970s and early 1980s, there were almost 150 uranium companies. There hasn’t been any underground mining since the early 1990s. And that doesn’t even include a wild card: there has been talk that by 2020, 90 percent of the nuclear reactors coming onboard will be for China.
And what would reverse uranium’s steep price rise?
The only thing that could kill this market would be if Russia discovered it had a lot more pounds to sell. Or the US government, through USEG, came up with more pounds. When we first entered the market, eight years ago uranium rose to around $17-$18/pound. Then it fell. What happened was the U.S. government sold their uranium to a private group, who turned around and dumped it into the market, from then until last year. In October of last year, the Russians were also dumping uranium onto the market for their hard cash.
If replacement value for uranium comes in the form of exploration costs to find and mine this energy source, what would that cost be?
Realistically, it would be $20 to $22/pound. I know some are going to say they can do it for less. By the time you take your exploration costs, development costs, and so on, you really need to get $22 to $25 for most properties to go into production and still make money. That’s why most of what you see in the market are ISL (in situ leach) projects. On one property we discovered, it would cost between $16 and $17/ pound to pull it out of the ground. But on others, it might take $20 – 22/pound to pull it out of the ground, after labor costs and sell it on a forward contract. Canada is producing the most uranium because of the grades. Some say Canada has the lowest cost, but that’s not quite accurate. What they mean to say is that the cash costs are the lowest. People forget that it costs up to $2 billion to put some of these into production. Cameco (NYSE: CCJ) was a creature of the government at one time. They were treated that way.
Earlier you noted that investing in Strathmore Minerals was “basically a call on the price of uranium.” Can you clarify what you meant by that?
As uranium prices, the share price of Strathmore Minerals should rise. If you look at Bema (Amex:BGO), when gold prices were at $265/ounce, what was it worth? As the price of gold moved up, it had value. Has it gone into production yet? No. Silver Standard (NASDAQ:SSRI) is similar, but it has had to tell its story because people are so focused on gold. The key for investors is not to go where the crowds go, but to go where you can find value. If you believe that nuclear power is the place to be, and the shortage is real, you have got to own uranium stocks.
What sets Strathmore Minerals apart from any other exploration companies in this sector?
I challenge any junior exploration company to show an individual who has actually put an ISL (in situ leach) uranium mine into production, including Cameco. They just aren’t around because the industry has been dead since the early 1980s. There aren’t many experts left in this business. The last standing geologist, which Cogema had, was David Miller, who is now working with Strathmore Minerals, as our head consultant. He is the one who has put the Strathmore strategy together. We’ve been looking in southern and eastern Africa. Strathmore is going wherever there are pounds that others have overlooked. Our competitive edge is a database we acquired from Kerr McGee (NYSE: KMD), which used to be number one in the uranium industry. Recently, we announced properties in Wyoming that could be satellite ISLs. We have enough pounds there that we could throw one of them into production. But we still need higher prices. We are still in the acquisition stage.
Strathmore is going to be very aggressive in picking up properties that we think have pounds in the ground or smaller properties that we think can be ISL-able in the US. Everything we’re looking at in the US is for ISL. In Canada, we have over 700,000 hectares in the Athabascan region. That’s a major asset for us. It’s one of the richest areas in the world for uranium. Some of our targets are near existing mines. In Quebec, we’ve got a large property that was drilled by Uranerz. Robert Quartermain has certainly been a part of that strategy. That’s what he did with Silver Standard, and that’s what we’re doing here. We are aggressively going after properties. When sophisticated investors meet our team, they see the story we’ve got and they see our management. You’ll see why we were able to millions of dollars in financings. Our strategy has been to buy the has-been properties, the low fruit in all the trees. And that’s what we’ve been doing.
Mr. Randhawa founded Strathmore Minerals Corp. in 1996 and is currently the Company’s CEO. Mr. Randhawa also founded and is currently the President of RD Capital Inc., a privately held consulting firm providing venture capital and corporate finance services to emerging companies in the resources and non-resource sectors both in Canada and the US. Prior to founding RD Capital Inc., Mr. Randhawa was in the brokerage industry for 6 years as an investment advisor and corporate finance analyst. Mr. Randhawa was formerly the President of Lariat Capital Inc. which merged with Medicure in November 1999 and the was the founder and former President and CEO of Royal County Minerals Corp. which was taken over by Canadian Gold Hunter (formerly International Curator) in July 2003. Mr. Randhawa also founded Predator Capital Inc., which became Predator Exploration. Mr. Randhawa received a Bachelors Degree in Business Administration with Honors from Trinity Western College of Langley, British Columbia in 1983 and received his Masters in Business Administration from the University of British Columbia in 1985.
Investors who bought during the top of the frothy commodities rally are now panicking or kicking themselves. Neither activity helps an investor or trader think straight. Below are a few tips in dealing with the current market shakeout.
1. If you believe you invested in the right stock(s), then turn off your computer and do something enjoyable.
Exercise is a great stress reliever. The market has already begun its shakeout. If you didn’t get stopped out, or failed to place earlier stops, your best opportunity lays ahead in picking up additional shares at a much lower price. Most of the experts we’ve interviewed tell us the next rally should start sometime between late July and Labor Day. In an attempt to interview the uranium guru James Dines in late May, we were told, “Call back in a couple of months.” That was a helpful clue that the markets were less than exciting. Mr. Dines is often eager to be interviewed, but recently he was not.
2. Do you believe the fundamentals which engendered the commodities boom have changed? If they haven’t, then the bullishness is only taking a breather.
We don’t see any fundamental change in the markets. Russia still wants nuclear power, and its oil production may be peaking. China hasn’t announced the end of its nuclear expansion program. India wants to spend $40 billion on new nuclear reactors. If you are invested in uranium stocks, spot uranium jumped another dollar to $45/pound this past week. Hardly the end of the bull market.
3. If you worry about your investment in one stock or another, then stop watching the ticker and focus on the company fundamentals. Is the story still true or has it changed? See #7 A, B and C below.
4. There’s an old cliché that the time to buy is when you feel like dumping everything you own in the category.
At the exact moment you want to sell your entire portfolio of uranium stocks, it may be wiser to add to your holdings. This applies mainly to the retail investor. Most of the professionals did dump at the top and are now slowly accumulating the shares of the na?ve who waited until the washout to start selling off.
5. Has a major, earth-shattering event occurred? The last bull cycle in uranium ended with Three Mile Island (TMI).
The last decent rally in the precious metals markets fell off a cliff after it was discovered Bre-X Minerals had perpetrated a fraud about its gold ‘discovery’ in Indonesia. Something significant and newsworthy always transpires, and it is also far-reaching. That is the trigger. As with TMI and Bre-X, those were the first shots which launched a later chain reaction to end those bull markets.
6. Before pulling the sell trigger, ask yourself: Do I really want to give up these shares to a bargain basement hunter, who will make a killing on my losses?
7. Since most of you will still panic, please review the following basics for any of the uranium companies you’ve read about:
A) How much cash does the company have in the bank? During shakeouts, cash is king. Prescient companies, which completed their financings during the recent and robust rally, are sitting pretty. They can weather the short-term storm and are well-oiled to move forward when this correction bottoms and reverses. Those companies are the strongest ones to check out when this correction looks gloomiest.
B) Has the management remained the same? Unless the top financial and/or technical people blew out the door, in recent weeks, the story probably hasn’t changed much. Companies which built a strong technical team are resilient and powerful. They will move forward.
C) Have the properties come up dry? One of the reasons you invested in a uranium company was because it announced it had “pounds in the ground.” Some companies have more than others. Some went to the expense and trouble of completing a National Instrument 43-101, which independently confirmed the quantity and quality of the uranium resource. If that changed – and the company announced, “Sorry, nothing there after all,” or announced, “Hey, we were kidding,” that’s one thing. If you haven’t heard that, or read a news release announcing that, then the uranium didn’t walk away or move onto a competitor’s property. It’s still there.
Next time, when the markets are racing higher, and you feel like you won the lottery, consider this bit of biblical advice. The old joke goes, “When did Noah build his ark?” The answer of course is: Before it began to rain.
Energy Guru Bill Powers Forecasts Uranium Shortfall in Three Years. Bill Powers focuses on investment opportunities in the Canadian energy sector, mainly independent oil & gas companies and now uranium companies. We talked with him and he thinks uranium could reach $100/pound this decade.
Interviewer: A lot of newsletters cover oil and gas, but you picked uranium, which hardly anyone was covering until recently?
Bill Powers: I feel the uranium market right now is the world’s most unbalanced commodity market. In a sense, the world, through the nuclear power industry, consumes approximately 172 million pounds of uranium per year, and the world only produces about 92 million pounds of uranium per year. The supply deficit is made up through above-ground inventories, which are being worked down pretty quickly. Those numbers were supplied by Uranium Information Center. A lot of my information comes from the U.S. Department of Energy (DOE) or the Nuclear Regulatory Commission. For example, I discovered from them that the U.S. produced, through the 1980s, about 43.7 million pounds of uranium. And by 2002, the U.S. only produced about 2.34 million pounds of uranium.
Interviewer: Where is uranium being produced in the United States?
Bill Powers: Wyoming. There is also a uranium facility in Nebraska. I think there are two in-situ leach plants in Wyoming and another one in Nebraska. There are a couple of phosphate farmers in Florida who produce uranium. I believe there is a facility in Texas that also produces uranium. For the most part, the uranium industry in New Mexico has just about been wiped out. The very low prices that we’ve seen, for about twenty years, have pretty much wiped out the entire U.S. uranium industry. To go from over 43 million pounds to less than 2.5 million pounds, it has really only allowed the most productive, highest margin and most efficient mines in the country to continue operating in that environment.
Interviewer: So that makes the U.S. a net importer of uranium?
Bill Powers: Absolutely. According to the DOE, US imports have gone from 3.6 million pounds per year in 1980 to 52.7 million pounds per year in 2002. A lot of it comes from Canada, but a significant amount is coming from the Russians, through a program called HEU (highly enriched uranium): the megatons to megawatts program. It’s where the United States Enrichment Corporation, as well as its partner in Russia, took highly enriched uranium and broke it down into lower grade uranium that could be marketed to nuclear power companies throughout North America and around the world. This has been one of the reasons we’ve had lower prices. All of this uranium has cluttered the market the past few years. And the US Enrichment Corporation has a lot to do with why we’ve seen low uranium prices here in the States. I had a conversation with them about the fact that since 1998, when they became a public company (after being a company that was owned by the U.S. government), their long-term inventories of uranium had declined. When they became a private corporation, the U.S. government gave them 7,000 tons of enriched uranium and 50 tons of highly enriched uranium. They have been selling about 6 million pounds of uranium into the marketplace every year since 1998. According to my conversation with them, they have about three to four more years of selling. It’s because the US Enrichment Corporation wants to get out of the uranium storage business, and they want to be in the processing business.
Interviewer: How long will it be, do you think, before USEC is going to stop being a factor on the selling price pressure of uranium?
Bill Powers: I would probably say in about three years. For the uranium they are now selling, the cost of the uranium to them was zero. This has really made that company look very profitable. They are selling about $100 million worth of uranium every year, and they intend to do this at no matter what price. This is an extremely bullish scenario right now because uranium prices have touched twenty-year highs, despite the fact that USEC is dumping more than three percent of the world’s uranium consumption onto the market place. When this dries up, we should see markedly higher uranium prices.
Interviewer: How high is high when you say that?
Bill Powers: I would say up to $100 per pound. Before the end of this decade, uranium will probably be $100/pound. The Russians are going to be holding back some of their output from the megatons to megawatts project. Their (the Russian) uranium is going to be needed for internal consumption. Russia has a growing nuclear power industry. They need to have uranium supplies available. They’re not going to be selling as much as they had in previous years. It appears it is going to be very important to factor in reduced Russian supplies as well as when USEC gets out of the business.
Interviewer: How can a sophisticated investor benefit from uranium’s rising price?
Bill Powers: The most leveraged investments are the Canadian juniors. I believe Cameco (NYSE: CCJ) has other businesses out of uranium exploration and production, and it is a very safe way to play uranium. But I think there are far better opportunities out there. One of my favorite companies is Strathmore Minerals (TSX-V: STM). I really like their business model of acquiring a great deal of very prospective uranium properties at bargain basement prices. They’re able to do this because, right now, uranium has gone through a twenty-year depression. The prices for some of these pretty far advanced projects are very cheap. I think they are well leveraged for that. Another safe way to play uranium is Denison Mines (TSX: DEN). They produce about 1.3 million pounds per year. They have properties are in McLean Lake, Saskatchewan, which is part of the Athabasca Basin. What I like about them is they are able to use their cash flow from their existing production to further expand some of their properties. With UEX Corporation (TSX: UEX), Cameco was the shareholder. UEX was founded several years ago with Pioneer Minerals. Both of the companies put in properties. It’s look like they are rapidly advancing some of their properties in Athabasca. I believe they have about eleven properties they have an interest in.
Interviewer: What about other energy factors, such as crude oil, and what do you see happening there?
Bill Powers: I would say crude oil is heading much higher. We have reached the worldwide production peak of crude oil, or we are very close to it. This is not very well recognized. As demand continues to rise, and world production starts a downward slope, we’re heading for much higher crude oil prices. I see much higher prices later this decade, if nothing goes wrong. What I mean by that is the natural market equilibrium price of crude oil should be $50 within the next eighteen months. And probably over $100 by the end of this decade if nothing goes dramatically wrong. That would come from the natural decline of existing reservoirs, limited new discoveries, and increasing demand. However, if a country, such as Saudi Arabia, were to have a regime change…
Interviewer: Are you looking for a regime change in Saudi Arabia?
Bill Powers: Yes, there is a body of evidence that supports this. Terrorist incidents are becoming more violent and closer together in Saudi Arabia. Right now, we’re seeing those attacks targeted to the oil workers. I believe it will not be too long before those attacks are focused more on the royal family. I believe that will be the next stage in Saudi Arabia. There’s a very good chance, which history supports, is when there are sudden regime changes in oil-exporting countries, oil exports from those countries drop significantly. Regardless of what were to happen, as far as the political situation, a lot of their fields, especially Ghawar, which is the biggest oilfield in the world – it produces between 4 and 4.5 million barrels per day – there is evidence that this field could decline relatively soon. Saudi-Aramco has been injecting substantial amounts of water into injection wells to push the keep production flat What this has done is it keeps production flat, but it’s sort of an illusionary fountain of youth. If you keep injecting water, the amount of water you produce, along with the oil, continues to rise. As the water cut continues to increase, the amount of oil produced can fall dramatically. If that were to happen, if Ghawar were to go into a permanent and irreversible decline – well, it could happen relatively quickly. There are other fields in the Middle East, such as Yibal in Oman, where they had a lot of water flooding and horizontal well drilling. Yibal has gone from 250,000 barrels per day in the late 1990s to about 80,000 barrels per day now. If we were to get that type of decline in Ghawar, the world is going to be seeing higher prices just on that. Right now, there is not any excess oil production supply anywhere in the world. A relatively small reduction in availability of supply will lead to an exponentially higher oil price.