-- Posted Tuesday, April 17 2007 | Digg This Article |

By now, you’ve seen uranium down right soar. But any savvy uranium investor will realize that demand hasn’t really increased at all. Despite estimates for the construction of as many as 200 new nuclear reactors to be built over the next 20 years, there have been no new reactors actually come on line.

In fact, we’re about to see a temporary decline in demand due to a potential shutdown of nuclear power plants in New Jersey. Without 90% of the local warning sirens working, the U.S. Department of Energy is threatening a full shutdown of the reactors until the sirens are within compliance.

However, a temporary shutdown, regardless of how unlikely, won’t provide any relief to nuclear power plants rushing to ink uranium supply deals.

Demand spike of $94 million

Nuclear power plants, the only businesses on earth with a real use for uranium, isn’t causing the soaring demand and high prices, its actually the hedge funds.

For instance, Uranium Participation Corp. (U.TO) is a publicly traded hedge fund set up to buy uranium.  This is the only way for an average investor to buy directly into uranium. 

And get this...  This hedge fund recently offered 6,500,000 shares to the public t $14.60 with an aggregate gross proceeds of $94, 900,000.  According to the company’s by-laws, 85% of this cash horde must be used to buy uranium.

Now get this.  The spot market for uranium trades an average of $56.5 million every week.  There is only 26 million pounds traded every year.  So you could see how even a new $94 million investment could change the market.

Doubling up on profits

The Wall Street Journal has called hedge funds' involvement in the market “a new type of nuclear-arms race.”

As Wall Street's bushwackers, hedge funds are hoarding every pound they can locate.

Hedge fund Adit Capital bought up millions of pounds for as little as $20 per pound.  Today, the fuel is trading at an even $90. QVT Financial, a $5-billion hedge fund, jumped into the market last August to the tune of $42.1 million. And Citadel Investment Group assumed control of 2.3 millions pounds through its stake in an IPO.

Hedge funds now hold nearly 25% of the total supply produced in 2005 and 2006 -- parting with only 1% of it.

They're intensifying the world's shortage -- and they're moving fast.

You see, they win either way. They’re aggressive buying is causing uranium prices to soar. Meanwhile, the value of their holdings is increasing in lockstep with the price spikes they’re causing. Due to the illiquid uranium market, the hedge funds are controlling their own profits. What a business!

Supply drops 32%

The hedges are causing most of the new demand for uranium. But there are supply issues hitting the market every day. ERA uranium miners recently announced that its uranium oxide production was 28 percent lower in the first quarter due to a cyclone that hit its Ranger Mine in the Northern Territory of Australia.

The volume of ore milled for the three months was 32 per cent lower than in the same quarter last year.  This was largely the result of a processing plant shut down and restart forced by the extreme weather. 

Something has got to give

Sure, something really does have to give. But it’s not going to be uranium prices.

You see, high uranium prices have little impact on their eventual user, nuclear power plants. In economic parlance, we call demand for uranium highly “inelastic.” That’s economic parlance for something that’s demand is poorly correlated to price. The classic example of a product with very inelastic demand is cigarettes. As a pack of cigarettes rises in price, the total number of packs consumed declines very little.

Uranium demand is so inelastic because of the amount of electricity a single pound of uranium can produce. In fact, uranium only accounts for a very small portion of the total costs of electricity generation from nuclear power. For instance, at $85 per pound, uranium only adds $4.25 per megawatt-hour (MWh) of electricity. And with a MWh of electricity currently selling going for as much as $60, uranium only accounts for 7.08% of nuclear power generation costs.

That’s why uranium could hit $200 per pound (which is very likely to happen over the next 18 months) and nuclear power companies wouldn’t be overly concerned. They could easily pass the extra $2.50 per MWh in costs onto consumers and only increase their rates by an additional 6.8%.

The second reason is because of the Cigar Lake disaster. In Canada, the world’s second largest uranium mine, Cigar Lake, was completely shut down four months ago. In one single day, between 12% and 17% of future uranium supplies were wiped out. And it’s going to take another 18 months to get the mine back up and running.

Realistically it would take uranium hitting $500 a pound before power plants would really start to get concerned. For now, uranium stocks are looking as good as ever.

That’s all for now,

By Andrew Mickey
Editor in chief, BreakAway Investor

P.S. You can keep tabs on all the happenings and the uranium and base metals sector by signing up for my free daily e-letter, Fear & Greed, here.

About BreakAway Investor:

BreakAway Investor is a monthly financial advisory newsletter published by the Taipan Group LLC, a division of Agora Inc. BreakAway Investor seeks to uncover investment opportunities in companies that are actively expanding market share within growing markets. The compounding returns created by these two elements of growth have historically proven to achieve superior investment results.

BreakAway Investor uses a unique set of investment principles to uncover tremendous growth opportunities that offer limited risk. The top-down analysis of BreakAway Investor analyzes a broad range of industries in order to identify the most attractive opportunities. The system intends to identify the future leaders within their respective industries by focusing on technological development, competitive landscape, and the potential disruptive nature of a new technology that has already started transforming a major customer’s operations.

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-- Posted Tuesday, April 17 2007 | Digg This Article |