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Minersí Face Uncertain Future as Uranium Deleveraging Continues

By: Andrew Mickey, Q1 Publishing



-- Posted Thursday, October 9 2008 | Digg This ArticleDigg It! | Discuss This Article - Comments:


Itís been a long time coming. I donít know who thought it would come this fastÖor all at once.

A few weeks ago, uranium prices seemed to have a gained some footing. But uranium prices crashed through the floor and it could be another big step down from here. The energy metal could be headed even lower. This fall could be harder and faster all due to deleveraging.

The nuclear energy argument is still there. In fact, itís even better than it was two years ago when the uranium market started to crack.

At the time there were plans for the construction of 222 new reactors. Today there are plans for 316 and 60 of them are expected to be on line by 2014. Although I think the world is starting to realize a lot of those will replace old reactors, but not all of them.

Also, the recent update on Camecoís Cigar Lake project wasnít very good news either. As most of us expected, itís a long way from recovering from the flood. The doubts still loom if it will ever be fixed.

We also learned a bit more about the Megatons to Megawatts uranium deal with Russia. As it sits right now, Russia will be halting shipments of uranium in 2013.

As you can see, the uranium story has actually improved a good bit. But that doesnít matter much now. There is a much larger storm cloud hanging over the uranium spot market; hedge funds.

By now most of us are familiar with deleveraging. After years of success and taking big bets, hundreds of hedge funds are on the verge of collapse. The markets have taken a turn for the worse and investors are calling for their money back. Hedge funds have to pay up. Record redemption rates are forcing them to sell anything off at any price.

For many funds that trade actively in large-cap stocks, raising cash for redemptions is not much of an issue. Itís a much different story for the funds that were buying physical uranium a few years ago. If they have to sell, theyíll have to do so at any price. Any added selling pressure in a weak and illiquid uranium market could have a big impact on uranium prices. It looks like itís already started to happen.

In the past few weeks uranium prices have fallen another 14%. Each week the price of uranium drops another few dollars per pound indicating a very weak market. Itís not just a one-time drop either. The fall has been consistent. That means the funds could be unwinding. If they are, thereís a lot more down weeks to come for uranium prices.

It wasnít long ago that everyone was buying uranium. The stocks were the hottest thing around and funds were consistently buying up anything uranium.

During the uranium heyday, a uranium trader stated, ďThey sweep the market clean. Every pound they can find.Ē

The Wall Street Journal said back in 2006, ďMany funds say they are holding their uranium off the market because they expect the price to climb.Ē

It was all artificial demand for uranium. It was unsustainable. They were just buying it with the only possible exit strategy of selling it. They had no use for it. Thereís nothing wrong with thatÖas long as they stay aware of it.

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And now it looks like weíll be forced to become all too well aware of it. All the uranium the funds swept up has to go back onto the market. And that could push uranium prices to ridiculously low levels we havenít seen in years. It wouldnít surprise me to see uranium back at $40Öor lower. It all depends on how fast they have to sell.

For instance, Adit Capital was one of the biggest buyers of uranium between 2004 and 2006. Itís estimated that Adit purchased between four and five million pounds of uranium. Citadel Investment Group controlled 2.3 million pounds of uranium.

The big wild cards here are GLG Partners and Fortress Investment Group. These multi-billion funds could be sitting on millions of pounds of uranium they may want or need to liquidate quickly.

In addition to all that, we canít discount the impact of the artificial demand created by Uranium Participation Corp (TSX:U). As of September, Uranium Participation Corp was holding 5.425 million pounds of uranium and more than two million pounds of uranium hexafluoride.

Although Uranium Participation Corp is a holding company that probably wonít be liquidated any time soon and they have created a uranium loan program, the demand the fund created on uraniumís way up will not be there on the way down. In August, the fund only purchased 50,000 pounds of uranium. Thatís nothing close to the 200,000 pounds a month it was bidding up when uranium prices were rising week after week.

Although we cannot determine exactly how much uranium these funds have left, we do know they throw another variable into the uranium mix. In a market like this, where even slight uncertainty can send share prices plummeting 10% to 20% in a single day, another variable is the last thing the market wants to see.

As a result, I recommending holding off on uranium stocks for the time being. The trend is still down. We might have caught a nice run with Hathor Exploration (TSXV:HAT) and Denison Mines (AMEX:DNN), but uranium prices have broken through the temporary floor. The wide sell-off hitting almost all commodity stocks could get even worse and now the best place to be is on the sidelines.

Uranium prices could fall another 50% or more from here if these funds liquidate. There could be another 5 to 10 million pounds of uranium just waiting to go on the selling block. Considering the spot market is very illiquid (it only trades 26 million pounds a year), uranium prices could have plenty more room to slide. The consequences on uranium stocks would be even worse.

Do you remember what happened to natural gas stocks when the hedge fund Amaranth had to unwind its bet on natural gas in 2006? The fund single-handedly pushed natural gas prices from $7 per Mcf to almost $4 per Mcf. The same fate could be headed for the uranium market. If that happens, then uranium would be an easy buy.

For right now, Iím afraid; the risks just outweigh the rewards in uranium stocks. There could be a true fire sale for uranium stocks coming up. To me, the opportunity to pick up high quality uranium plays like Hathor and Denison around $1 per share or Cameco under $10 (it could happen) is something worth waiting for.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing


-- Posted Thursday, October 9 2008 | Digg This ArticleDigg It! | Discuss This Article - Comments:



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