Mickey Fulp, Mercenary Geologist: The Demand is There
By: The Energy Report and Mickey Fulp
-- Posted Thursday, June 18 2009 | Digg This Article | Discuss This Article - Comments:
Well-known and highly regarded throughout the mining and exploration community, Mercenary Geologist Mickey Fulp returns to discuss the brightening prospects for uranium and natural gas with The Energy Report readers. A Certified Professional Geologist, Mickey says he's comfortable focusing his hard-earned dollars in junior and mid-tier uranium companies working in the U.S. and Canada.
The Energy Report: Mickey, you have followed uranium in the past. Whatís your thinking about uranium now? Is it going to make that comeback? That famous newsletter writer, who is now the original rare earth element bug, is looking at uranium and saying itís pretty positive. Do you agree?
Mickey Fulp: I agree wholeheartedly. I've liked this sector since before the first boom in '06. Uranium was the proverbial canary in the coalmine for the commodities crash, but the sector has shown recent strength. The long-term contracts price is $65 a pound. Short-term contracts are at $50 a pound. The uranium sector is still, from a market valuation, a little beaten up, but itís been looking up, and I have a couple of favorite companies.
TER: When we interviewed you for The GOLD Report, you also were intrigued with emerging environments and the prospect of more major finds in areas that havenít been as thoroughly explored or drilled. Would you expect anything in the uranium sector to come about in these emerging environments, do we even need to go there, or just stay in Wyoming and/or Texas?
MF: In the U.S. we have 104 of the worldís 430 or so nuclear reactors. We use about one-third of the worldís uranium every year. Iím very comfortable staying in the U.S., specifically Wyoming, Texas, and then in a little longer-term scenario, New Mexico.
In terms of geopolitical risk in the uranium sector, there have been some very negative developments over the last or three to four weeks. In Kazakhstan, the head of Kazatomprom was arrested and charged with making illegal and corrupt deals with unnamed foreign companies for uranium production. This incident leads to some intriguing questions. When is a deal actually a done deal? Is the Kazakhstan government on the road to increasing nationalization of its uranium production? Weíve seen this happen before in Kazakhstan in the gold sector. Kazakhstan is the worldís third-largest uranium producer. So thatís a bit scary for the West.
Recently in Niger, which is the worldís fifth-largest uranium producer, the president tried to get a referendum to pass parliament to allow him to run for a third consecutive term. That referendum was not passed and so he simply dissolved parliament. The point I make is there is considerable geopolitical risk to the West with its dependency on emerging market countries for a significant portion of uranium supply.
In the U.S., we have known deposits that the economics were derailed when our uranium industry crashed in the early '80s. They are basically sitting there, drilled out and waiting to be permitted, developed, and mined. So now it becomes a matter of the time period to permit the deposits. All in all, Iím comfortable focusing my hard-earned dollars in junior and mid-tier uranium companies working in the U.S. and Canada.
TER: Mickey, can you talk a little bit about the demand for uranium? Nuclear is still a nasty word, even though the U.S. is looking at alternative, cleaner sources of energy. I donít think there are many new nuclear reactors on the dockets in the U.S. compared to countries like China and India. So are we really expecting to see these companiesóHathor, Strathmore, and the Wyoming and Texas companiesóappreciate in value if the demand is not appreciating in value in North America?
MF: The demand is there. The mined supply every year is somewhere around 110 to120 million pounds. The current world demand is somewhere around 160 to 170 million pounds. So in terms of mine production, the world is at a one-third shortfall on a yearly basis. Over the last few years, these shortfalls have been supplied in large part by the Russians and their "Megatons to Megawatts" program, which converts highly enriched weapons-grade uranium into low-enriched uranium suitable for reactors. The Russians have stated publicly that sales to the U.S. are going to end in 2013. Currently, the U.S. uses somewhere around 55 million pounds of uranium per year and produces less than 4 million pounds. The demand obviously is there. We have not built a nuclear reactor in the U.S. for years, but we have increased the efficiency and increased units within our existing nuclear power plants, so that our demand has been going up. As an energy supplier, uranium is just about as green as you can get. It leaves no carbon footprint. Itís safe. The Three Mile Island scare was media-driven hype, and we all realize that now. Increasingly, the green sector is looking at nuclear energy as a viable, clean, alternative source in the United States.
TER: Are there other areas in the energy sector that are interesting to you?
MF: I continue to follow the natural gas sector. Itís been beaten up even more since March, as the yearly lows in natural gas are usually sometime in the late spring or early summer; Henry Hub natural gas is at $3.75. Interestingly, November futures are at $5.00 and a lot of that is seasonal speculation as we get into the heating season in the northern tier of the United States. I continue to watch this sector.
There are some buys out there, no doubt, but the question in the natural gas sector is when is the price going to turn around? Is it going to be six months? Is it going to be 12 months or 18 months? Or could it even be two years? There was a lot of drill success in the shale gas arena in the U.S in the past couple of years, so weíre looking at a bit of a supply imbalance right now. But most of the shale gas producers are not going to make money at $3.75. Itís a sector that I continue to watch but have not yet moved into it; Iím casting about for the right companies. Many of these companies are debt ridden, so you probably want to find one that has manageable debt and has production ready to go, perhaps even shut in, and then it becomes a contrarian play. Buy at low volume when nobody else is buying the stock, and sell when the boom comes. Much like the gold and uranium sectors were in Decemberówe knew that they were beaten up beyond imagination and that it couldnít continue that way and the smart money got in thenóand look at the returns weíve had on some of these companies. Thatís the way I view the gas sector right now.
TER: So gas is going to turn around; you just donít know when and you need to find the right plays in that sector.
MF: Right. Iím going to be in before gas turns around, but at this point Iím looking for the right companies to get into. Iím own a couple of natural gas companies, Alberta producers, but Iíve been in them for a long time. Iím looking for undervalued stories right now.
TER: Very interesting. Maybe you can share them with us when you find them?
MF: Well, Iíd certainly be glad to do that. Mickey, the Mercenary Geologist, hasnít waded into this sector yet, but I really think itís time. Iím just trying to do some due diligence and find out which companies I want to put some high-risk capital into. Ultimately, I think you canít go wrong in this sector as long as you buy production and donít buy companies that end up going bankrupt before it turns. That, of course, is the risk. The oil and gas sector is fairly debt ridden as opposed to the junior gold sector, which raises nearly all of its money through equity financing.
TER: So weíre looking at the balance sheet on this case then.
TER: Do you have any other insights youíd like to provide to our readers?
MF: I think that weíre perhaps at a bit of a tipping point in the economy now, and the resource sector presently is looking good. Americans are feeling better than we were six or seven months ago. But readers should always realize that this is a very high-risk, high-reward sector and itís really gambling money. It can be rewarding if you make the right stock picks, so I encourage everyone to do his own careful due diligence before investing.
TER: Very good. Appreciate that, Mickey. Thank you for taking time between trips to speak with us.
A confirmed contrarian who invests solely in stocks he expects to at least double in value and considers himself a classically trained economic geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist who earned his bachelorís degree in Earth Sciences at the University of Tulsa and his masterís in Geology from the University of New Mexico. Specializing in geological mapping and property evaluation, he brings more than 30 years of experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, and water to his popular Mercenary Musings and other venues. Mickey launched MercenaryGeologist.com in April 2008.You may contact him at Mickey@MercenaryGeologist.com .
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-- Posted Thursday, June 18 2009 | Digg This Article | Discuss This Article - Comments:
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