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Michael Berry: Uranium—Part of the Energy Solution

By: The Energy Report and Michael Berry

-- Posted Friday, April 16 2010 | Digg This ArticleDigg It! | Discuss This Article - Comments:

President Obama has called for the development of more nuclear reactors in the coming decades. Discovery Investing pioneer Dr. Michael Berry says for that plan to work, uranium has to be part of the solution. In this exclusive interview with The Energy Report, Michael talks about the need for more uranium mining in the United States. He also explains why right now an investment in energy metals is a safer bet than investing in industrial metals.

The Energy Report: Last December, you thought inflation was still 18 to 24 months in the future. Is that still your thinking?

Michael Berry: It depends who you talk to. We don't have any visible inflation in this economy right now. If anything, there's still de-leveraging. There's excess capacity out there. We're not moving down the unemployment scale very much. We still have 9.7% unemployment, even after a lot of government intervention in the labor markets. Right now inflation is hard for me to see. We're still that magical 18 to 24 months away, or maybe even more, from inflation.

Certainly if interest rates move up we could have that, but there's still a lot of excess capacity. There's a lot of debt. The Obama administration and the Bush administration really didn't deal very well with the excess debt. They just kind of rolled it over and pushed it out. Europe seems to be following suit in Greece today.

I'm an optimist. If you're an optimist in this market, you believe inflation is coming. If you're a pessimist in this market, you believe that we're going to be in a painful deflation for some time to come. I'm an optimist, so I think within the next couple of years, we'll get some inflation.

TER: With inflation somewhere on the horizon and a continued period of recession in the meantime, part of the strategy is to be defensive. In a world where we have inflation, but we also have pressure in the U.S. strategic metals, would you consider uranium a safe investment area?

MB: Today, any energy metal is a safer investment than an industrial metal. We're going to need uranium because the world, if not the U.S., is going nuclear. We're probably going to need thorium eventually. In some sense, uranium is very cheap now and we have a lot of it in the U.S. and Canada. Resource nationalism is spreading around the world.

If you look at the rare earths (REE), I think the same thing applies. We have to have rare earth elements because they're integral in many strategic applications and we don't have much REE resource in the U.S. We don't have a lot in Canada. Some of these energy and strategic resources are going to be more resistant to downturns. Copper is trading for $3.50 a pound and it seems to want to stay there. I'm a little nervous about copper. If we do have a major downturn, you could see the industrial metals, as opposed to the strategic or energy metals turn down.

I'd like to make one other point. Up until 2007, we had this theory of decoupling as it relates to China. Then everybody pooh-poohed it and said, oh no, China isn't decoupling. China may well be a bubble, too. There may be a significant downturn in China. However, I think decoupling is going to come from the emerging markets. The emerging markets are where growth will emanate because we are witnessing a quality of life increase there that you aren't going to have here and in Europe. Probably not in Canada either. Decoupling, in this case, will be the generator of demand for these metals, which is going to be stimulated from sources other than the U.S. and the OECD countries.

TER: But going with that decoupling theory, if we're seeing expansion, then wouldn't the industrial metals also continue up?

MB: Yes. Except that in the short run, we may see excess capacity in places like China. I don't think you're going to see it in India. You may see a bubble that bursts in China. There is excess capacity. On the other hand, China is a state-run economy and so they can do things that democracies cannot do. My long-term view is that there will be decoupling and that the emerging countries of the world, not just China, but India, Brazil, Argentina and others will eventually lead us out of this global recession. That is the significance of this sort of "decoupling." Emerging countries will take the lead and they'll outgrow us consistently over time because people in those areas need infrastructure. They want a better lifestyle and all the things that we've become accustomed to in the West since the end of the Second World War.

TER: There are lots of different types of rare earths. How do you compare heavy and light rare earths?

MB: The heavy rare earth elements, compared to the light REEs, are rare indeed. Some of the "heavies" are Europium, Terbium, Dysprosium and Yttrium, used in magnets, superconductors, ceramic and lasers. The companies probably compare favorably, actually. The heavy rare earth elements are sought after and sell for hundreds of dollars per kilogram.

I'd have to say I'd rather be in Canada. The other thing that is interesting is that it's pretty much Canadians that make this mining game go. These companies are Canadian companies headquartered either in Vancouver or Toronto. The world is getting smaller for us all, and we must begin to look far afield. Canadians seem to be well received.

TER: When we were chatting before the interview, you mentioned that the rare earths are worrying Washington. Can you explain that?

MB: I do quite a bit of work with The Western Caucus, which is a group of congressmen from the Western states, mostly Republicans. The U.S. defense strategic stockpile of metals has been basically sold down. This country is more or less dependent on either what we produce internally or what we can import.

For example, we import 31% of the copper we need in this country. With rare earth metals, we have very few mines and they're mostly light rare earth elements. China controls about 97% of that market. These are very important metals for strategic applications. Things like weapons, magnets for motors, superconductors and so on.

This issue of declining strategic resources has come to the attention of congressmen like Bishop from Utah, Forbes from Virginia and others. Anytime China has an advantage, Washington becomes concerned. You can say the same thing about molybdenum and tungsten—other metals that China basically has a grip on.

Washington's holding hearings on these issues. It's had a lot of hearings on them. I'm not sure exactly what they're going to do, but most of the opportunity right now in Washington is to teach congressmen about our metal dependencies, our mining inefficiencies and domestic mining development in this country. I spend a lot of time doing that. Right now you can get everybody's attention in Washington if you talk rare earth elements because they know we don't really have much of a resource in that area.

TER: How difficult is it to get the uranium out of the ground in areas such as the Grand Canyon?

MB: It's not very difficult. These pipes are north of the canyon and above the water table. They're very small, very compact. The surface footprint is 20 to 25 acres. Usually a couple of million pounds each, plus or minus and they can be mined in two years and reclaimed quickly. They were mined and reclaimed in the 1980s very successfully with no known environmental damage. This is 10 to 15 miles north of the Grand Canyon. So you can't see them from the south rim. There are hundreds and hundreds of these uranium pipes out there.

The mining on these pipes is very straightforward. It's underground, so there's no open pit. There's no scar on the landscape. If you raft down the Grand Canyon, you can actually see pipes in the walls of the canyon where they've been naturally eroded down. People have said, well, mining companies are going to contaminate the groundwater. In fact we've never seen any uranium contamination or radioactivity in the water of the Colorado River at all. It's a pretty big issue and it means jobs. Both the governor of Arizona and the governor of Utah want see these natural resources developed in an environmentally responsible way. There's no reason why we can't do that.

If we're going to have clean energy, if we're going to have move forward and move away from carbon-based energy sources, nuclear energy has to be part of our solution. If nuclear energy has to be part of our solution, at least for the next several decades, domestic uranium has to be part of the solution. We have it. We have more uranium than most other countries domestically. Why would we again run up a deficit, pay somebody to become dependent on uranium as we've done with oil? We don't need to.

TER: Thank you for your time.

Dr. Michael Berry has lived in the U.S. for 36 years but raised in Canada. A math major at the University of Waterloo in Ontario, he earned an MBA at the University of Connecticut and obtained a PhD specializing in quantitative analysis and investment finance from Arizona State University. He has specialized in the study of behavioral strategies for investing and has been published in a number of academic and practitioner journals. His definitive work on earnings surprise, with David Dreman, was published in the Financial Analysts Journal. While he was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia (1982-1990), Michael spent considerable time with some world-renowned geologists on the Carlin Trend. While a professor, he published a case book, Managing Investments: A Case Approach.

Michael also held the Wheat First Endowed Chair at James Madison University in Virginia, and managed small-and mid-cap value portfolios for Milwaukee-based Heartland Advisors and Chicago-based Kemper Scudder. His
Morning Notes publication, distributed worldwide, provides analyses of emerging geopolitical, technological and economic trends, as well as identifying opportunities for the Discovery Investing strategy he developed. Read Dr. Berry's testimony presented to a subcommittee of the Natural Resource Committee, United States House of Representatives (4/8/10).


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-- Posted Friday, April 16 2010 | Digg This ArticleDigg It! | Discuss This Article - Comments:

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