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Mickey Fulp: Solving the Uranium Price Puzzle

By: The Energy Report and Mickey Fulp

-- Posted Thursday, July 22 2010 | Digg This ArticleDigg It! |

Apparently flouting the law of supply and demand and mystifying experts and analysts alike, depressed uranium prices present some excellent bargain-hunting opportunities for investors, according to Mercenary Geologist Mickey Fulp. In this exclusive interview with The Energy Report, Mickey shares some thoughts about the uranium space and says he's also keeping an eye on natural gas stocks.

The Energy Report: When we talked in April, Mickey, you said that the only sector you thought was absolutely undervalued as a whole was uranium, and that it had been beaten up a lot since mid-2007. You felt uranium prices should have started to rebound beginning in 2009, but they haven't done so yet. What's keeping prices down? Should we see a rebound soon?

MF: There has been a little encouragement in the fact that the spot price was up $1 over the last couple of weeks of June, but trading at $41.75 on the spot market is still very low compared to the uranium boom run up. Although it's a minor part of the entire market for uranium, the spot market very much influences the price of uranium stocks.

TER: Will uranium ever return to the 2007 peak?

MF: That was an anomaly, so not in the foreseeable future. Hedge funds basically came in and bought up a bunch of uranium. The crash started earlier for uranium, but all those exorbitant commodity prices in '07 and '08 were due to hedge fund buying.

TER: If we take out that anomaly, where would you say uranium's price stands today?

MF: I think we're still relatively low, in the fact that the cost of production is going up. All the new mines coming on will have higher costs of production than the established mines. We'll need higher uranium prices in the mid to long term to make these mines profitable.

TER: But nuclear facilities are being built, coming online in China and Europe and the United States. Why isn't the additional demand pushing uranium prices up?

MF: Your guess is as good as mine. The long-term contract market for uranium is very opaque. The spot market is a little more transparent. Spot market prices are basically set by whatever trades happened last week or last month, when buyers and sellers sat across the table from one another and negotiated a price. Why the spot price has barely moved puzzles most people in the business and most analysts, because we do see this increased demand and we don't know where the uranium will come from.

There are a couple of wildcards out there though. The U.S. Department of Energy has something on the order of 158 million pounds stockpiled. The price is probably suppressed right now, too, because the Russians still supply a significant amount of uranium through the "Megatons to Megawatts" deal, which ends in three years. Mining currently supplies two-thirds of the world's demand. Secondary sources, the heavy to light enrichment process and stockpiles, have supplied the rest. Most analysts say that certainly within three to five years demand will exceed total supply from these sources. Therefore, it appears the price has to go up. What's the timing of the price going up? ¿Quién sabe?

Demand is exceeding mine supply right now. Obviously, there has been enough uranium to keep power plants going. One thing that's become apparent in the last few months is that utilities and governments, consumers of uranium, are carrying something on the order of 18 months' average forward supply. Historically, that supply stockpile has been more like three years. That difference may represent supply tightness.

I wish I had better answers. I think everybody in this business is grasping for straws as to why prices are still relatively depressed, especially in terms of cost of mine production.

TER: At the close of the G20 Summit in Toronto last month, India and Canada signed a nuclear agreement supposedly paving the way for Canadian firms to export controlled nuclear materials, equipment and technology to India. What does this portend for the sector in North America?

MF: I wouldn't put a lot of stock in the importance of that agreement. We've seen the U.S. and seven other countries already sign deals like this with India. India's building 12 nuclear reactors in the next decade, and because they are not a large uranium producer, they need a uranium supply. That's probably one of the motivating factors. India is one of three countries that never signed the Nuclear Nonproliferation Treaty, the others being China and Pakistan. So for a long while, they were blacklisted.

Both the Climate Conference in Copenhagen and this G20 Summit in Toronto dealt somewhat with world movement to reduce the amount of heavy-enriched uranium (i.e., uranium that could be made into bombs) and convert that to low-enriched uranium. There have been myriad such agreements between countries over the last two years, all in response to the idea that we need to get the bomb-capable uranium into secure facilities to downgrade for use in power plants.

China has an aggressive goal of increasing nuclear capacity for electricity generation from about nine gigawatts (GW) to as much as 160 GW by 2030. So what we're seeing now is that yellowcake, or low-enriched uranium, will cross international boundaries freely. Of course this will not be the case with rogue nations such as North Korea, Iran and other places where the civilized world would not be certain about that uranium being used for peaceful purposes.

TER: If non-peaceful nations got the uranium, they would still have to enrich it to make weapons?

MF: Right. And they need the facilities to be able to do that. It's fairly apparent that North Korea and Iran have those capabilities. Low-enriched uranium is something on the order of 3% to 4% U-235, whereas high-enriched uranium—the bomb-making stuff—is more like 85% U-235. So there’s considerable upgrading to achieve weapons-grade uranium and it's an iterative process to get those high concentrations. Conversely, it’s also a laborious process to downgrade weapons-grade uranium to concentrations suitable for power plant fuel.

TER: As with the Megatons to Megawatts program.

MF: Exactly. You take high-enriched uranium, bomb-capable uranium, and downgrade the enrichment factor 25–30 times.

TER: That's why it's lasting so long in terms of being part of the supply.

MF: Right.

TER: What's your take on the future of deepwater offshore drilling?

MF: With something on the order of 25% of our domestic oil production coming from the Gulf of Mexico, it is very important to the U.S. economy. Among the ramifications, I think we're going to see increased regulation, permitting delays and environmental lawsuits. All of this means less drilling for both production and exploration, which means we'll have less oil and more dependence on the Middle East. It's also going to mean an increasing move to onshore oil. It's a very sad situation.

TER: Do you expect a greater focus on alternative energies as another possible outcome?

MF: I think that's likely.

TER: How might that play out and which players stand to benefit?

MF: Uranium first and foremost. I certainly think the rare earth elements (REE) sector will benefit because these are so-called green metals. They are necessary for alternative energies; for example, wind turbines need a lot of neodymium. Hybrid cars require lanthanum, neodymium, dysprosium, terbium and europium. So an increase in the green-and-clean energy technologies will benefit the REE sector.

TER: You've called the REE sector one of your favorites. Do you still feel that way?

MF: I do, but as we've seen lately, it's very dependent on the health of the world economy. I have several core positions in the REE sector that I hold for the long term.

TER: So to the extent that it brings alternative energies more front and center, rare earths may benefit from the Gulf disaster. Any other sectors?

MF: Yes. I also think it will benefit the natural gas industry because that's much cleaner than other hydrocarbon products. The U.S. is the world's largest gas producer now. Gas is cheap and relatively clean; but gas storage is still high. The oil-to-gas price ratio right now is way out of whack, approaching 15, with historical ratios somewhere around 6. So in relation to oil, gas is quite cheap.

TER: What about solar?

MF: I don't particularly like the wind or solar sectors because they still require government subsidies to be economic. I don't like private industry depending on elected government to generate cash flow.

TER: And geothermal?

MF: Especially in the junior resource sector, I look at geothermal as too long term and the junior plays too risky. The payback schedules for geothermal electrical generating plants is okay for monopolistic utilities, but I just really don't get it for a junior that has a limited lifespan. In my opinion geothermal is best suited for local space-heating needs where the geothermal fields exist.

TER: OK, any other energy sectors that you follow?

MF: I follow natural gas. As a contrarian, I like to find things that no one else is looking at right now, are off people's radar screens or are not the flavor of the year. So uranium and natural gas have piqued my interest lately.

TER: Is it a good time to buy natural gas stocks?

MF: I'm watching right now. I haven't waded into this sector yet. I would say that if you do, you want to buy the best and strongest companies with good balance sheets and the ability to generate cash flow and not exceed their revolving credit lines. It's a bit of a different philosophy because all oil and gas companies carry debt whereas juniors in the metals sectors generally don't carry debt.

TER: What's keeping you from jumping into the market at this time?

MF: I think it's a little early. I'd like to see some more positive indications that gas prices are going to be relatively strong and that demand is going to increase in the mid to long term. I think it will because it's cheaper and cleaner than burning coal or burning gasoline or diesel in your car.

TER: What cues are you looking for to make your move?

MF: I generally listen to other analysts, take it all in and try to make my own decisions.

TER: Is that time drawing close?

MF: I'm not sure. If it were getting close, I would be going into the natural gas sector right now. I'm still on the sidelines watching.

TER: Mickey, you are a big proponent of investors doing their due diligence. For those new to investing in energy, what conferences, books, seminars or newsletters would you recommend to them?

MF: There are numerous investment conferences every year, and I personally speak at about 10 or 12 of them. They're held in various large cities—Vancouver, Toronto, Calgary, Chicago, Phoenix, New York City, New Orleans, San Francisco. I encourage investors to go to these; most of them are free to the investing public. At the upcoming San Francisco show (Hard Assets Conference, November 21–22), some educational workshops will be free and some will have small fees.

TER: You'll be there?

MF: Yes. I will be presenting my educational workshop called "Geology for Lay Investors." Probably the most difficult thing for lay investors to get a handle on is the geology of these junior resource companies' projects. We geologists tend to speak our own language; we understand the jargon, but it's probably puzzling to the investing public with no background in the science. In an hour-long seminar, and however long I stay for questions—which tends to be quite a while—I try to boil it down into the basics of geology. Geology is a science, but the best geologists are artists. So through these educational seminars, my mentoring of investors and a book I'm writing on resource investing for the lay investor. . .

TER: When is that coming out?

MF: I keep saying a year, but it keeps getting put off as I keep adding more chapters, kind of like most juniors' Gantt charts. I'm chipping away at it but then I get busy with other things. I'm writing it chapter by chapter, so it's a work in progress.

TER: Any final thoughts you'd like to share today, Mickey?

MF: Yeah, I've got two. "There ain't no cure for the summertime blues" except that. . ."Time is on my side, yes it is."

TER: You ought to set that to music.

MF: I think that's already been done.

The Mercenary Geologist, Michael S. "Mickey" Fulp is a Certified Professional Geologist with a bachelor's degree in Earth Sciences with honors from the University of Tulsa (1975), and a master's degree in Geology from the University of New Mexico (1982). He has more than 30 years' experience as an exploration geologist searching for economic deposits of base and precious metals and other resources. Mickey has worked for junior explorers, major mining companies, private firms and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation and business development. Respected throughout the mining and exploration community due to his ongoing work as an analyst, newsletter writer and speaker, Mickey can be reached at Contact@MercenaryGeologist.com.

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-- Posted Thursday, July 22 2010 | Digg This ArticleDigg It! |

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