Uranium: Analysts Forgot Yellow Cake
dec 24 2008
The financial analytical business is one of comic and irony. During prosperous economic times, the aggregate success of financial analysts’ ability to make their clients money is very high on a percentage basis. When the economic worm turns, the field of financial analysis turns into this sort of absurd puppet show. It’s really a simple notion. It’s just easier to make money in bull markets. But, during periods of economic decline, the demand for financial knowledge in order to navigate these volatile rapids increases dramatically. In turn, the quality and competency of these analysts simply evaporates. If I were to put a number to it, I would guess that maybe one in every couple hundred analysts understands what’s really going on, where we’re going from here, and how to position his/her clients to make money off it. So how do these financial boobs still have jobs? Well, maybe 1/2 of 1% of analysts have a clue, but probably 1 in 10,000 Americans understand current economic circumstances. The reason that these analysts still have jobs is because America buys into the mainstream media, and the mainstream media cradles these analysts. The reason for the lack of success is probably due in part to a number of reasons: conflicts of interest, desire for fame, lack of bear market experience, the inability to price in black swan events, etc. These reasons, and many others, result in this extreme ratio of poor analysts. Fortunately for us, they are the ones who allow us as contrarian investor, to make money. I am going to discuss a particular market that not too long ago, before the main stream analysts dismissed this market as worth covering anymore, carried sex appeal that had it making regular headlines. Uranium Market Yearns for Attention Do you remember that radioactive metal that went from a single digit price to over $130/pound in one of the greatest commodity bull markets in our history? Uranium was the hot ticket for a lot of time and those who played the game made a lot of money. When this market was hot, Canadian analysts were pushing the uranium miners and explorers as the key to riches. In true bubble form, any company that had the word ‘uranium’ in it, in true bubble form, went to the moon regardless of actual prospects and/or production. Like all bubbles, the uranium bubble burst. The same hedge funds and speculators that helped blow the price out to the upside assisted in doing just the opposite when they blew the price out to the down side. Spot uranium fell all the way to $45/pound. Since then, uranium has been forming a consolidated base that it could, and probably will rally off of. During all of this price volatility, analysts’ coverage of the uranium market ceased to exist, and not just main stream coverage either. Data via the internet and other independent sources has also dried up significantly. But that’s to be expected. Your standard analyst just isn’t contrarian. He follows the crowd. The problem is that contrarian play is the ONLY way to make the big plays that can make a difference in your financial circumstances. I digress. In the mean time, the fundamentals of the uranium market haven’t changed. Markets Eying up Higher Uranium Prices Currently, there are 439 reactors in 30 different countries. The reactors consume 167 million pounds of uranium on an annual basis. The problem is that current mine production is only 108 million pounds per year. In addition to that, there are 36 reactors currently being built, with China, India, and Russia leading the way. There are 99 reactors in the ‘planned’ stage and 232 reactors in the ‘proposed’ stage. The majority of these planned and proposed reactors are in BRIC countries. This makes intuitive sense given that the BRIC countries need to grow their electrical infrastructure in order to fuel the growth. At $54/pound, uranium is very economical to mine. At this point of the commodity supercycle, we would expect some new mine supply to be coming on board. Unfortunately that is not the case, due mainly impart to several mine disruptions. Cameco (CCJ) has had nothing but problems with its super mine at Cigar Lake. It has had costly setbacks for the past couple of years due mainly to mine flooding. Cigar Lake was expected to bring on board 17 million pounds of annual supply. Uranium One (SXRZF.PK) was forced to shut down its Dominion operations in S. Africa, and Denison (DNN) just shut down its recently opened U.S. mine. The discrepancy between mine supply and reactor demand has been fulfilled by blending down materials from dismantled nuclear weapons and old stock piles, but these supplies are finite. The uranium market is a perfect example of the financial analysts’ incompetency. Those who listened to their advisers who joined the band wagon at $100+ uranium lost their clients a lot of money. Opportunity is presenting itself again. Many of those analysts who once covered these markets have moved on and aren’t even aware of the recent price turnaround. That’s why we at Oxbury Research separate ourselves from the rest. Stay tuned as I will be sharing some of the particular investments in the uranium sector that I expect to outperform.