Investment Indicators from
Peter George
Nuclear Revolution - in
the making
Peter George
November 4, 2004
"Do not conform any longer
to the pattern of this world, But be transformed by the renewing
of your mind." -Romans chapter 12, verse 2
SUMMARY
Gold Bugs are used to a world of conspiracy - banks and governments
fighting to deflect the relentless forces of speculators and
the market. Despite feeling at home in such an environment, the
writer was surprised at the web of intrigue and confused emotions
battling for supremacy in the field of nuclear science, some
determined to damn its role in the field of energy. Even today,
when the man in the street confronts the concept of 'atomic power,'
he often thinks first of bombs and radiation. He can largely
thank the 'Greens' and their political cousins in the 'Anti-War
Brigade' for most of these distorted perceptions. In a fit of
blind zeal the 'Greens' were set to ditch baby and bath water
both. It was not always that way.
By the end of the seventies the nuclear option was gaining ground
everywhere. The US had 100 Nuclear reactors in operation, 20
under construction and 100 more planned. The world had successfully
constructed over 400 in total: then came 'Three Mile Island"
(1979) and Chernobyl (1986). Most of the US '20' were halted.
Those on the drawing board got cancelled. TMI was an American
phenomenon. The world largely ignored it and waited for Chernobyl.
The 'Greens' and their 'fellow-travelers' blew a minor glitch
at TMI out of all proportion. Later, they and others totally
misrepresented the true extent of 'fall-out' from Chernobyl (1986).
On the back of both they sowed a wind of invective against anything
nuclear which succeeded in gutting it as an energy source for
the next quarter century. The process was aided and abetted by
a 20-year downtrend in oil and commodity prices. This helped
defer decisions by skewing the economic risk from nuclear, to
less complicated fossil fuels like oil, coal and more recently,
liquid natural gas.
A quarter century later, thanks to the misguided efforts of the
'Greens,' the world looks set to reap a double whirlwind - a
crisis in oil and gas supplies, coupled with a menace in 'global
warming.' The former could see oil prices spike ten-fold in a
decade. The latter could spawn increasingly nasty side-effects,
ranging from 'acid rain' and radically changing weather patterns,
to melting perma-frost and sharply rising sea levels. If at some
point in the future every identifiable 'Green' is punched black
and blue by an angry world, it would be no more than their just
deserts. They have been fighting the wrong war. Well-known 'Green'
James Lovelock, of Mother Earth 'Gaia' fame, has repented. We
discuss his views below.
Professor John McCarthy, ex-Director of 'Artificial Intelligence
Research' at Stanford, spent much of his life studying the modes
of reasoning required for intelligent behaviour. He summed up
political opposition to nuclear as follows:
"The counterculture generation is passing through the peak
of its political powernext generations seem to be more RATIONAL
about nuclear energy and many other issues. Therefore the US
is likely to resume building reactors before being driven to
it by other countries getting economic advantages."
When politics and phobias fight markets, markets invariably win.
The two-edged crisis in oil and energy will resolve itself in
similar fashion. The market will determine our choices. First
there's not enough easily-accessible oil and gas. Second, what's
left is destroying our planet. Few will take heed of the damage
until dollars and cents combine with the effects of global warming
to give us all a fright.
When the US was confronted in March 2001, with international
pressure to comply with the requirements of the Kyoto Treaty,
rolling back consumption of carbonaceous fuels like oil, coal,
and gas, to combat the 'Greenhouse' effects of global warming,
Bush was blunt in his refusal to give a blank cheque promise
of compliance:
"We'll be working with our allies to reduce greenhouse gasses.
But I will not accept a plan that will harm our economy and hurt
American workers."
Drawn up in Kyoto, Japan, in 1997, the accord initially called
for industrialized nations to cut greenhouse emissions 8% below
1990 levels, but gave them 'til 2012 to reach respective targets.
To become effective the agreement required ratification by countries
responsible for at least 55% of carbon emissions in 1990. The
US was then producing 36% of the total, but with only 6% of total
population, making it far and away the biggest polluter. US rejection
was a real setback but Bush did not act in isolation. Two years
earlier the Senate had voted unanimously, by 95-0, to reject
Kyoto unless China and other rapidly developing countries were
also required to join. Despite current protestations to the contrary,
Senators Kerry and Kennedy both voted WITH the majority, and
AGAINST Kyoto!
Fast forward to 2004 and China has leapt up the rankings to become
the world's second biggest consumer of oil. In the medium term
their demand could double again so, in retrospect, the US was
entitled to dig in its heels until compliance with Kyoto became
more widespread.
Today the Bush plan to fight greenhouse gasses calls for investment
in Hydrogen and other alternative sources of energy, together
with financial incentives to encourage their use. But hydrogen
is not in itself an 'energy source.' Furthermore, it can only
be produced economically - and in the spirit of Kyoto - as a
by-product of nuclear power. There is no point in burning oil,
coal or gas, to generate hydrogen.
In pursuance of their revised strategy, the US Department of
Energy a year ago commissioned a study by the University of Chicago
to investigate the economic factors affecting the future of nuclear
power. That report was only completed in August 2004. It made
ultra low projections about the likely future course of oil and
gas prices, totally ignoring the theory of 'PEAK OIL' discussed
in this report. Conversely, it made quite high estimates for
long term interest rates, and required returns on equity. Both
decisions selectively disadvantaged the capital intensive nature
of nuclear reactors. Despite these distortions, the study fully
assured the competitiveness of nuclear power.
CONCLUSION
The above summary is designed to demonstrate a principle. If
market forces require it, then 'Greens' or 'no Greens,' nuclear
will return to fashion. The appointed time for its restoration
is close. We intend to demonstrate why the case is far more compelling
than the tame conclusions of the Chicago report would indicate.
Those who position investments appropriately can make excellent
profits as events unfold, both in the short term and the long,
depending on the sector. As with all markets, they discount the
future. For major new producers of Uranium and certain leading
edge technologies in the field of Reactor Design, the rewards
could be exciting. We briefly mention our top two recommendations
below, but they are discussed in greater detail in the body of
the report. In the case of Uranium, the short-term outlook is
very strong. Not only is underlying demand set to ratchet up
sharply in the years ahead, but stockpiles of highly-enriched
weapons-grade uranium - and other non-mined sources - are depleting
fast. Simply to close the current gap, production will need to
double in the short term from 85m lbs a year to 170m. If the
oil crisis worsens, nuclear will be the main beneficiary. If
'Greenhouse' fears mount, nuclear is the only realistic way out.
Once the world's brightest and best are let off the leash and
enticed to re-enter the world of nuclear research, plants will
get simpler, design margins safer, fuel enrichment cheaper, licensing
quicker and construction times shorter.
In 1979, following the shock of Three Mile Island, uranium prices
peaked at $43 a lb. In the absence of this extraneous event,
uranium may well have continued to rise in step with other commodities,
peaking a year later at $50 a lb. That would have coincided with
Brent oil notching its then all-time high of $40 a barrel, and
gold a record of $850 an ounce.
Twenty four years down the track, Brent leads the pack. The price
has surpassed its previous high. At time of writing it had breached
the $50 level for the first time ever. Our initial short-term
'point and figure' target is $54. Nymex 'Light Sweet Crude' is
there already. (NYMEX is short for New York Metal Exchange).
Some commentators predict Brent could reach $60 in 9 months and
$80 in 24 months. No doubt there will be the odd gut-wrenching
correction on the way - as we saw in copper recently - but the
trend will remain intact.
In response to these multiple pressures, the uranium price will
undoubtedly play catch-up. Within 24 months it could equal and
surpass oil. Longer term both can DOUBLE - $100 a barrel for
oil and possibly $125/lb for uranium. Only then would they be
back to where oil was in REAL terms in 1980 and where uranium
might have been were it not for Three Mile Island. The short-term
logic in favour of selecting uranium stocks as top pick in the
energy sector, is therefore overwhelming. The metal starts from
a much lower base than oil - being $20 /lb instead of Brent's
$50 a barrel - yet on past performance the two should at least
rank pari passu.
If a cascade of bursting debt bubbles causes the dollar to tank
50% over the remainder of the decade, nominal dollar values for
oil and uranium could conceivably even RE-DOUBLE. (The 50% figure
was a forecast made by The Economist scarcely a year ago. It
is no more than the strict measure required to restore the US
trade deficit back to surplus - currently running over 5,6% of
GDP).
TWO SPECIFIC RECOMMENDATIONS
Based on the above summary and conclusion, we have two specific
investment recommendations to make. Clearly no action should
be taken until you have passed them across the desk of your personal
investment advisor, for a careful 'yea' or a 'nay.'
1. AFLEASE - Gold and Uranium Producer of Promise
The first is a simple gold/uranium play, but with the emphasis
on uranium. As a South African, the writer spent part of his
career in finance as a stockbroker in Johannesburg, the other
as a bond trader in Cape Town. But his most exciting four year
stint took place in between the two moves, from 1983 to 1987,
whilst Executive Chairman of junior gold miner Wit Nigel.
Half way through the writer's stormy tenure as Chairman, the
company made a public offer for a minimum 25% stake in a gold-uranium
producer called AFLEASE, then controlled 65% by Anglo's Vaal
Reefs gold mine. Today that company, with a much-expanded capital
base, sits on a uranium resource estimated by Anglo to amount
to 330m lbs. That would make it approximately 60% the size of
Canadian heavyweight CAMECO. AFLEASE also has two small, but
proven shallow gold reserves - and a potentially much larger
gold resource which has yet to be properly drilled but could
ultimately contain in excess of 10m ounces of gold. A 'reserve'
is a deposit which has been properly established. A resource
is far less certain.
In total Aflease controls approximately 60% of South Africa's
easily- available uranium. Grades should initially average close
to 1kg a ton (2,2 lbs). A third of projected uranium revenue
will come from gold which co-exists in the same deposit, at an
average recovered grade of 1gm/ton. Much of the resource lies
at or close to surface. The other three gold deposits are quite
separate and have nothing to do with the above gold as a by-product
of uranium.
The company recently raised R200m ($33m) via a share swap with
Randgold & Exploration. A portion of the funds will be used
to complete a 'pre-feasibility study' of the uranium deposit.
It should take 6-9 months from start to finish. In the late 70's
and early 80's the giant Anglo American Corporation sank 240
boreholes on the uranium prospect. These ranged from surface
down to 2000 meters. To put it bluntly, the deposit has been
drilled as thoroughly as a Swiss 'Emmentaler' cheese.
Seventy of the cores are still available for re-assaying to enable
the information to become SAMREC compliant. In the old days of
South African mining, exploration of the 'Main Gold Reef' - or
even the 'Merensky' Platinum reef - was relatively predictable.
Less than a dozen good borehole results were all one needed to
prove up a viable mine because it was simply an 'extension' of
an existing reef. Imagine having 240 drill holes in a single
large deposit! All thanks to Anglo thoroughness.
Subject to the pre-feasibility study producing no unpleasant
surprises, the company will approach one of a handful of potential
customers with a view to establishing an initial mega mine capable
of producing up to 6m lbs a year. 2m would come from a 'soft
start' short-term opencast proposition, taking a year or so at
most to bring on stream. The mega mine would take four years
to establish and would have a minimum 25-year life.
Most of the initial finance for the above mine would come from
the customer. Mining and treatment costs are expected to average
less than $15/lb. If the uranium price is trading over $30/lb
by August next year - currently $20/lb - we have a very sound
proposition on our hands. If the spot price hits our more realistic
target of $45/lb, we have ourselves a veritable humdinger of
a project - despite our long-term bullish projections for the
Rand, currently trading above R6/$.
We enclose a far more detailed analysis in the main body of this
report, but it is only available to SUBSCRIBERS. The Company's
CEO is currently on an overseas 'roadshow,' visiting potential
investors in the UK, Switzerland, Canada, the US, and Japan.
Japanese gold group Jipangu already holds 20m shares and has
recently appointed a second director to the Board.
In the long term, should the pre-feasibility pan out as hoped,
and should the market warrant, AFLEASE could one day open THREE
mega mines producing a total of 12m lbs a year. This would place
them in the same league as CAMECO with their current production
of 20m. Although AFLEASE has nowhere near the high grades of
CAMECO, it will operate in a far kinder environment. When account
is taken of its by-product revenue from gold, the company will
enjoy surprisingly low costs in relation to it's the price of
uranium.
The company has a present issued capital of less than 325million
shares. The ruling price at time of writing was R2,10/share equivalent
to US 35cents. We believe that at around R2,50 ( US 40cents)
- it would be possible to pick up between 20m and 30m shares
in sizeable blocks. The total investment would amount to less
than $15m. Should any of our readers be interested, they may
contact us via our web site, www.investmentindicators.com.
On July 27 of this year, we recommended the stock at R1, (US
16 cents) in a special report entitled: ENERGY UNLIMITED - AFLEASE
and URANIUM. It has since doubled off a low base. We believe
that by July of next year, with the 'pre-feasibility' complete
and uranium at $30, the shares could be trading at R7 ($1,16).
By the end of next year, 14 months down the line, with spot uranium
probably up at $45/lb and gold at $600 an ounce, these shares
could well be trading between five and six times current levels.
That would put them between R10 and R12/share, equivalent to
US $1,80 each.
2. SOUTH AFRICA'S 'REVOLUTIONARY REACTOR'
Investment recommendation number two is even more interesting.
The Pebble Bed Modular Reactor (PBMR) is a South African development
based on German technology established in the 60's, 70's, and
80's, which the Germans dumped after the traumas of Chernobyl.
It promises to revolutionize the nuclear power industry over
the next decade with its inherent safety, cost-competitive small
unit size, and flexible operation. It has perfect application
to commercial-scale production of hydrogen - which Bush is pushing
for - plus desalination for areas short of potable water, and
normal electrical generation in lieu of oil, gas and coal. In
terms of cost, ease of operation and safety, it is 5 years ahead
of any other nuclear designs currently on the drawing boards.
It is genuine fourth generation technology but its biggest selling
point is its inherent safety. Those who understand nuclear plants
describe it as follows:
"It is a reactor whose safety is a matter of physics, not
operator skill or reinforced concrete."
The first prototype is due for completion by end 2008. If successful,
from 2015 onwards, 35% of all new power plants in the world could
be PBMRs - not nuclear plants, ALL plants.
The South African Government is shortly expected to announce
its full backing for the continuing development of this exciting
project. However, if, after the announcement, a multi-billionaire
foreign investor with youth on his side and a penchant for calculated
risk, is prepared to stump up $1,2billion, he could take a controlling
stake in the Pebble Bed project - on condition he undertakes
to keep assembly in South Africa. In 10 years time he could have
an organization valued at many times the size of his initial
investment. South Africa could be generating $25 billion and
more a year, from exports. For the foreign investor, it would
be like finding another NOKIA - 15 years ago, when the company
was still in the timber business.
In a Financial Times article on August 10, 2004 there
appeared the following description of the Pebble Bed:
"Looking further ahead,
a US-led consortium of 10 nations is planning fourth generation
reactors that could be deployed after 2015. The six reactor concepts
being studied by the consortium mark a REVOLUTIONARY change.
They would operate at high temperatures (500 - 1,000 degrees
centigrade) to maximize efficiency and minimize the output of
radioactive waste. This is too hot for a pressurized water circuit,
so they would use new coolants such as helium, molten lead or
molten salt. Conventional uranium fuel rods would be replaced
with another system such as South Africa's "Pebble Bed"
technology, in which fuel is encapsulated in spheres the size
of billiard balls."
If there is anyone out there
interested in the amazing potential of this project, and capable
of handling the financial challenge of $1,2billion, please contact
the writer.
N.B. Neither of the above two recommendations has merit
unless our primary analysis of the energy markets is correct.
Prospective investors should carefully assess our detailed reasons
for predicting a massive swing back to nuclear. At this point
the reader will only have had sight of our six page 'Summary
and Conclusion.'
The
full report is over 40 pages long explaining the nuclear and
broader energy markets as well as giving more detailed valuations
of Aflease and the Pebble Bed Reactor. We encourage you to access
it at Peter George's website with a view to becoming a SUBSCRIBER.
The address is:
www.investmentindicators.com |
Peter George
tel: 021-700-4880
cell: 082-806-3147
Contact
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________________
321gold Inc
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