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The Other Yellow Metal

Ralph Kettell
June 1, 2004

Which yellow metal has appreciated approximately 75% in the past 8-9 months? If you don't know right off the bat, don't feel bad. Most people don't know, but I'll give you a few clues. The shares of companies who mine or explore for this metal are up between 75% and 1500% in the same time frame. This metal has a tiny market value relative to gold and there are only a handful of companies currently active in it. The market for it is quite restricted and its price is quoted just once a week as opposed to gold and silver which are quoted every second of the trading day. For those who haven't guessed correctly yet, this metal is uranium, which in its natural form, U3O8, is called yellowcake for its bright yellow color.

Warning: if you begin to get bored with the length of this treatise on nuclear power and mining nuclear fuel, go to the end of the article for some information on specific stocks in this sector.

Uranium U3O8 Price History

Why is Uranium on the move? Well, as with many commodities in the past one to two years, it probably has a lot to do with the decline in the dollar and the voracious appetite of the Chinese for raw materials. However, as with some of the other commodities there are other underlying structural changes taking place in the market or significant events that have taken place. One such event in the uranium market is the flood at Cameco's MacArthur River Mine, the world's largest and highest grade uranium mine. Let us review what has occurred in the uranium market over the past 10-15 years. I have attached a graph of U3O8 prices, from the informative website of the Ux Consulting company,

We need to back up a bit further and explain what happened to U3O8 prices prior to 1987. When the nuclear industry was going full force back in the early 1970's, the price for U3O8 reached an all time high around $43 per pound. However, following the problem at the Three Mile Island Nuclear Plant, the price of U3O8 dropped by 70% or more. This set up the oscillation which we see in the 15-year price graph below, and is common when the market has to absorb an excess supply of material and the uneconomic sales and contractions which happen from the resulting bankruptcies and consolidations.

The 1987/1988 peak was the first major reaction following the downdraft of the late 1970s. The market plunged down again in 1989 through 1992 and attempted another move upwards in 1996. This time, however, the uranium market was trounced by the oversupply following the fall of the Soviet Union. An agreement was signed between the Russian government and a consortium of US companies and agencies to reprocess Russian uranium products from their weapons programs into fuel for nuclear power plants. This caused a rapid downward spiral in the price of uranium and caused U3O8 to bottom around $7.00 in early 2001. This put in place a huge double bottom spanning from late 1991 to early 2001, or nearly 10 years. This is quite an impressive base on which to build a new bull market.

For more information on the agreements between Russia and the consortium see Cameco's website here. The link also lists quite a few definitions which may be helpful in understanding some of this article and learning a bit more about the nuclear power/fuel business.

The extremely low price of uranium in 2000/2001 put many high cost producers out of business or at least forced them to shutter their higher cost mines until the raw material prices rose sufficiently for them to be profitable again. The double bottom at $7 has seemingly ended the bear market in uranium fuel. The current price peak at $17.75 has exceeded the two previous peaks and with other factors in place may be ready to move to significantly higher levels. The move initially got its start from the extreme oversold levels which developed in late 2000 and early 2001. Then the price accelerated up after the supply disruption from the flood at MacArthur. It now appears that the market has digested much of the affects of the overhead supply from the Russian weapons reprocessing.

Current Uranium Supply and Demand Factors

Now what might the future hold for U3O8 prices. When the first Russian weapons deal is complete in 2008, there will be an annual shortfall of 3M pounds of U3O8. In addition to the shortfall, there are approximately 40 nuclear plants currently under construction worldwide which will need fuel as they come on line. Also most of the operating nuclear plants in the U.S. are having their licenses renewed which also adds to the demand for additional fuel. There is currently a huge supply deficit which is met by sources other than from operating mines. This deficit is going to continue to grow and as discussed above some of those additional sources of supply will disappear quite soon.

What are some other drivers for the price of uranium. Let's compare uranium to some competing technologies. The figure below shows the comparative costs for oil, gas, coal, and nuclear through 1999. Nuclear is the cheapest beating out coal by a small margin. The cost of natural gas and crude oil have both risen significantly in the past 5 years and so the costs for those fuels which were 50% or more higher in 1999 are likely significantly higher today.

As for coal, the following from an article in the Financial Times, shows the price of coal for generating electricity has gone from just $25 a ton in 2001 to a 20 year high of $100 to $150 a ton presently. If nuclear power is currently comparable to power generated from coal, and the cost of coal has risen by 4 to 6 times then certainly the cost of coal generated electricity is no longer as cheap as nuclear generated electricity. You could argue that the cost of nuclear fuel has also more than doubled in the same time frame. You would of course be correct, but would be overlooking one very important fact. The cost of the fuel for a nuclear plant is a much smaller portion of the total cost of nuclear generation than the similar ratio for a coal plant. Thus when the cost of coal goes up it has a far higher impact on the electricity cost than a rise in U3O8 will have on the cost from a nuclear plant. This is true, because much of the cost of nuclear generation is in the construction of the plant, equipment, and regulatory expenses needed to get started. Once a nuclear plant is in place, the incremental operating costs are quite small by comparison.

I could go on and on about the positive factors in the nuclear industry in 2004, but then the rest of you would fall asleep as well and no one would make it to the important facts and figures at the end of the article. To summarize, I see a bright future for nuclear power for the next 2-3 decades. Practically every other day there is a newspaper article about nuclear power making a comeback. There are currently three consortia of companies with applications pending with the D.O.E. for new nuclear plants in the U.S. The Chinese have such a power shortage that in some areas of the country, companies are provided with power only 3-4 days per week. The cost of crude oil and natural gas is marching ever higher and many experts are claiming that the world production of crude oil is currently peaking. The rail infrastructure in the US can not support shipping any more coal than it currently does. The U.S. Power grid needs more generation capacity to avoid regional blackouts. The list could go on and on, but the punch line is that nuclear is the only viable answer currently available. Nuclear is not without its problems, regulations and waste, but compared to going without electricity or joining Don Quixote chasing windmill fantasies, those issues are quite manageable. The nuclear power bonus is that it generates no greenhouse gases.

Players in the Uranium Resource Market

The following is not necessarily all encompassing for the uranium resource market, but it lists the companies whose primary business is uranium exploration and/or production. It does not include companies who have only a small portion of their resources devoted to uranium, nor does it include companies which are predominantly processors or refiners of uranium products. The list has also been limited to those companies operating and/or listed in the U.S. and Canada.

Company Name Stock
# of shares x1000 Closing stock price 05/28/04 Market Cap as of 05/28/04
Cameco Corp. CCJ 56,954 $52.30 $2,979M
International Uranium Corp. IUC.TO 77,670 $2.19 Cdn $170M Cdn
UEX Corporation UEX.TO 106,227 $0.65 Cdn $69M Cdn
Strathmore Minerals Corp. STM.V 25,700 $0.36 $9.3M Cdn
Uranium Resources Inc. URIX.PK 88,574 $0.29 $26M

I have created a uranium resource index which I had intended to include in this article, but the article has gotten quite long enough without it. I will publish it in a future piece, but will give a brief summary of it herein. It is made up of the five companies listed above and is more heavily weighted to the higher market cap issues (similar to the HUI for gold stocks). The index started on June 1, 2003 at 100 and is now at 540 just one year later. It hit a peak around of approximately 655 in early March. It has had a bit of a consolidation in concert with the rest of the commodity sector for the past 2 months, but in comparison it has been quite mild for the uranium companies.

Strathmore Minerals Corp.

I will provide more info on these companies in a future article, but of the group the company I like best at present is Strathmore Minerals (STM.V). Their stock has pulled back significantly from the highs reached in March of this year and is currently hovering around a support level on the chart dating back several years.

The chart for Strathmore appears to be forming a teacup and handle formation which is an extremely bullish pattern and portends a strong move up from current levels. This is the same kind of chart pattern we saw in gold and many of the gold mining stocks back in 2001/2002 and could be presaging a similar sort of move in the other yellow metal, uranium.

Strathmore Minerals has tremendous leverage to the cost of uranium and have approximately 3.5 pounds of U3O8 per fully diluted share. Note the resource amount that they quote on their website is for reference only as it does not conform to Canadian 43-101 requirements because of the age of the data. I would look for Strathmore to exceed its 52-week high of $1.00 sometime in the next 6-12 months Strathmore's current market cap is only about $7M US or about $12M fully diluted. It certainly could take off if the price of uranium continues it rise to $20 and beyond. It would not surprise me for investors who get aboard at these prices to achieve 10X plus returns over the next 2-3 years.

Jun 1, 2004
Ralph Kettell, II, P.E.
Concentric Energy Corp.
P.O. Box 806
Burtonsville, MD 20866

Ralph Kettell is the President and founder of Concentric Energy Corp. Concentric Energy Corp. is a private uranium resource and exploration company and has property positions in Arizona, New Mexico, and Nevada. Concentric currently controls 70M plus pounds of U3O8 which were drilled out to the reserve and resource categories by major oil and energy companies in the mid 1970s.

The author is not an investment advisor and this article should not be construed as a recommendation to invest in the discussed securities. The author is merely presenting some possible scenarios and what the potential risks and rewards associated with an investment in these securities could be. The author has not been paid to write this article, either in cash or securities. The author is not a share holder of these but does have a significant position in the uranium mining sector.

The author's objective in writing this article is to make potential investors aware of the possible rewards of investing in this security and to elicit interest on their part in it to the point where they are encouraged to conduct their own further diligent research. Neither the information, nor the opinions expressed should be construed as a solicitation to buy or sell this security. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions.

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