The New Gold Rush

No, not the yellow metal - yellowcake. As in U308 or uranium ore. The New York Times had a very good story today on the recent mania surrounding uranium mining in the western part of the United States, what some now call "uraniumania".

The revival of uranium mining in the West, though, has less to do with the renewed interest in nuclear power as an alternative to greenhouse-gas-belching coal plants than to the convoluted economics and intense speculation surrounding the metal that has pushed up the price of uranium to levels not seen since the heyday of the industry in the mid-1970s.
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Prices for processed uranium ore, also called U308, or yellowcake, are rising rapidly. Yellowcake is trading at $90 a pound, nearing the record high, adjusted for inflation, of about $120 in the mid-1970s. The price has more than doubled in the last six months alone. As recently as late 2002, it was below $10.

A string of natural disasters, notably flooding of large mines in Canada and Australia, has set off the most recent spike. Hedge funds and other institutional investors, who began buying up uranium in late 2004 to exploit the volatility in this relatively small market, have accelerated the price rally.

But the more fundamental causes of the uninterrupted ascendance of prices since 2003 can be traced to inventory constraints among power companies and a drying up of the excess supply of uranium from old Soviet-era nuclear weapons that was converted to use in power plants. Add in to those factors the expected surge in demand from China, India, Russia and a few other countries for new nuclear power plants to fuel their growing economies.

“I’d call it lucky timing,” said David Miller, a Wyoming legislator and president of the Strathmore Mineral Corporation, a uranium development firm. “Three relatively independent factors — dwindling supplies of inventory, low overall production from the handful of uranium miners that survived the 25-year drought and rising concerns about global warming — all have coincided to drive the current uranium price higher by more than 1,000 percent since 2001.”

Strathmore controls more than three million acres of exploration projects in Canada and previously discovered sources in the United States, primarily around Grants, N.M. In its heyday, the Grants “uranium belt” provided 340 million pounds of uranium, making New Mexico an even larger producer than Utah or Wyoming. Some politicians in the area hope there will be a new wave of mines, mills and jobs.

Strathmore, with a market capitalization of $300 million, is one of about 400 publicly traded uranium stock companies (most of them, like Strathmore, trade on the Toronto Stock Exchange). Many of the companies are much smaller. Some are essentially shells.

Shares of Strathmore (CDNX:STM.V) could have been had at almost a 30 percent discount from current levels or prices being fetched just prior to the Feb 27th world-wide equity sell-off.


There were no willing sellers found at the price specified in my offer during those days - sometimes it's hard to set a reasonable price when it's so difficult to know what is reasonable. That is, when global financial markets look to be coming unhinged.

Fortunately, long-time Iacono Research model portfolio member Laramide Resources (Toronto:LAM.TO) was clung to tightly during that period and it too emerged no worse better for wear. Laramide does much of their work "down-under" where a uranium renaissance, led by the Australian government, appears to be gathering pace (some impressive drill results from work in New Mexico have helped the share price recently too).


In any event, it's an exciting sector to be sure. You never know if it's about to come tumbling down all around you or if there will be a mad dash to $200 per pound - recent movements in the price of oil certainly favor the latter.

But there are many fundamental factors involved.

Uranium executives, investors and analysts alike agree that a major underlying cause of the current bull market is that mines are not generating enough uranium to meet growing demand. The supply constraints can be traced back to the end of the cold war when the United States and the former Soviet Union started converting enriched uranium from dismantled atomic weapons into nuclear fuel for peaceful purposes.

That program, and huge incentives offered to uranium companies by the Nuclear Regulatory Commission, flooded the market with excess supply. At the same time, demand shrank. The price of uranium fell sharply.

As a result, most uranium producers scaled back or closed their mines. Some companies sold themselves to French, Canadian and British corporations, which now dominate the industry. Some companies with nuclear power operations sold some of their inventories when the price was low to avoid storage costs.

But by 2003 uranium inventories held by utilities in the United States were coming back into balance. Then a series of natural disasters — flooding of the world’s largest uranium mine, McArthur River in Canada, and more recently at other mines in Canada and Australia — further pinched supply. Power companies now find themselves competing with aggressive institutional investors for high-price uranium.

It's that same old "two decades of underinvestment" story that no one really wants to listen to when the discussion turns to commodities. The latest "spot" price hit $95 per pound over the weekend. Back when it was near $50, some laughed at the few bold strategists calling for prices of $100 - they're not laughing anymore.

Disclosure: Long LAM, no position in STM at time of writing