24/04/2007 - 22:00

The uranium game is changing

24/04/2007 - 22:00

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Bubbles never last long, as every child knows. No sooner have you blown one than it pops. What happens in the playground also happens on the stock market, as speculators are about to discover when the great uranium bubble of 2007 explodes.

The first sign the bubble is in trouble will arrive in the next few days when the Australian Labor Party votes to end its farcical three mines uranium policy.

The next sign will come when the ownership of the world’s uncommitted uranium stockpile is revealed, because from what Briefcase has been reading it’s not government, and it’s not nuclear power station operators – it’s the clever dicks who run the world’s risk-taking hedge funds.

A third sign is that leading players in the nuclear power game have said publicly, for the first time, that they know exactly what’s afoot, and they’re taking action to avoid being screwed by the hedge funds – and they want government to assist them.

A fourth sign is that the world’s big miners are dusting off their mine expansion, and new mine plans, as the uranium game shifts from the speculators’ playground into the serious business of long-term production.

These signs, which will be explained a bit further on in this week’s ramble, are obvious to anyone not caught up in the euphoria of Australia’s classic penny dreadful uranium boom, a place where travelling on promises is always better than actually arriving.

Over the next few months, if they are able to find buyers, the hedge funds will make their standard killing with their ‘play’ on uranium – almost certainly causing a sharp fall in the price of the fuel, and a corresponding collapse in uranium share prices.

The reason this is highly likely to happen is that the exit of the hedge funds will be driven by their ability to recognise when it’s the time to sell an investment, take a profit, and move on to the next game.

While there is no doubt that uranium will play a much bigger role in the future generation of electricity, it is equally certain that it will not jump into that role overnight, because developing uranium mines (not to mention actually finding them) takes time. And building nuclear reactors takes even longer (not to mention actually designing them) – another factor everyone seems to overlook.

If anyone doubts what’s happening in the uranium market, here is some of the evidence.

• The ALP conference, while little more than a jamboree for the true believers who can sniff power in the air as the Howard era grinds to an end, will send a signal to the uranium world that Australia is open for business, and that production will rise strongly to meet the demands of China, India, Europe and the rest of the world, which wants to switch to nuclear to cut greenhouse gas emissions. For the market, the message is simple – rising supply.

• The stockpile ownership question is only just surfacing, but according to reports from Canada, hedge funds snapped up an estimated 20 million pounds of uranium after it was revealed that the Cigar Lake project of that country’s biggest uranium miner, Cameco, had flooded, and production would be delayed for two years. In a classic hedge fund squeeze play they bought the world’s surplus uranium and are trying to gouge fat profits out of power station operators.

• The operators are not stupid. As Jim Malone, vice-president of nuclear fuels for Exelon, the biggest nuclear power station operator in the US, said on March 31: “The reality is that the speculators have sent an amplified signal to the market to encourage exploration and development. In the longer term they’ve done us a favour, though some of my colleagues have cringed at the short-term cost”.

The Nuclear Energy Institute in the US has called on the US government to create a strategic nuclear fuel reserve that can “only be accessed by commercial nuclear reactors” – a classic supply (and price) fixing mechanism to beat the speculators.

• News that Rio Tinto is pushing ahead with expansion plans at its Ranger project in the Northern Territory, and at Rossing in Namibia, plus having the Kintyre project in WA on a “green light” alert for the moment the ALP changes policy. Rio Tinto is not alone. Uranium mines are expanding around the world, and new ones are being developed.

•••

It would be very unwise for speculators to ignore these signs of rising supply, and the potential for government controls to play a role in controlling the uranium price.

True, much of what we’re seeing is happening in slow motion, but so does everything else when it comes to the real world. It’s only on financial markets, especially when hedge funds are at work, that there is an expectation that a game can be played on a weekly basis before moving on to the next bit of fun.

To test that comment, consider the often repeated remark that it takes a long time to develop new uranium mines to meet rising demand – and then apply it to the construction of a nuclear power station.

If five-to-seven years is a reasonable assumption for a new uranium mine (and a lot less in the case of Kintyre, or BHP Billiton’s dormant Yeelirrie project), then 10-to-15 years is a reasonable assumption for a new nuclear power station.

Boil all this down and you get the picture. Much of what we’ve seen in the uranium world during the past 12 months is pure speculative madness driven by: a genuine realisation that the world is going nuclear thanks to high oil prices and global warming; the fact that new mines are needed as stockpiles of old military material are consumed; hedge funds have played the game perfectly by snapping up surplus uranium; and a myriad of new “penny dreadful” explorers have been floated and will die penniless as reality dawns that this is a game being played in slow motion.

The final words go to Jim Malone: “The impact of the rising (uranium) prices isn’t now, it’s later. The prices in (long-term) contracts we have are reasonable. I think we can, so to speak, weather the storm of these very high prices.”

Mr Malone’s prediction is that, once the dust settles, the hedge funds have taken their money off the table, and the way cleared for new mines in Australia (and elsewhere) the uranium price will settle to around $US40 a pound (versus today’s $US113/lb) – double what it was a few years ago, but less than half what it is today.

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“The supreme happiness of life is the conviction of being loved for yourself, or more correctly, being loved in spite of yourself.” Victor Hugo

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