Natural resource speculators know that past uranium bull markets offered some ’explosive’ (pun intended) upside. I have been fortunate enough to experience two uranium bull markets: the 1970s bull market, which saw a tenfold increase in the uranium price and a hundredfold increase in some uranium equities, and the bull market of the last decade, which saw a repeat of the earlier performance.1 If past is prologue, the stage may be set for a third uranium bull run.
Conditions have changed so completely since the 1970s that a thorough examination of that market teaches us little that is relevant today. But one thing about the 1970s bull market is instructive -the market collapse was partially caused by two catastrophic plant failures: at Chernobyl and Three Mile Island.
The bull market of the 2000s, he says, gives fodder to the case for higher uranium, because the bear market that preceded it is similar to conditions we experience today:
An examination of the last uranium bull market is more instructive, particularly because many readers were participants. This great bull market had its origins (as almost all natural resource bull markets do) in the preceding bear market. In that 20-year-long bear market, the nominal (non inflation adjusted) spot uranium price declined from over $30 per pound in 1980 to $8 per pound in 2001. The costs of producing uranium began to exceed the spot price for many miners 2. By the turn of the millennium, the stage was set for a dramatic rebound. Uranium producers had total production costs exceeding $20 per pound. They sold their product on spot markets for $8 – losing $12 per pound on sales. There was little incentive to increase or maintain production.
Of course, these low prices were beneficial to power generators and power users. So uranium’s utility to consumers was high. As a consequence of this extraordinary utility, declining US demand was more than offset by increased demand elsewhere – particularly from France, Japan, South Korea and Taiwan.
Japan, for example, instituted a power-generation policy that focused on nuclear energy. The Japanese had learned important energy security issues during the oil embargos of the 1970s. The energy density (the amount of power generated by a given mass of material) of uranium was extremely high, compared to other sources of energy. That meant that it was feasible to stockpile uranium, which gave the resource-poor island nation geopolitical energy security unavailable from oil, gas or coal.
This 20-year bear market at once stimulated demand and constrained supply, as one would expect. By 2000, global mine supply was estimated at 80 million pounds 3, while demand was estimated to exceed 150 million pounds, resulting in an annual supply deficit exceeding 60 million pounds 4. The world enjoyed a substantial aboveground stockpile – boosted by the conversion of ex-Soviet weapons-grade uranium – but the supply deficit was reducing inventories to a degree that began to worry power generators.
On the demand side, rapid growth of emerging economies, particularly in Asia, sparked a dramatic revival in nuclear plant construction.”
The Makings of a Bull Market
Back then, Rick says, no one wanted to hear his thesis for higher uranium, despite positive signals for the green metal:
Any observer who cared to look at the uranium market (mercifully, I did) would have noted the makings of a bull market. Extraordinary utility to users, no possibility of substitution, rising demand, falling production, and dramatically declining stockpiles guaranteed one of two outcomes: rising uranium prices or dimming lights! Remember that even the ’anti-nuke’ US generated 20% of its base load electricity from nuclear energy. France and Japan were above 70%.
When I drew investors’ attention to these facts and their probable consequences, I was met by one of two responses: broad indifference or overt hostility. Most risk-oriented speculators are attracted to popular or ’hot’ stories. But uranium had been out of favor for 20 years. Others were outraged that I had the temerity to mention a commodity they associated with Hiroshima, Nagasaki, Chernobyl and Three Mile Island.
The markets worked eventually, as they always do. In fact, prices for uranium and uranium equities overshot what analysts looking for equilibrium between supply and demand would have expected. The uranium spot price rose from $8 per pound, through $20… and peaked at levels substantially in excess of $100 per pound.
“But this meteoric rise paled in comparison to the increase in the prices of uranium equities. One company, Paladin Energy Ltd. (which many of our clients had the great fortune to own), rose from $0.01 per share to $10 per share – a thousand fold increase – in a six-year timeframe.”
When the spot price of uranium rose, speculators suddenly thought getting in would be a good idea, Rick explains:
At the start of that epic bull market, there were five public junior exploration companies that described themselves as 'uranium focused.' The worst performer of that farsighted group saw share price increases exceeding 2,000% over six years. By the end of the bull market, 500 juniors described themselves as ’uranium focused.’ And speculators’ regard for the sector changed from indifference or hostility to universal unreserved adulation!
Note that in 2000, when the price of uranium had to go up, almost no speculators or brokerage houses cared. Only five management teams were dedicated to a thesis that had to work. Five years later, with the commodity up to arguably unsustainable levels, investor appetites were insatiable, and 500 management teams were committed to the sector!”
Of course, the sudden rush of investment interest caused a bubble to form in uranium and associated sectors, such as uranium exploration:
This hysterical market reaction is particularly ironic when you consider that the preceding 20-year bear market had decimated the population of qualified uranium professionals. Nuexco Inc., a private uranium trader, estimated at the time that no more than 20 potentially qualified uranium teams existed worldwide, five of which were already employed by major miners or state-backed enterprises. Exuberant speculators ignored some sobering math at the market top: the probability that a uranium junior was run by a qualified team could be quantified by dividing the number of qualified teams (15-20) by the number of aspiring junior issuers (500).
Once again, markets worked. The uranium price fell from levels above $100 per pound to levels below $70 per pound, before stabilizing at the $80-per-pound level. New supplies – particularly from Olympic Dam in Australia, new mines in Kazakhstan and down-blending of massive quantities of Russian weapons-grade material – helped moderate the market.
These new market realities and laughable performance delivered by massively incompetent junior managements decimated the junior uranium equities sector. Hundreds of management teams – and hundreds of thousands of speculators – gradually departed the sector, as always, in search of other overpriced ’bubbles.’”
How did the catastrophic failure of a nuclear reactor in Japan change the picture? Will uranium become the object of adulation again as it did during the 2000s? Tomorrow’s Sprott’s Thoughts will explain the former and lay out Rick’s arguments for investing in the green metal now.
Rick Rule founded Global Resource Investments in 1994. In 2011, Global merged with Sprott Inc. Rick continues as Chairman of Sprott USA.
IAEA:World Distribution of Uranium Deposits (UDEPO) with Uranium Deposit Classification (2009 Edition)
1. http://www-pub.iaea.org/MTCD/publications/PDF/te_1629_web.pdf [9]
2. World Nuclear Association: Uranium Markets http://www.world-nuclear.org/info/Nuclear-Fuel-Cycle/Uranium-Resources/Uranium-Markets/#.UZFWKKI4sec [10]
3.World Nuclear Association: Uranium in Canada http://www.world-nuclear.org/info/Country-Profiles/Countries-A-F/Canada--Uranium/#.UZFhWKI4sec [11]
4.OECD and IAEA report: “Uranium 1999: Resources, Production and Demand”
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