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#1 Russ Winter

Russ Winter

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Posted 31 May 2012 - 11:02 PM

The markets and economy are horribly maladjusted, trading on one trick ponies,  hooks, rumors and bizzarro world “investment themes.”  I am attempting to develop a more bottoms up approach to operate in this “algo like” environment, but still it seems the same Alice in Wonderland patterns trade day after day.As investors with money we still all have to consider how to position ourselves. One over-riding theme that I am evaluating is the energy arena which has been disrupted by China excess and hoarding,  money substituting,  and capital destroying gambling.  Overlaid against the booms, and now inevitable busts,  is my fundamental belief that peak oil is here in spades.  A capital destruction bust in energy, such as that occurring in coal, nat gas, and alt energy will lay the seeds for severe price spikes sooner, rather than later.I also believe the Iran black swan is still lurking as a much higher event risk than is generally perceived. I also believe money tends to flow to energy (as a money substitute) when the monetary authorities get active.  This is not the primary reason to buy (can be a hook), but with monetary doves and nutwings still in control,  I had guessed that this would occur if Brent Sea oil traded below $100. That is now within earshot. The next Fed meeting is June 19-20. The ECB, China, and Japan could also panic at any time, and they may do a one trick pony in unison.Within the energy sector bust is that there is one asset, uranium, that is not being subjected to maladjusted overproduction, or where one does not have to await the demise of some insider- sand- box-turd-playing gangster firm like CHK for resolution. In additional uranium is an energy asset that has been already been marked down and where supply is dissipating.Bullish sentiment for uranium has vanished in the wake of the earthquake in Japan that crippled the Fukushima Daiichi nuclear complex. Uranium has fallen from about $70 to $51. Much of this is a consequence of the Japanese selling inventory on the spot market. The 2007 spike was too brief to bring on any new supply.Posted ImageSecondly low uranium prices simply don’t justify expanded production, and this is preventing the industry from readily meeting the market’s increasing demands. For producers, it’s a simple consideration. When deciding whether to extract uranium from the ground, you can estimate how much it will cost and exactly what price per pound of uranium will make that mine a profitable venture.  In a detailed analysis of 20 potential uranium mines by JPMorgan, uranium prices must be around $83 per pound for new projects to become profitable.  So once again, like coal and nat gas we have disequilibrium.However unlike coal and nat gas, the fundamental balance between reactor requirements and primary production is in deficit.  Last year world consumption was 176 million pounds; production was 143 million pounds.  There is an imminent supply demand imbalance due to the coming end of the Megatons to Megawatts program at the end of 2013, as well as an abundance of new nuclear reactors set to come on board.  The Megawatt program will remove 24 million pounds of uranium from the market each year. That is equivalent to almost 15% of last year’s consumption.  In comparison the US only produces 4 million pounds a year.Posted ImageAccording to figures from the Japanese Atomic Industry Forum,  Japan faces a 12-15% shortage of electricity this summer. Meanwhile additional fossil fuel imports are costing it about $40 billion – or $333 per person, per year – while its carbon emissions are roughly 14% above 1990 levels. Expectations are up in the air that some Japanese nuke plants will come back on line. Although the government recently recommended restarting 2 reactors in western Japan, the conventional wisdom is that Japan won’t blink.  My game theory holds that they will once the blackouts in hot weather hit, at least beyond what consensus holds.A  NY Times article on Thursday describes the PR song and dance over this in Japan. This, deep-value and M&A are the shorter term catalysts for uranium stocksNuclear power in the US is not dead.  The Nuclear Regulatory Commission has approved the first new nuclear power project in more than three decades. The panel approved plans from Southern Company for two reactors at a Georgia site. The $14 billion reactors could begin operating as soon as 2016 and 2017. Utility companies in Florida and the Carolinas also plan new reactors that use the same design by Westinghouse Electric Co.There are 435 nuclear reactors in operation all over the world. Add to this another 100 nuclear reactors are under construction or on the drawing boards. There are 63 reactors under construction globally, according to industry trade group the World Nuclear Association. Of these, 26 are in China and 10 in Russia.  India has 17 reactors operating and seven under construction, according to the nuclear association. Another 23 Indian reactors are expected to come on line in the next eight years. Unlike other commodities, Indian and Chinese consumption of uranium is at a modest level, only beginning it’s growth curve.  If algos are dumping these stocks because of the China/India bust, they are processing the wrong headlines.  Australian Bureau of Resources & Energy Economics,  says China’s consumption of uranium is likely to triple between 2011 and 2017 to about 15,500 tonnes a yearThe new modern breed reactors in China will arrive in sequence starting later this year with two, and then eight more throughout 2013.  There is real momentum right as the Megawatts program ends, and that game changes the market dynamics. And remember there are few new projects feasible under $80, and considerable mine development time lags.Posted ImagePosted ImageThe prime,  low political risk uranium deposit is Canada’s Athabasca Basin.  Canada and China inked a supply deal,  that will allow Cameco (CCJ), the largest publicly traded uranium company to deliver 52 million pounds of uranium to China by 2025. The contract is worth about $2.5 billion in sales.  CITIC Group, which is a Chinese sovereign fund, is interested in uranium explorers in the Athabasca Basin.The big boys such as Cameco, Rio Tinto, Sovereign Asian Funds and possibly BHP (BHP) are also realizing that large profits from uranium production will come from the Athabasca Basin. This is where deposits have grades tens to hundreds of times greater than conventional projects worldwide.  Operating costs of the several world class mines and projects there are $20-25 a ton. The majors are having problems dealing with the ever rising threat of resource nationalism.  So Athabasca Basin is primarily where I would focus, and right now stock prices are in deep-value mode. I have two picks for now.Cameco Corp. (NYSECCJ), accounted for 16% of world uranium production at 22.7 million pounds in 2011.  Even though it’s already a major producer, Cameco has plans to nearly double annual production from 22 million pounds to 40 million pounds by 2018. It’s nearly a pure play, deriving 79% of its profit directly from uranium. The company has five different, productive locations, and has a billion pounds (435 P&P 234 M&I, and 317 inferred) of reserves and resources. CCJ is invested across the nuclear fuel cycle. At $19 enterprise value is $7.5 billion.The largest project,  a mine at McArthur River, produced 18.7 million pounds of uranium in 2011, of which 13 million pounds went to Cameco as a 70% owner. Currently, McArthur River has a projected production life of 24 years. Cameco plans to boost that production to 22 million pounds per year.The biggest increase will come when it begins production at Cigar Lake in Saskatchewan (Athabasca Basin). Mining development there has been delayed by flooding multiple times, but management now expects production to start in 2013,  peaking at around 18 million pounds per year, half of which is CCJ.It also owns smaller, but still productive, mines at Rabbit Lake (Saskatchewan), Smith Ranch-Highland (Wyoming), Crow Butte (Nebraska) and Inkai (Central Kazakhstan).With Cameco’s average cost of production around $25 per pound, and an extra 20 million pounds of annual production in the near future, even small moves can turn into serious earnings. Prices at $60 per pound would boost earnings around 20%. Earnings are $1.20 a share at $50 uranium and at current production without Cigar Lake.Cameco recently lined up a billion in financing to go with its cash stash of a billion to possibly go on a shopping spree. One likely target is Denison Mines which holds 22.5% of the mill (McClean Lake) used for CCJ’s new Wheeler River mine.  DNN also holds 60%, with CCJ as 30% partner of a high potential high grade discovery at the Phoenix Zone in Wheeler River. The total (I and I) which only includes results through 2010, and not several recent 18% grade drilling hits is 40 million pounds. Total DNN M&I at 72 million pounds and 65 inferred, and DNN has decent cost $34 production of 1.6 million pounds.  I would guess that as soon as the summer drilling is finished, CCJ may just buy DNN as a natural fit. DNN’s enterprise value at $1.50 is a little over $500 million.DNN is all over the Athabasca Basin.Posted ImageFor those who want a diversified play there is an ETF, URA. The expenses aren’t bad.URA- ETFPosted ImagePosted Image

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