Mickey Fulp: Bullish on Uranium and Rare Earths
Source: Karen Roche of The Energy Report 4/29/10
http://www.theenergyreport.com/pub/na/6186
Mercenary Geologist, Mickey Fulp feels that much of the uranium production in the world is under the auspices of regimes or countries that are unstable or unfriendly to the West, leaving supplies vulnerable. He prefers "companies operating in Wyoming, New Mexico and the Athabasca Basin because that's where the majority of uranium has been produced in the past and will be in the future." In this exclusive interview with The Energy Report, learn why his eyes are on uranium right now and why the unique niche rare earth market is heating up and still at early stages, providing potential investment upside.
The Energy Report: Mickey, do you see undervalued sectors that make you think, "Boy, the market just hasn't gotten this yet?"
Mickey Fulp: The only sector that I think is absolutely undervalued right now as a whole is uranium. It certainly has been beaten up since mid-2007.
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TER: Are things improving, in your opinion?
MF: Absolutely not. Although I first started saying in January of '09 that the uranium sector was down and I expected uranium prices to rebound, they haven't done that. However, as opposed to last year, there is a lot of analyst consensus now that the uranium sector is undervalued. I've been bullish on uranium for quite a while based on supply/demand fundamentals and that bullishness still exists. So, from a contrarian point of view, I would say that most uranium stocks are undervalued right now and present buying opportunities.
TER: Some interesting agreements have been made surrounding the Washington Nuclear Security Summit regarding enriched uranium, specifically the agreement between the United States and Russia to disarm one-third of their nuclear arsenal. Ukraine has also agreed to dispose of their highly enriched uranium stockpile. Will these developments have a continued impact on uranium prices?
MF: I think that is unclear as of now. These highly enriched uranium agreements could certainly supplement supply but weapons-grade material has to be converted into low-enriched uranium for use in nuclear reactors. Highly enriched uranium used for nuclear weapons is about 85% U-235. The typical light-water reactor uses light enriched uranium that's typically 3% to 4% U-235. This could certainly overhang the market. The spot price is $42. Long-term is about $58. I don't think it's likely we will see major increases or decreases in these prices in the short to mid-term.
Certainly all the new mines coming onstream have increasing costs of production. There are very few new mines proposed or in development that are going to make money at a $40 spot price, but between 80% to 85% of the uranium yellowcake market is sold on long-term contracts. That's somewhere around $60 right now. The other thing to note is that fuel is only 10% of the cost of producing electricity in a nuclear power plant, which is very minor. We see sovereign nations, companies and utilities as some of the biggest buyers of uranium and often those sovereign entities are not concerned with the price.
In the uranium sector, supply security is the important thing. We do know that demand is increasing significantly year after year. Mine production is about two-thirds of the world's use. There are 59 new reactors in construction which will need initial startup feed. Utility companies that produce power through nuclear power plants historically have signed supply agreements for about three years. Those secure supplies right now are averaging about a year and a half. Based on that, I'm very bullish on the demand for uranium.
What we have to take into account is the geopolitical situation of uranium production. Forty-six percent of 2009 production came from countries that are not stable or very friendly to the western world. Most uranium is consumed by the West, especially the United States, which consumes about 30% of world production on a yearly basis, around 55 million pounds. Yet we produced less than four million pounds last year. So where does our uranium supply come from?
For the last few years, a significant amount has come from the Russian Megatons to Megawatts program; high-enriched uranium being reduced to low-enriched uranium. However, the number-one producer of uranium last year was the country of Kazakhstan, which is arguably one of the most corrupt regimes on the face of the planet. There were internal corruption issues in Kazakhstan last year with the government showing indications of increasing nationalization of its uranium industry. Nevertheless, production continued to increase significantly. The number-five mine producer last year was Russia, followed by Niger, which had a coup in February. There is every reason to think that a significant economic reason for the coup was that over 70% of Niger's exports are uranium. It supplies France with 40% of its uranium. The number-seven producer in the world is the country of Uzbekistan. Investing in the "Stans" is a huge geopolitical risk and has been since the Soviet Union dissolved in the early '90s.
TER: But is it an increased risk because they won't sell to the West, or because they may not produce uranium because of political and economic turmoil?
