Monday, April 30, 2007

Looking At Uranium - What a hedge.

As an investor uranium has made me very uncomfortable. There is no question that there is a huge gap in supply and demand and that uranium mines take longer to get the approval process to build them than other mines, so there should continue to be a gap for some time, but it has all the appearance of a bubble.

So, I've been looking deeper into uranium because the spot is very, very, very high, and any one in a position to take advantage of that spot price is going to make a lot of money. The question is, have investors fairly valued the potential, under valued or over valued it?

So, I've been reading Cameco's management an analysis. Cameco has 513 million pounds of uranium reserves. At that spot price of $113/lb, well that's $58 billion dollars!!! And their market cap is only $17.8 billion US, fully diluted. And heck, they also have 100 million pounds of resource and another 316 million pounds of inferred resource. They also have 3.6 million ounces of gold reserves. And then they have the electrical part of the business.

Actually, the numbers do not excite me. Certainly if they were able to sell their uranium at those prices they would make so much money because the profit margin would be incredible.

But, these are things that I found. Much uranium is bought and sold through long term contracts. In 2006 the cost per kWh for energy produced from nuclear power was 1.66 cents, from coal was 2.28 cents, 6.60 for gas and 9.64 cents from petroleum.

So nuclear energy costs only 1.66c/kWh (average 2006) when spot prices are $49.60 (average 2006), right?

Wrong, time to choke, Cameco's average price was $20.62/lb, about 41% of the actual spot price. The industry tends to make contracts 2-4 years prior to delivery and have those contracts in place for 4-6 years. Cameco has 60% of its uranium hedged. Looking back to just 2003, well that was the first year the average spot price exceeded $11 US, that's the price range for 60% of it uranium. That's only about 90% short of the current spot price...

At $20.62 that 513 million pound uranium reserve is worth about $10.6 billion.

Currently their production volume is about 21 million pounds per year, and they have a fully integrated business in converting the uranium from what's pull from the ground to what nuclear reactors actually use. They actually ended up selling 32 million pounds, but they purchase other uranium concentrate, process it and then sell it. They do not gain from the bull run on uranium for those 11 million pounds.

It seems Cigar Lake had production commitments for 2007. It seems like these contracts at low prices are being extended for 5-7 years.

I didn't find guidance on the price of the hedged uranium, but it seems only an inflation increase is in order.

It sure changes the dynamics of what a stock might be when they are only getting about 10% of the current spot price for 60% of their production.


IIO said...

You really do some good research on this blog. Do you have any opinion on which way the price of gold is headed?

Deborah said...

I'm not especially bullish on gold. I think any commodity based investment would protect in the same way that gold bugs suggest that only gold would protect. So, say US dollar tanks, well all commodity prices would go up.