| We thought by now we'd heard it all. But the | | | | |
| quote which follows, given to us in a | | | | "It's a long haul to get all the pieces," |
| tape-recorded telephone interview by the man | | | | Malone explained. "Japan Steelworks is |
| who obtains nuclear fuel for the largest | | | | putting out a slightly greater than 100 |
| nuclear utility in the United States, | | | | percent increase in their capacity to produce |
| surprised even us. | | | | the forgings. The process is going to take |
| | | | several years, probably on the order of five |
| "From the point of view of today's price, | | | | to ten to get the real production up to where |
| they did us a favor by sending a really | | | | we want it to be." |
| strong signal to the production-side | | | | |
| community that it was time to get out there | | | | Since 1974, Japan Steelworks (JSW) has |
| and start looking to get stuff back into | | | | manufactured the forgings of components found |
| production," Exelon Corp nuclear fuels vice | | | | in nuclear plants. The company has |
| president James Malone told Malone was | | | | manufactured about 130 reactor vessels now |
| referring to the uranium speculators and | | | | used around the world - nearly 30 percent. |
| financial community, who have driven | | | | |
| long-term uranium contracts to US$85/pound | | | | The company recently announced it would |
| and the weekly spot price to $125/pound. "It | | | | increase investments in manufacturing |
| may not have happened as quickly without this | | | | capacity to meet the global demand. One of |
| strong signal." | | | | the company's main targets is to supply new |
| | | | nuclear pressure vessels to the U.S. and |
| And then we talked about the widening spread | | | | Chinese markets. JSW anticipates orders for |
| between the weekly spot and long-term uranium | | | | 25 pressure vessels and 31 from the U.S. Some |
| price. | | | | wonder about the challenges increased |
| | | | activity in the nuclear sector holds for the |
| "I think the sellers have the perception that | | | | supply chain's growing demand for heavy |
| prices should be higher in the spot market, | | | | forgings and other major components. |
| but obviously the buyers aren't sharing that | | | | |
| perception right now," Malone told us. Hence | | | | According to the Nuclear Energy Institute |
| the pricing stalemate. "There isn't any | | | | (NEI), license applications for more than 18 |
| long-term activity to base a change in that | | | | new reactors could be filed by a dozen energy |
| price. It's been flat for several weeks." | | | | companies by 2009. |
| | | | |
| According to the Uranium Marketing Annual | | | | On Wednesday, Richmond, Virginia-based |
| Report, published by the U.S. Energy | | | | Dominion Resources reportedly asked Hitachi |
| Information Administration on May 16th, | | | | and General Electric to build its third |
| owners and operators of U.S. civilian nuclear | | | | nuclear-powered electric generating unit at |
| reactors purchased 56 million pounds of | | | | the company's North Anna power station in |
| uranium oxide equivalent from foreign | | | | Mineral, Virginia. Earlier this month, |
| suppliers at a weighted-average price of | | | | Dominion awarded GE Energy's nuclear business |
| US$18.75/pound. The balance of 11 million | | | | a contract to secure critical, 'long-lead' |
| pounds purchased by U.S. utilities in 2006 | | | | components for the nuclear power unit. This |
| came from U.S. production and inventories, | | | | order included large forgings required for |
| and sold at an average price of US$17.85. | | | | GE's ESBWR reactor design. The forgings would |
| | | | likely come from Japan Steelworks. |
| Although the spot uranium price continues to | | | | |
| set new records, many utilities are | | | | A long lead time is required for the |
| comfortable with the amount of U3O8 | | | | forgings. "It's a long haul to get all the |
| equivalent they have stockpiled. In his | | | | pieces," Malone told us. "Right now, the |
| previous media interviews, Malone gave the | | | | facilities even for assembling a reactor in |
| impression that Exelon did not lack for the | | | | the United States are limited in their |
| nuclear fuel to power the company's 17 | | | | capabilities." |
| reactors, which produce about 20 percent of | | | | |
| the U.S. nuclear electricity. | | | | A bottleneck could result in obtaining heavy |
| | | | forgings as well as assembling them. In |
| We asked if this were true. "That's correct," | | | | August 2006, Constellation Energy announced |
| he responded. Others such as Entergy and FPL | | | | it had entered into an agreement with AREVA |
| may not be as fortunate. The rumored scramble | | | | to procure 44 heavy forgings - needed for the |
| by at least three utilities for uranium | | | | reactor pressure vessel and steam generators |
| equivalent could be one driver for the higher | | | | - to construct the first potential nuclear |
| spot price. | | | | power plant of a planned U.S. EPR fleet. The |
| | | | forgings will reportedly be manufactured into |
| And this brought us back to the uranium | | | | the final components at the BWX Technologies |
| speculators. In late April, Malone wrote a | | | | facility in Mount Vernon, Indiana or AREVA's |
| guest commentary, which appeared in Fuel | | | | facility in Chalon-St. Marcel. |
| Cycle Week. This nuclear industry trade | | | | |
| publication is widely read by many who play | | | | Construction on the Dominion plant could |
| an important role in the nuclear fuel cycle - | | | | start as early as 2010. It could go into |
| including utilities, fuel brokers, enrichment | | | | production by 2014. This matches the |
| and fabrication companies, governments and | | | | timetable Malone cautioned us about. He |
| investment funds. | | | | pointed to progress made by NRG Energy made |
| | | | at the company's South Texas project. |
| In that issue Malone contended uranium | | | | |
| speculators were driving up the spot price of | | | | On April 27th, NRG announced an agreement |
| uranium to make their investments in mining | | | | with Tokyo Electric Power Company (TEPCO) to |
| stocks more valuable. | | | | help develop the combined construction and |
| | | | operating license for NRG Energy's |
| We confirmed he continued to believe this. "I | | | | application to the U.S. Nuclear Regulatory |
| am not knocking the guys who are in it for | | | | Commission later in 2007. "The good news is |
| financial gain. I can't blame them for | | | | that the ABWR (Advanced Boiling Water |
| wanting to make money, but you have to | | | | Reactor) has been built in Japan and is under |
| understand what it is they are doing," he | | | | construction in Taiwan," Malone said. The NRC |
| said. | | | | has already certified General Electric's ABWR |
| | | | design. "It's a known entity and licensed in |
| Malone cited the strong correlation between | | | | the United States," Malone explained. |
| the stocks of junior mining companies and the | | | | |
| uranium price. "The R squared is somewhere | | | | Doesn't this appear like enormous momentum |
| around 0.95," he explained. R-square is a | | | | moving forward? "I think it's going to be a |
| statistical coefficient of determination, | | | | slow build up," he told us. "It's like one of |
| which provides information about the validity | | | | those curves that's kind of slow, then has |
| of a model. This compares with TradeTech's | | | | the knee out there - the hockey stick - and |
| evaluation of the relationship to uranium | | | | then it starts to go up." But he also warned, |
| stock share prices to the uranium price, | | | | "We have to have the folks to operate them. |
| which Gene Clark explained in an interview | | | | We have to have the infrastructure to build |
| about a year ago. | | | | them. We have to have the regulatory |
| | | | oversight. If we go at it the right way as an |
| Again he surprised us, having taken the time | | | | industry, I think it can be terribly |
| to meticulously study the 'sell-side' of the | | | | successful." He believes the renaissance will |
| uranium market. But Malone admitted, "We | | | | emerge several years down the road. "Probably |
| didn't look at all 450 of them." | | | | on the order of five to ten years to get the |
| | | | real production to where we want it to be," |
| And why should he? Malone agreed with our | | | | Malone said. |
| premise that more than 90 percent of the | | | | |
| 'uranium' companies are likely to | | | | Malone firmly believes there will be a |
| disintegrate at some point. "Some of the | | | | nuclear renaissance in the United States. "We |
| smaller folks that are out there, really | | | | need electricity, there's a tremendous amount |
| shouldn't be there because they are not going | | | | of emotion with respect to greenhouse gases, |
| to make it," he said. "The other folks are | | | | and nuclear can be base load electricity |
| going to fill the gap so that we'll get a | | | | without the greenhouse gases," he told us. "A |
| last marginal pound in at a reasonable | | | | lot of people are realizing that now, |
| price." | | | | especially when James Lovelock takes the |
| | | | position that nuclear power is a good thing |
| When would we reach this 'reasonable' price? | | | | to do for electricity production. I think |
| "It depends upon how some things like Cigar | | | | he's got the right message." |
| Lake come back to life because that's such a | | | | |
| large component of production," Malone said. | | | | Our final surprise was that Malone had a copy |
| "Whether Shea Creek comes in during that | | | | of Investing in the Great Uranium Bull |
| timeframe - which will pretty much make a big | | | | Market. "I was impressed by the fact that he |
| dent - there's several smaller ones. There's | | | | (James Lovelock) was right in the foreword." |
| a raft of properties people want to bring | | | | Dr. Lovelock actually wrote the foreword for |
| back into production. They may be able to | | | | this publication and personally endorsed our |
| only produce one or two million pounds a | | | | book, writing, "'I unhesitatingly recommend |
| year." | | | | it to politicians, environmentalists and all |
| | | | those concerned about our future." |
| He agreed with our evaluation that many of | | | | |
| those projections are falling short, | | | | And finally we asked whether or not Exelon |
| especially on the smaller projects. But what | | | | Corp would participate in NYMEX futures |
| about BHP Billiton's Olympic Dam? "I think | | | | trading. "That's too early to say," Malone |
| Olympic Dam is so big that they can't rush | | | | responded. "My position on that is we need to |
| it," he said. After we pointed out this could | | | | digest what we were told, learn how it works, |
| become the biggest open crater on earth, we | | | | observe it - and if we believe there's some |
| both broke into laughter. "I think they've | | | | advantage or some useful purpose for us |
| got to be reasonable in their approach to | | | | participating, then we would consider it." |
| it," he added. | | | | |
| | | | And finally we asked whether or not Exelon |
| We speculated about when hedge funds might | | | | Corp would participate in NYMEX futures |
| begin selling uranium. Over the next few | | | | trading. "That's too early to say," Malone |
| weeks, both Mestena Uranium LLC and an | | | | responded. "My position on that is we need to |
| unnamed hedge fund plan to offer the largest | | | | digest what we were told, learn how it works, |
| amount of spot U3O8 and equivalent into the | | | | observe it - and if we believe there's some |
| market in any single instance since last | | | | advantage or some useful purpose for us |
| September. Dr. Robert Rich, a director of | | | | participating, then we would consider it." |
| Yellowcake Mining, cautioned of a uranium | | | | |
| 'price adjustment' at an unspecified time. | | | | But what about the safety of nuclear |
| "Bob and I used to share an office together | | | | reactors, especially from terrorist attacks? |
| when we were young and worked at Yankee | | | | After September 11th the U.S. Nuclear |
| Atomic," Malone said. | | | | Regulatory Commission mandated new security |
| | | | measures at U.S. nuclear power plants. These |
| He agrees there could be an adjustment. "It | | | | measures included altered or new physical |
| could be a two-phase thing. Some of the hedge | | | | barriers, increased security personnel, |
| funds may exit and just move on. Others may | | | | training enhancements and additional |
| hang on and the market could stay above where | | | | surveillance equipment. According to Exelon |
| it ought to be because it's not yet fully | | | | Corp's website, the total cost of these |
| rationalized with respect to the balance | | | | enhancements exceeded $150 million in capital |
| between supply and demand." He added, "But, | | | | spending and now includes approximately $20 |
| you could see some kind of adjustment that | | | | million in additional annual operating |
| would bring it down a bit, and then take a | | | | expenses each year. |
| longer time for it to reach a true rational | | | | |
| equilibrium level." | | | | How do these enhancements hold up? |
| | | | |
| Malone's conclusion? "The market | | | | In a recent note from the Nuclear Energy |
| fundamentals, if you simply look at the macro | | | | Institute, legendary actor Paul Newman (and |
| situation of supply and demand, it simply | | | | now also becoming a legend for his line of |
| doesn't support those kinds of numbers, | | | | food products) toured Entergy's Indian Point |
| especially in that time frame," he said. "It | | | | nuclear plant outside New York City this past |
| is really a puzzle why some people have such | | | | Monday (by the way, Paul Newman also has our |
| a strong bullish position." | | | | book, Investing in the Great Uranium Bull |
| | | | Market). Mr. Newman reported as follows: |
| And what does Malone believe is wrong with | | | | |
| the time frame? | | | | "I recently toured the Indian Point nuclear |
| | | | plant and I expected to be shown safety and |
| BOTTLENECK IN THE NUCLEAR RENAISSANCE? | | | | security at the plant. But what I saw |
| | | | exceeded my expectations. No Army or Navy |
| Malone doesn't think the nuclear renaissance | | | | base I've ever visited has been more armored |
| is as imminent as many have forecast. "This | | | | and I couldn't walk 30 feet inside the plant |
| is one of the things that frustrates me a | | | | without swiping my key card to go through |
| little bit," he started. "I think people need | | | | another security check point. There was |
| to understand: There's an expectation of a | | | | security at every turn, and the commitment to |
| tremendous number of plants around the world | | | | safety is clear." |
| coming online real fast, and therefore | | | | |
| driving demand up. Eventually, there will be | | | | We agree with both Mr. Malone and Mr. Newman |
| that many plants. I just don't think they can | | | | that nuclear power will be more important for |
| come on as fast as some people think they | | | | the anticipated dramatic electricity growth |
| can." | | | | in the future. And no one really knows |
| | | | precisely how much longer the spot uranium |
| Where, then, is the obstacle? "You've got to | | | | price could continue higher, where it will |
| get the forging to build the power plants," | | | | peak and at which price level would be |
| Malone pointed out. "There are only a few | | | | sustainable. But everyone likes to guess |
| places in the world that can do that right | | | | about these matters. |
| now." He cited Japan Steelworks as the | | | | |
| predominant supplier, and two others - one is | | | | COPYRIGHT© 2007 by StockInterview, Inc. |
| South Korea and another in France. "There's | | | | ALL RIGHTS RESERVED. |
| nobody in the U.S.," he said. | | | | |