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