Special Report: Uranium

Uranium Special Report

Industry Background

The primary commercial use for uranium is as a fuel for nuclear power plants. Through the process of nuclear fission, the uranium isotope U-235 releases a significant amount of heat energy, which is used to generate power.

The first civilian use of nuclear power occurred in 1951, when an experimental nuclear reactor in the United States research center lit four ordinary light bulbs. In the late 1950s, the first full-scale nuclear power plants went into service in the U.S., the United Kingdom, Russia and France. The nuclear industries of these countries and several others grew rapidly during the 1960s and 1970s. The first export orders for nuclear power reactors were awarded in 1958 and were followed by the spread of nuclear electricity generation to many other countries.

Before uranium can be turned into a useable fuel source, uranium ore must be mined in one of a variety of methods depending on the characteristics of the deposit. Uranium deposits close to the surface can be recovered using an open pit mining method. Higher-grade, deeper deposits can be mined using conventional underground mining methods. If ground conditions are appropriate, the ore can be mined via in situ leaching, whereby oxidizing agents dissolve the uranium contained within the ore body, and the resulting solution is pumped to the surface for uranium recovery.

Once the uranium ore or solution has been extracted via one of the above mining methods, it may, for example, be transferred to a mill for primary refining. Mined ore is ground and leaching is used to extract the uranium. The uranium is then removed from the leach solution and precipitated, producing concentrates containing 80-90% uranium oxide (U3O8). Uranium oxide (which is also known as yellow-cake) is the most commonly priced and sold form of uranium.

U3O8 is typically shipped from the mine site in drums to a conversion facility for refining into uranium trioxide (UO3). The UO3 is further purified and converted into a gaseous uranium hexafluoride commonly referred to as UF6 or ‘‘hex”. Conversion plants operate commercially in the United States, Canada, France, the United Kingdom and Russia.

Supply and Demand

The annual production of uranium from mines is about 118 million pounds. The annual demand is about 180 million pounds. The shortfall between mine production and demand is made up from a variety of sources including government stocks sold, recycling, and conversion of nuclear war heads into re-usable utility fuels. This underpinning of supply and demand activity has been recently upset by both man-made and natural disasters.

Globally, there are presently 441 nuclear plants in operation. We anticipate growth in China alone, over the next decade, to constitute at least a 10% addition to the global plant count. That represents close to forty plant additions, but may mean as much as a 15% increase in uranium demand as plants are likely to increase in size. Estimates from some sources for China range as high as one hundred nuclear plants added in the next fifteen years. The current Chinese GDP growth remains in excess of 9%. In order to sustain this growth rate the Chinese and other Asian countries including India may bid up the prices of “portable BTU’s” to heretofore unseen levels including crude oil at over $150/barrel; and are likely to see uranium as not only readily portable but in many instances readily usable in their political and end-user environments.

Therefore we think the upside in uranium prices, over the long term, will reflect both Asian—mainly Chinese—demand growth, as well as the price increases of other readily portable BTU’s. We think the price upside on uranium may be in the range of $80 a pound assuming Cameco’s 13 million pound annual production prospect at Cigar Lake is eventually put in production after facing floods and other challenges. Absent Cigar Lake or other large new projects coming into production, the upside in uranium prices could exceed $80/lb.

Fukushima and the Impact on Political Climate

Mark prices for uranium and slowly trending higher prior to the earthquake and tsunami in Japan. The Fukushima Daichi plant withstood the powerful earthquake, but was victimized by the subsequent tsunami that took out its cooling system generators. The whole world watched as emergency crews worked feverishly to contain the disaster, while policymakers watched public opinion turned negative toward nuclear power.

Almost immediately, the leaders said they would assess power-plants at home for safety and revisit their long-term nuclear energy strategy. In the following weeks, some leaders, including those in China and India, began to reaffirm a long-term role for nuclear energy in their countries. Even in the US, President Barrack Obama supported the vision of growth in the industry as part of a plan to reduce US reliance on foreign oil.

Yesterday, however, German Chancellor Angela Merkel made an about-face on her position toward nuclear energy in Germany. Originally, Merkel had proposed extending the operating lives of the nation’s nuclear plants by another 14 years to 2036. At the time, this ran in direct opposition to a large number of political opponents that want to see Germany increase its use of wind and solar energy. In fact, the Greens, a German political party, grew in influence on the back of the antinuclear movement. Chancellor Merkel’s initial support of expanding the lives of Germany’s plants, in fact, was in direct opposition to a coalition between the Greens and Social Democrats back in 2001.

Since then, however, Merkel’s party, the Christian Democrats, who have suffered through regional election defeats and is served as a warning sign for Merkel. Did the German Chancellor change her opinion? Not likely. When she is doing, is saving her political future, for which she is already being labeled as a “chameleon” by some.

More importantly, the question has been raised: “How will Germany make up for the loss of nuclear power?” Presently, Germany gets 25% of its electricity from nuclear power. In order to bridge the gap, the government will support the building of new fossil-fuel plants, mainly gas and coal. How long will it be before environmentalists realize they have traded safety for carbon emissions? This is likely to be the next political battle in Germany, and possibly elsewhere. When the dust settles, the compromise position may be new safety standards and newer, smaller, plant designs as a way of addressing public concerns, while also acknowledging the advantages of nuclear energy.

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The assembled information disseminated in this report is for information purposes only, and is neither a solicitation to buy nor an offer to sell securities. All assembled information within this report is subject to change without notice. The assembled information within this report is based on information believed to be reliable as of the date of the report but no representation, expressed or implied, is made as to its accuracy, completeness or correctness.

Forward Looking Statements:
Information in this report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. All readers are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance or portfolio performance is no guarantee of future price appreciation or performance.

A.L. Waters Capital, LLC is a FINRA/SIPC broker dealer in Braintree, Massachusetts. Visit www.waterscapital.com or call us at 781-380-8888 for further information.