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Powertech and other uranium stocks headed lower due to hedge fund sell-offs and credit crisis

Investment strategist says stay away from uranium mining companies; suggests uranium price could fall below $25 a pound; selling price could drop below cost of production

Posted October 12, 2008

 

 

An article published Friday by investment strategist Andrew Mickey paints a bleak picture of the near-term prospects for the uranium market and uranium company stocks.  Mickey explains that hedge funds looking for high returns created an artificial demand for uranium and drove up the spot price (to a high of $138 a pound in June 2007.)  According to a March 2007 story in the Wall Street Journal, hedge funds bought about 25% of the uranium sold on the spot market in 2005 and 2006.  The funds aren't legally allowed to possess the radioactive mineral, but can store it at licensed repositories previously used only by the nuclear industry. 

 

The credit crisis may force these funds to liquidate their uranium holdings and this selling pressure could have a big impact on uranium prices.  He predicts uranium prices could fall 50% or more from the current spot price of $49.00 a pound.  Mickey notes the recent, steady decline of uranium prices:

In the past few weeks uranium prices have fallen another 14%. Each week the price of uranium drops another few dollars per pound indicating a very weak market. Itís not just a one-time drop either. The fall has been consistent. That means the funds could be unwinding. If they are, thereís a lot more down weeks to come for uranium prices.

A lower price for uranium could spell trouble for uranium mining stocks, especially exploration and development companies such as Powertech Uranium Corp., which has never actually mined uranium.  Powertech's stock price closed at $0.36 CAD on Friday, down 92% from an all-time high of $4.45 CAD on March 23, 2007.

 

It costs roughly $30 to $60 a pound to produce uranium using the in-situ leaching method.  Powertech proposes to use ISL on the northern portion of the Centennial uranium project, which contains an estimated 3.8 million pounds of uranium.  ISL production costs vary widely depending on ore deposit grade, average depth from the surface, hydrologic properties of the aquifer, flow rate from recovery wells, concentration of uranium in the recovery solution, recovery percentage from the aquifer, permitting costs, royalties and commissions, capital costs, costs of process chemicals, labor, and electricity, and restoration and reclamation costs.

 

Uranium Resources Inc. operates the Vasquez and Kingsville Dome ISL mines in south Texas.  Over the last eight quarters, production costs have ranged from $28 to $59 a pound according to company news releases:

Production & Sales Summary     Q2 2008      Q1 2008     Q4 2007      Q3 2007      Q2 2007      Q1 2007      Q4 2006     Q3 2006


Pounds U(3)O(8 )produced          113,500          83,400        68,000       103,800      135,800        109,000         72,000        72,600

 

Production cost per pound       $  40.03         $ 49.78      $  45.72        $  28.41      $  27.78       $  34.44         $ 46.07       $ 59.14

At the current spot price of $49 a pound, and assuming Powertech's costs would be comparable to URI's, the Centennial project certainly appears to be less economically-viable than it was a few months ago.

 

Making matters worse, most of the estimated uranium deposits in the Centennial project (roughly 60%) are located in the southern portion of the project area.  These southern deposits are above the water table, making them unsuitable to mine using typical ISL techniques.  In-situ leaching must be done in saturated aquifers that have sufficient water pressure or "head".  Glenn Catchpole, CEO of Uranerz Energy Corp., explains it this way:

Letís assume youíve got good uranium values from the results of your exploration program, and that you may have an economic ore body using the ISR (in-situ recovery) method. You then need to confirm that the ore body is in an aquifer or that the sandstone is saturated with water....You want the water under pressure because the more pressure in the formation, or in the sandstone unit, then the more oxygen you can put in the solution. In the United States, you either add CO2 or sodium bicarbonate plus an oxidant, such as oxygen, to the groundwater. Then you re-inject the solution into the sandstone host formation to dissolve the uranium off the sandstone. The more oxygen you can put into the solution, the more effectively you can dissolve or oxidize the uranium.

Early statements from Powertech officials called for open pit mining of the southern deposits.  The southern tip of the project area is only seven miles from the city limits of Fort Collins, a growing city of 130,000 people.  After a firestorm of criticism, Powertech CEO Richard Clement backtracked and has recently claimed that they will use a mining method he refers to as "water-mounding" to extract these southern deposits. 

 

Based on statements from the company, this may involve the construction of slurry walls to create impoundments.  The impoundments would then be flooded to saturate the uranium-bearing sandstone formations, allowing for something Powertech officials call "modified in-situ" mining.  Curiously, there appear to be no references to water-mounding or modified in-situ in the technical and scientific literature of uranium mining.  In addition, Clement has not said where all this extra water would come from. 

 

Either way, open pit or water-mounding/modified ISL, extracting the six million pounds of uranium in the southern area would be much more costly than using typical in-situ leaching.  Uranerz's Catchpole has this to say about mining uranium in unsaturated formations: "If uranium went to $500/pound, maybe some day you could put a conventional mine on them."

 

JW

 

 

 

Itís been a long time coming. I donít know who thought it would come this fastÖor all at once.

A few weeks ago, uranium prices seemed to have a gained some footing. But uranium prices crashed through the floor and it could be another big step down from here. The energy metal could be headed even lower. This fall could be harder and faster all due to deleveraging.

The nuclear energy argument is still there. In fact, itís even better than it was two years ago when the uranium market started to crack.

At the time there were plans for the construction of 222 new reactors. Today there are plans for 316 and 60 of them are expected to be on line by 2014. Although I think the world is starting to realize a lot of those will replace old reactors, but not all of them.

Also, the recent update on Camecoís (CCJ) Cigar Lake project wasnít very good news either. As most of us expected, itís a long way from recovering from the flood. The doubts still loom if it will ever be fixed.

We also learned a bit more about the Megatons to Megawatts uranium deal with Russia. As it sits right now, Russia will be halting shipments of uranium in 2013.

As you can see, the uranium story has actually improved a good bit. But that doesnít matter much now. There is a much larger storm cloud hanging over the uranium spot market and uranium stocks: hedge funds.

By now most of us are familiar with deleveraging. After years of success and taking big bets, hundreds of hedge funds are on the verge of collapse. The markets have taken a turn for the worse and investors are calling for their money back. Hedge funds have to pay up. Record redemption rates are forcing them to sell anything off at any price.

For many funds that trade actively in large-cap stocks, raising cash for redemptions is not much of an issue. Itís a much different story for the funds that were buying physical uranium a few years ago. If they have to sell, theyíll have to do so at any price. Any added selling pressure in a weak and illiquid uranium market could have a big impact on uranium prices. It looks like itís already started to happen.

In the past few weeks uranium prices have fallen another 14%. Each week the price of uranium drops another few dollars per pound indicating a very weak market. Itís not just a one-time drop either. The fall has been consistent. That means the funds could be unwinding. If they are, thereís a lot more down weeks to come for uranium prices.

It wasnít long ago that everyone was buying uranium. The stocks were the hottest thing around and funds were consistently buying up anything uranium.

During the uranium heyday, a uranium trader stated, ďThey sweep the market clean. Every pound they can find.Ē

The Wall Street Journal said back in 2006, ďMany funds say they are holding their uranium off the market because they expect the price to climb.Ē

It was all artificial demand for uranium. It was unsustainable. They were just buying it with the only possible exit strategy of selling it. They had no use for it. Thereís nothing wrong with thatÖas long as they stay aware of it.

And now it looks like weíll be forced to become all too well aware of it. All the uranium the funds swept up has to go back onto the market. And that could push uranium prices to ridiculously low levels we havenít seen in years. It wouldnít surprise me to see uranium back at $40Öor lower. It all depends on how fast they have to sell.

For instance, Adit Capital was one of the biggest buyers of uranium between 2004 and 2006. Itís estimated that Adit purchased between four and five million pounds of uranium. Citadel Investment Group controlled 2.3 million pounds of uranium.

The big wild cards here are GLG Partners and Fortress Investment Group. These multi-billion funds could be sitting on millions of pounds of uranium they may want or need to liquidate quickly.

In addition to all that, we canít discount the impact of the artificial demand created by Uranium Participation Corp. As of September, Uranium Participation Corp was holding 5.425 million pounds of uranium and more than two million pounds of uranium hexafluoride.

Although Uranium Participation Corp is a holding company that probably wonít be liquidated any time soon and they have created a uranium loan program, the demand the fund created on uraniumís way up will not be there on the way down. In August, the fund only purchased 50,000 pounds of uranium. Thatís nothing close to the 200,000 pounds a month it was bidding up when uranium prices were rising week after week.

Although we cannot determine exactly how much uranium these funds have left, we do know they throw another variable into the uranium mix. In a market like this, where even slight uncertainty can send share prices plummeting 10% to 20% in a single day, another variable is the last thing the market wants to see.

As a result, I recommend holding off on uranium stocks for the time being or wade in and use a prudent investing strategy that reduces risk. The trend is still down. We might have caught a nice run with Hathor Exploration and Denison Mines (DNN), but uranium prices have broken through the temporary floor. The wide sell-off hitting almost all commodity stocks could get even worse and now the best place to be is on the sidelines.

Uranium prices could fall another 50% or more from here if these funds liquidate. There could be another 5 to 10 million pounds of uranium just waiting to go on the selling block. Considering the spot market is very illiquid (it only trades 26 million pounds a year), uranium prices could have plenty more room to slide. The consequences on uranium stocks would be even worse.

Do you remember what happened to natural gas stocks when the hedge fund Amaranth had to unwind its bet on natural gas in 2006? The fund single-handedly pushed natural gas prices from $7 per Mcf to almost $4 per Mcf. The same fate could be headed for the uranium market. If that happens, then uranium would be an easy buy.

For right now, Iím afraid; the risks just outweigh the rewards in uranium stocks. There could be a true fire sale for uranium stocks coming up. To me, the opportunity to pick up high quality uranium plays like Hathor and Denison around $1 per share or Cameco under $10 (it could happen) is something worth waiting for.

Disclosure: I have no position in any of the companies mentioned

http://seekingalpha.com/article/99310-miners-face-uncertain-future-as-uranium-deleveraging-continues

 

SOURCES:

New Exotic Focus For Hedge Funds: Uranium Market Speculators Drive Up Price, Irking Utilities; Adit Capital's Big Bet - Ann Davis

Wall Street Journal - March 5, 2007 (pdf)

 

Water: The Key to ISR Uranium Mining - ISR Valuations Require Water Factor When Appraising ĎPounds in the Groundí - James Finch

StockInterview.com - April 9, 2007

 

CORRECTING and REPLACING Uranium Resources, Inc. Reports Second Quarter 2008 Results

Uranium Resources, Inc. - August 11, 2008

 

Uranium Resources, Inc. Reports $8.0 Million in Revenue and $1.2 Million in Net Income for Second Quarter 2007 Results

Uranium Resources, Inc. - August 9, 2007

 

 

RELATED INFORMATION:

 

The True Cost of Uranium Production - Ken Seitz

World Nuclear Association - Annual Symposium 2005 (pdf)