Summary: TradeTech LLC Chief Executive Gene Clark talked with StockInterview about the uranium bull market, where his price models show uranium prices heading and when to expect the peak of the current upward cycle of the bull market. When will “hard” times again hit the uranium market, and how long will the trough last? And what does the future hold for the uranium price? An industry insider gives us his insights.
StockInterview: When the uranium bull market began, did you foresee $40/pound uranium, now that the spot price has risen above this level?
Gene Clark:
I don’t think any of us saw $40 per pound coming. We had price projections at the time that indicated probably $25 per pound, which would be a long term equilibrium price in constant dollar terms. But, I think it was a surprise the price went up so high. I think what’s going, the biggest factor right now, is the advent of the so called hedge funds or speculator fund and groups of people. The price started to go up, and they came into the market with the express purpose of buying for holding and then selling into the market later to realize the trading profit. In 2005, the hedge funds were responsible for purchasing about 10 million pounds of the 29 million pounds purchased. I think the market is now finally adjusting to the realities of primary supply and demand. It’s been a depressed market for 20 or 30 years, primarily from the draw down of excess inventories, and what we call secondary supply.
StockInterview: Will the speculators remain active in driving the spot uranium price higher?
Gene Clark:
I think there is still some room for further speculation activity. Uranium Participation Corporation, for example, is rumored to be about to come to the equities market again to raise funds for another purchase. They’re asking for authority to buy UF6, as well as U308, and different forms of uranium than they were locked into before. Whether it be at the 10 million pound level (size of purchase), I think it kind of depends on where the market goes. If it tends to flatten out, then I think there’s going to be obviously less interest on their part. When they were active in the market, they, of course, wanted the price to go up. Therefore, they weren’t too careful about what they paid for uranium. I think that’s a part of it. In the long run, it was due for a readjustment to reflect prices of the cost of new production facilities. But, the hedge funds came in and kind of overdrove the market. Eventually, what it’s going to wind up doing is, if they sell off, it could have the impact of driving prices back down below where they would otherwise have gone.
StockInterview: Did the speculators interfere with the trading efficiency of the uranium market?
Gene Clark:
In theory, speculators come in, tend to take the risk and smooth out market prices. But, it never really works out that way. They always come in and only take the risk, if there’s an opportunity to make money. So some people make a lot of money. It does tend to upset the market. If you get away from the primary users of uranium and primary producers of uranium as your market participants, then you tend to introduce more noise than you would like.
StockInterview: With that in mind, in which direction are your price projections going?
Gene Clark:
We’re actually updating our uranium price forecast right now. We haven’t decided on a reference case yet. The reference cases we’re looking at will peak at about $50 to $55 per pound in about three years, and will then drop off pretty drastically. It has to do with a selling of the speculator reserves, the uranium that’s being held (for speculative purposes). I can see it coming back down to $30, maybe below $30 per pound. Then, in the long run – out through 2020 – getting easily back up over $40 per pound.
StockInterview: Are you predicting a down cycle during the course of the uranium bull market?
Gene Clark:
Yes. It’s pretty consistent with everything we’re doing with the changes in requirements, in different cases of high, low, and medium demand. Our modeling system is projecting this. It has to do with the supply and demand balance and the cost on the margin. The way to describe it is that prices have come to a point now of higher than we would have projected them to be, such that the supply is going to evolve. The large low cost projects will reach a point where supply then overshoots demand for a few years, which causes the price to come back down. Then demand growth, in the long run, picks up and puts a lot of pressure on the supply market to be able to meet the demand. So you wind up with pressure toward the end of the period.
StockInterview: But the markets are finicky, filled with variables, and can frequently trick price models.
Gene Clark:
Here’s what it would take to shoot that down: We have a problem with small numbers, and there are some very large projects – Cigar Lake, for example. The expansion of Olympic Dam in Australia would be going from about 12 million pounds of production to over 30 million pounds, if they finish. If you shift that out by four or five years, or if the owner decides, “No, we’re not going to expand at all,” you have a drastic effect. Then you would wind up with $100 per pound uranium, I think.
StockInterview: What are your estimates on the peak price years and the bottom years?
Gene Clark:
A lot of things could change, but here is what we’re looking at. In one case scenario, the speculators are really going to stay out of the market and holding onto their stuff for a long time. If so, then we’re going to be at the peak by the end of this year. If they stay active in the market and buying, then that stretches it out further. Depending on the scenario, we see the peak possibly at 2008 or so. I would say we’re looking at a trough around the timeframe of 20011 to 2013. Then back up after that.
StockInterview: How do you arrive at your weekly numbers for the spot uranium price?
Gene Clark:
We get our data from all of the key sources: the utility fuel managers, sales staff and management of uranium producers and processors, and uranium traders, brokers and asset managers. Some are, of course, more cooperative than others, and whom we call depends on the type of information we are seeking. Since our price indicators are a judgment call, we often focus on the losers in particular recent transactions, as those will be the next to make offers in the market.
StockInterview: Let’s back up a bit. Why has uranium gone up past the levels of the “cost of production,” which would place the spot price between $25 and $35/pound?
Gene Clark:
The biggest factor, in signaling the market, was when utilities went out for long term bid requests. They found they reached a period in which producers would have to build new facilities. Producers building those facilities felt, “I have to make at least enough profit to cover the construction costs for those facilities.” That was much higher than the market at the time. Basically, you reached a point where the chief stuff has been sold. Now, we have to actually spend some money, some capital, to build new facilities, new mines and new mills. That was, I think, the earliest signal of the price needing to adjust.
StockInterview: Isn’t there a ton of hype across all media channels about the “nuclear renaissance” and the demand for more nuclear energy?
Gene Clark:
First of all, all the hype about nuclear renaissance is really in the United States. The Chinese have had plans to expand for a long time. The Japanese have been steadily adding new capacity. Koreans have been adding new capacity. Indians have been adding new capacity all along, all the way through this, even before we started this discussion on nuclear renaissance. I think that phrase is really focused more in the United States., which really hasn’t ordered a plant since 1976 or something like that. There is a boom. Maybe it’s the uranium renaissance.
StockInterview: Is all of what we’ve been reading just plain hype?
Gene Clark:
There is some hype, but there is also some substance. A part of it is certainly a change in public attitude about nuclear power. If I was riding on an airplane, ten years ago, and someone asked me what I did for a living, I was guaranteed to have a lousy trip, arguing about nuclear power. When I mention it now, I get a positive response. There’s been a market shift in public attitude about nuclear power. From the standpoint of the utilities that would be ordering nuclear plants. To the extent that they need new capacity, looking at nuclear now is not off the drawing boards, partly because of public attitude. The industry has been moving through this trough period, preparing itself for a new era. It remains to be seen when the first order comes. But when the first actual order of a nuclear power plant, along with the license application does come, I think you’ll see several U.S. utilities following, probably five utilities very actively involved.
StockInterview: When will that actually happen?
Gene Clark:
I think it will come within the next five years, the ordering process. Of course it will be probably another eight years before we actually see the first power plant from that process. We’re talking probably about 13 years. That’s how long it takes. You can actually construct one in 48 months, but you have to have been through the licensing. If you don’t believe the anti-nuclear people are going to be psyched up to fight the first plant coming through, then you’d be very na