Current Events And Nuclear Energy

Sprott Asset Management uranium expert Kevin Bambrough talked with us about the “second leg” of the current uranium bull market. He sees a massive nuclear build up heading our way with “the environmentalists leading the charge.” He said many price projections may be inaccurate because “people are underestimating future demand.”

StockInterview: Price forecasts on spot uranium are widening. Some insiders have predicted uranium prices may drop back into the $30/pound range; others, such as yourself, continue to suggest $50/pound or higher. Any comments on the forecasts others are making?

Kevin Bambrough: There are many people forecasting uranium prices now. It’s important to consider their track record of forecasting prices. Look at the contracts that have been written by many companies in the industry, over the last number of years. Anyone who had ceilings, or had signed fixed-priced contracts, has been punished. Very few people in the industry predicted what has happened. Looking forward, I think that in our view, the cost of production of current producers isn’t going to be as relevant as it has been in the past. It will be the more marginal, much higher cost producers who will be setting the price.

StockInterview: Isn’t there a sense of false optimism that “projects in the pipeline” will ensure an ongoing stream of uranium oxide for the nuclear fuel cycle?

Kevin Bambrough: There are a lot of people looking at the supply situation going forward while underestimating future demand. They are very optimistic that mining projects are going to go as planned. We had recent news that Cigar Lake had a problem. There was a flood the. There’s a couple million pounds shortfall to most people’s models for at least two years. All because of one mine’s six month delay.

StockInterview: Would that have the kind of impact the McArthur flooding (Athabasca Basin, Cameco) had on the spot uranium price a few years ago?

Kevin Bambrough: I think it could. It was forecast to go up to 18 million pounds of production. That would have been ten percent of the world’s current consumption. Cigar Lake would need to ramp up over a three year period, once it gets started. Now, there is a six month delay. What if it’s delayed a year? That really changes the production profile for the next decade. There are many projects that could see delays. The mining business is always full of delays. Remember that when we bring on new nuclear plants, they take on average about 1.6 million lbs when commissioning. What will happen, if in a decade, we bring on just 10 or 20 reactors each year? That’s another 16 to 30 million pounds per year of demand just because of the start up. StockInterview: Does this mean the current uranium bull market still has strong legs?

Kevin Bambrough: I think we’re entering the second leg of the bull market here. It is going to move away from a supply shortage story, where we focus on the fact that we only get about 60 percent of the current consumption from mines, while the inventories are being worked off. Now, we’re moving into a situation where we’re seeing an explosion in demand growth. Just a couple of years ago when we first started investing in uranium, we could see probably about a dozen nuclear facilities being planned for construction throughout the world. Now we’ve got well over 100 being planned. It seems there are new additions and talk of more additions every day.

StockInterview: How you envision this nuclear buildup rolling out?

Kevin Bambrough: I don’t think it’s unreasonable to think, looking ten to twenty years out, there are going to be a lot of countries that will be trying to get in the position that France is in, with a much higher percentage of their power coming from nuclear generation. We could see a move to where maybe 50 percent of global energy production or more could eventually be supplied by nuclear. There is nothing else that can really step up and fill the void and take care of this problem that we’re having. France produces 78 percent of their electricity from nuclear. Why isn’t that reasonable for others? Look out a decade or two, and it doesn’t appear like we’re going to have the oil and the gas in order to handle our needs. Obviously we can do more with coal, but if we’re going to keep using coal we’ve got to put in place technology to take care of the carbon dioxide sequestration. If you want to have a stable, secure supply of electricity, it seems that you’re going to have to go with more nuclear or eventually with these new coal technologies. I think there is going to have to be a balance of both, because the oil and gas just isn’t going to be there.

StockInterview: What do you think is the catalyst for this anticipated growth in nuclear energy demand?

Kevin Bambrough: The most interesting thing is the fact that some environmentalists are leading the charge to go more nuclear. It’s because they realize nuclear energy is the only practical alternative and because of the situation with the carbon dioxide (CO2) levels. There have been some recent reports about CO2 levels reaching 381 parts per billion, just spiking out of the range that has kept the world in a relatively stabile environment for the last 400,000 years. If you look at the work of people like James Hanson, the correlation between CO2 levels and temperature is undeniable. Basically, mankind has increased the CO2 levels beyond a level that hasn’t been seen in over a million years. We are just starting to see the weather impacts. There are problems with droughts across the world as well as elevated hurricane activity. Going nuclear on a mass scale is starting to become recognized as one of the only ways to have a real impact. I think what we’re going to see is an unprecedented build out in nuclear capacity throughout the world in the coming years and decades. I’d equate this to what happened when we went from using oil for just lamps and home heating to using it as a transportation fuel. What’s going to happen with the people who have the higher quality uranium reserves and lower cost production? They are going to be able to reap massive profits over the coming decades.

StockInterview: Looking ahead, do you think we’ll see more deals between a small uranium producer, such as Uranium Resources (OTC BB: URRE) and the Japanese multi-national conglomerate, Itochu Corporation?

Kevin Bambrough: I have no doubt that it’s going to continue to happen. More importantly, I’ve heard that some of the major builders of nuclear facilities around the world, companies such as Areva are quite concerned about the availability of supply going forward. When these companies are talking to countries and utilities that potentially could contract to build nuclear facilities, they’re basically being told that buyers want uranium supply assurances, or they aren’t going to give an order to buy a nuclear facility. I’ve heard they are looking to do joint ventures or at least contract with emerging producers to try to get future supply. Then, they will be able sell their nuclear technology to countries and ensure supply.

StockInterview: Will the Chinese be satisfied with the uranium they plan to buy from Australia, or will they have to tap into uranium production from another or other countries?

Kevin Bambrough: I think that the Chinese will probably look elsewhere as well. Countries have strategic oil reserves. Why shouldn’t they have strategic uranium reserves to supply their nuclear reactors? It makes sense to have a good stockpile of uranium considering the relative cost of nuclear power versus anything else. I don’t think that the nuclear power industry should operate on a just in time basis, considering the costs and the risks of making sure you can secure supply. Don’t get me wrong. There is plenty of uranium in the world, but we’re just going to have to pay up for it. I believe we’re going to consume lot more than what we’re consuming nowadays – a decade or two out. The world is waking up to the reality of peak oil production, and how it is going to affect all aspects of energy production.

StockInterview: How much of a factor will Russia play in the nuclear build up?

Kevin Bambrough: Looking at some of the recent statements made by Russian officials, it’s completely clear to me that we’ve been correct in what we’ve been thinking for a long time: the HEU agreement (to deliver highly enriched uranium and have it blended down) is probably not going to be renewed. The Russians are planning to make nuclear technology a key export for them, really as a value added product to go with uranium production. They desire to be able to offer a complete solution, not just uranium, but the actual building and technology around the nuclear facilities themselves. They will also have growing uranium demands domestically and have voiced concern about being able to meet their own needs beyond 2015.

StockInterview: But nuclear energy critics claim all of these power plants won’t secure financing and most plans are just pipe dreams never to be built.

Kevin Bambrough: Two years ago, the critics said there would never be any more nuclear plants built in the U.S. People used to say nuclear was over for Germany, and that many countries would exit nuclear power. Now we’re seeing the exact opposite. We’re seeing proposals being done, incentives put in place, and a multitude of projects moving ahead. If what the leading scientists from NASA, the NOAA and from many organizations around the world are saying about global warming, and the acceleration we’ve recently seen continues, people are going to be begging to have more nuclear facilities and cut CO2 emissions. The environmentalists will be leading the charge.

StockInterview: How long will it take before the proposed nuclear build up impacts the uranium mining companies?

Kevin Bambrough: The actual build of all this takes time. I think the increase in the positive perception, of the nuclear industry is going to continue to accelerate. All demand for uranium can come from just the planning stage for nuclear power plants, as companies look forward and try to contract future supply. Ultimately, that’s what will keep driving the uranium price higher.

StockInterview: How seriously is the nuclear industry taking the global build up?

Kevin Bambrough: I think the industry is starting to take it very seriously. That’s why the uranium price keeps pushing higher. People are going around trying to contract for uranium, and they are finding it more difficult. People are also starting to realize that as you have problems, such as the McArthur River flooding, which got the uranium bull market jump started, and now a problem at Cigar Lake, you really should have a good build up of inventory in order to protect yourself in this environment. Especially when the relative cost of having to switch off a nuclear facility to go to something else in a pinch is multiples higher.

COPYRIGHT © 2007 by StockInterview, Inc. ALL RIGHTS RESERVED.

If you haven’t heard already, The President’s new budget just came out (02/07/08) and it couldn’t be more unfriendly towards the environment in general unless they go that extra mile and put in special tax breaks on the purchase of clubs for the express purpose of baby seal hunting.

While there there are many points to the ‘09 budget that are great, if you are really interested in an all out nuclear conflict, for the most part, the alternative energy sectors, primarily wind and solar get a big kick in the nards from the administration because of the elimination of the government’s incentives for the addition of solar power. Oh and here’s the best part…the reason. These incentives were removed because the package that was offered for the proposed incentives was funded by taxation on big oil, and many senators thought that these taxes were too harsh, even though the big oil companies have been reporting insane profits lately. The explanation given was that we would ultimately end up paying for this at the pump.

Just for those that didn’t get that: The government is saying that they just cut funding offered to put solar/wind on your home for power, something that helps our country get away from foreign oil, helps the planet, cuts pollution..etc..etc, so that gas prices won’t go up.

Also, while renewable energy took a beating, nuclear energy got a boost in the form of funding for loans to build new nuclear plants, and funding for nuclear weapons.

Yes, we apparently do not need to create new energy sources or keep our water and air clean because we really don’t want to make the oil companies mad, and we need new nuclear missiles. God I love this country. If you want to take a look at this big steaming pile of a budget, just go here:
Budget Environmental News Service has a pretty good article here

I’m not really a politically motivated individual on this topic, nor am I a Birkenstock wearing vegan that has a composting toilet and hordes all my trash in the basement to reduce my environmental impact. What I am, is an individual that believes the world in general would probably be better off if the use of fossil fuels and specifically the dependence on oil from the middle east, or anywhere else were greatly reduced, if not completely eliminated. To me, The President’s budget shows a complete disinterest in long term reduction of dependence on oil, and more of an interest in updating our offensive capabilities in the event of a conflict, most likely in response to Iraq’s nuclear build-up. In my opinion, this is a catch-22 situation. One is connected to the other, and if it weren’t for the need for oil, the ultimate reason, perceived or not for the nuclear buildup wouldn’t be present.
Ok, let me put my political soapbox away.

Fortunately, there is quite a bit of momentum going and interest generated that people and governments around the world are starting to see that a change must be made, and the tools for that change are available.

What is really great is the amount of clever innovations and applications that the average individual comes up with. The prices for solar and wind powered equipment have been coming down, and continue to drop. This is excellent for new product R&D in the renewable energy fields, and there is a lot that the average individual is coming up with.

While surfing around I have come across a couple really good videos for DIY power generation. I’ve also acquired quite a bit of research that I’ve been doing on my own that other’s may want or like as well. Much of this is information that is free, can be found pretty easily and demonstrates how easily alternative power sources can be created by the average person. It’s my thought that hopefully the more people see that building/using renewables, especially solar is easy, affordable and the smart thing to do, maybe the more they will see they can probably do it themselves.

In light of Toshiba’s recent proposed acquisition of Westinghouse Electric from the government-owned British Nuclear Fuels (BNFL), historians may be reminded of former Westinghouse Chairman Robert Kirby’s litigious international outcry and prolonged battle over secretive and illegal price manipulation by a global uranium cartel. In the 1970s, Westinghouse, determined to capture the world market of building nuclear reactors, offered dirt-cheap nuclear fuel as part of its incentive to get sales from utility companies. The company’s 27 utility customers had locked in agreements with Westinghouse to provide them with 65 million pounds of U3O8 over the next twenty years, well into the 1990s. Those contracts set off one of the most curious legal battles of the 1970’s, ultimately reducing Westinghouse to a shell of the powerhouse it once was.

In recent weeks, Toshiba (London Stock Exchange: TOS; Tokyo Stock Exchange Ticker Code: 6502) has been strongly criticized for the Westinghouse acquisition, and may sell as much as 49 percent of the deal to two other Japanese firms and a smaller stake to an American firm. Toshiba’s CFO, Sadazumi Ryu said the company would pay for some of its acquisition costs within three years out of current cash flow plus float debt to about 115 percent of equity. Will Toshiba repeat the mistakes made by Westinghouse in the mid 1970s during the last uranium bull market?

Today, Toshiba aims its sights on the lucrative Chinese nuclear energy market, which on the surface appears more ambitious than the U.S. civilian nuclear program of the 1970’s. Toshiba wants to be a major beneficiary of China’s aggressive plans to expand the country’s nuclear energy program. And why not? Uranium prices have soared the past few years. Spot uranium rocketed in 2005 at an even faster degree than in 1975. That was the year when Westinghouse’s Robert Kirby was told by his doctor to not even bother giving up his chain-smoking habit. Things at Westinghouse had gotten that bad.

The head of the Pittsburgh-based conglomerate failed to grasp what was behind the escalating uranium price during the 1970s. His Westinghouse incentive plan sounded great when spot uranium sold for $6/pound. However, at $40/pound, Westinghouse got stuck with potential liabilities of more than $2 billion (1970s dollars) because of his offer to provide the utilities with cheap fuel. By July 1975, Kirby began blaming the world’s uranium cartel, which he believed manipulated the spot price higher to piggyback his company’s development plans. Across from Kirby’s offices in Pittsburgh’s Golden Triangle were the offices of Gulf Oil, a uranium supplier, whom he believed to be a member of the uranium cartel. By September 1975, Westinghouse announced a shortfall of 25,000 metric tons of uranium, and claimed “commercial impracticability” in honoring its nuclear fuel commitments to the 27 utilities. And the lawsuits began.

According to a special report in the Pittsburgh Post-Gazette, Kirby’s “suspicions heightened when, in late 1976, he received copies of documents suggesting Gulf and 28 other suppliers had conspired to form a cartel to keep Westinghouse out of the uranium business.” The documents were the minutes of a private meeting of uranium suppliers held in Australia. In a bizarre twist of fate, the whistleblower came in the form of Friends of the Earth, which offered Westinghouse additional documents if the nuclear power plant manufacturer would help the environmental group release jailed members in the Philippines. Kirby ran with what he had, ignoring their request, and began a course of intense litigation. The lawsuits were eventually consolidated and heard in a federal district court in Virginia. During the course of the litigation, Westinghouse took its grievances to London’s House of Lords, setting international case law about the discovery process in litigations.

What really happened in the 1970’s?

Kirby and Westinghouse were caught up in an international trade dispute, during a world revival of the uranium market. Uranium prices had collapsed in December 1959 when the U.S. government placed an embargo on the purchase of foreign uranium for domestic purposes. The embargo came after the nuclear weapons build-up of the 1950s had peaked. In 1959 alone, the U.S. bought 20,000 metric tonnes of uranium for the country’s weapon procurement program, about 61 percent from Canada. Within a week after the embargo, global uranium prices fell by 75 percent. Twenty-four out of the 28 Canadian uranium producers and processors left the business.

Two Canadian crown corporations remained with viable uranium assets to mine and sell. Eldorado Mining and Refining Ltd had stakes in mines at Port Radium, Key Lake and Rabbit Lake. The provincially owned Saskatchewan Mining Development Corporation owned had stakes in Key Lake, Cluff Lake and Down Lake. Before 1942, Eldorado Mining (later re-named El Dorado Nuclear Ltd) had been a privately owned radium company, which in that year was taken over by the Canadian government and made into a crown corporation. During World War II and for the next decade, the company’s raison d’etre was to produce uranium for the U.S. and U.K. nuclear weapons programs.

By 1956, both countries looked elsewhere for their uranium. By 1965, Canada’s production plummeted to 3,000 tonnes from a peak of 12, 000 tonnes annum in 1959. Canada’s uranium exploration came to a standstill, and only three mines remained operational. Boom town Elliot Lake became a ghost town. Lacking buyers, a self-serving Canadian Prime Minister Lester Pearson announced in 1965 that Canada’s exported uranium would only “be used for peaceful purposes only.” Nearly a year earlier, the U.S. government had banned the enrichment of foreign uranium for domestic use, pre-empting any newsworthy value to Pearson’s announcement.

Between 1964 and 1967, more than sixty nuclear reactors were ordered for the U.S. civilian nuclear energy program. Westinghouse’s newly designed light-water reactor created excitement within the industry. During that time, Canadian uranium exploration was taken out of mothballs and production resumed. Hardball shenanigans in Washington kept the uranium ban intact, and global uranium prices reached an all-time nadir of $4/pound. Canada was shut out of the U.S. nuclear fuel cycle market, and Ottawa was forced to stockpile a reported $100 million of uranium during the Nixon presidential administration. By late 1971, Prime Minister Trudeau’s cabinet had reached the end of their rope failing at every step to remove the ban by diplomatic means.

News reports suggest a number of uranium-heavy countries held an initial meeting in Paris in February 1972 to establish a uranium-producer’s alliance, in essence a de facto uranium cartel. Others suggest it was formed in April 1972, after the Canadian government reportedly gave its blessing. Canadian author Gordon Edwards (Canada’s Nuclear History) bluntly wrote, “The purpose of the cartel was to secretly manipulate world uranium prices using a phony bidding system. Hidden quotas were established by representatives from Canada, France, Australia, South Africa and Rio Tinto Zinc (London Stock Exchange: RIO).” Namibia and Niger were also included in the alliance, as was Gulf Oil, at least according to Robert Kirby of Westinghouse.

When the U.S. government re-affirmed its trade embargo in March of that year, a subsequent uranium cartel meeting took place in Johannesburg, South Africa in May 1972. At an Ottawa conference on May 28, 1972, it was reported that Jack Austin, then deputy minister of energy, voiced his concern the cartel could be considered illegal under Canadian law. Nonetheless, the politicians gave the uranium cartel a green light.

The alleged price manipulation was paying off. In 1973, the spot uranium price doubled. By 1976, it doubled again and stayed above $40/pound for nearly four years. It was around that time the alleged cartel disbanded to avoid international anti-trust laws, which Westinghouse was arguing after unleashing a tsunami of litigation. Westinghouse was desperate to escape its liability over the promise of cheap uranium to utilities. In March 1976, the U.S. Department of Justice began investigating possible infringements of U.S. anti-trust laws by the alliance of uranium producers. By mid 1977, a federal grand jury had been formed to pursue the investigations and possibly initiate criminal proceedings.

In a letter dated July 12, 1977, the U.S. Attorney-General wrote to the U.S. District Attorney for the Eastern District of Virginia, explaining the quandary this international episode had caused and discussed invoking immunity to obtain witnesses who would talk about the alleged conspiracy:

“These persons are not likely to come within the personal jurisdiction of the United States courts so long as the Department of Justice continues a sitting grand jury investigation of the international uranium industry; (3) These persons are British subjects and we have determined that it is highly unlikely that their testimony could be obtained through existing arrangements for law enforcement co-operation between the United States and the United Kingdom; (4) The Department of Justice has been largely unable to obtain information from these foreign persons about the subject matter of this investigation…”

By mid 1978, Westinghouse Electric’s complaint against Rio Tinto Zinc in the United Kingdom floundered in that country’s court system. Obtaining evidence in England was markedly different from the U.S. style of depositions.

Conclusion

During this litigious period, Westinghouse settled with several utilities, but continued to pursue the lawsuits. By 1979, Judge Merhige in the U.S. District Court for the Eastern District of Virginia, Richmond Division, ordered Westinghouse and the utilities to equitably resolve their differences. Westinghouse agreed to concessions that ultimately cost the company nearly $1 billion, but locked up the utilities as long-term customers by providing parts and engineering services for up to 25 years. In quiet out-of-court settlements, the uranium suppliers paid Westinghouse nearly $100 million and supplied the company with uranium.

Besides, there was another cartel in the 1970’s, which posed a far greater risk to the developed nations. From the oil embargo, which began 1973 and throughout the decade, the OPEC oil cartel overshadowed the tiny uranium cartel. Saudi King Faisal’s “oil sword” had a far greater impact on the energy climate, Gross Domestic Product, inflation and quality of lifestyles, than an anxious alliance of uranium producers trying to meet production costs and peddle stockpiled inventory at higher prices. Not only was the oil crisis a more serious affair, but another un-related episode tanked the price of uranium.

Just as the decade was coming to a close, on March 28, 1979, a water pump broke down at the Three Mile Island nuclear plant, about ten miles southeast of the Pennsylvania state capital. It was an unexpected event, heightened Hollywood-style, as the accident coincided with the opening of a new movie called The China Syndrome, starring Jane Fonda, Michael Douglas and Jack Lemmon. In short order, many Americans were persuaded that events within the movie were somehow related to the Three Mile Island event. This was a Hollywood PR man’s dream. Fanning the media flames to capture a larger box office gross, a basically nothing episode (in terms of loss of human life, since no one died from the reactor accident) was transformed into an earth-shattering campaign against the entire nuclear energy industry. Ironically, more died in the movie (one, Jack Lemmon’s character) than as a direct result of the Three Mile Island accident (0 reportedly died).

Hysterical commentary from that era bespoke of a nuclear accident, which would melt down to the earth’s core, as one character in the movie suggested. Unable to distinguish what was movie fiction from scientific reality, the movie’s message left a horrifying memory in the collective minds of the general populace. A general panic followed, and nuclear energy was badly tainted by the accident. As the momentum for building U.S. nuclear power plants came to a grinding halt, overflowing inventories for the raw material to fuel those power plants had once again nullified the uranium exploration and mining sector. It took more than two decades to draw down those built-up uranium inventories, about as long as it has taken for the public to once again accept nuclear energy as a safer, cleaner alternative to fossil-fuel powered electricity.

Why is today’s uranium bull market different? Is the current and spectacular rise in spot uranium prices different today than it was in the early to mid 1970’s, when an alleged uranium cartel reportedly bid up prices to an artificial level? Is that same factor occurring during the current steep rise in the spot price of uranium? Will Toshiba sink into the same quicksand, during the balance of this decade, as Westinghouse Electric once did?

(To Be Continued)

COPYRIGHT © 2007 by StockInterview, Inc. ALL RIGHTS RESERVED.

Many researchers believe that harnessing the power of the atom in fission reactions is the most significant alternative energy resource that we have, for the fact of the immense power that it can generate.

Nuclear power plants are very clean-burning and their efficiency is rather staggering. Nuclear power is generated at 80% efficiency, meaning that the energy produced by the fission reactions is almost equal to the energy put into producing the fission reactions in the first place. There is not a lot of waste material generated by nuclear fission although, due to the fact that there is no such thing as creating energy without also creating some measure of waste, there is some.

The concerns of people such as environmentalists with regards to using nuclear power as an alternative energy source center around this waste, which is radioactive gases which have to be contained.

The radiation from these gases lasts for an extraordinarily long time, so it can never be released once contained and stored. However, the volume of this waste gas produced by the nuclear power plants is small in comparison to how much NOx (nitrous oxide that is, air pollution) is caused by one day’s worth of rush-hour traffic in Los Angeles.

While the radiation is certainly the more deadly by far of the two waste materials, the radiation is also by far the easier of the two to contain and store. In spite of the concerns of the environmentalists, nuclear power is actually environmentally friendly alternative energy, and the risk of the contained radiation getting out is actually quite low. With a relatively low volume of waste material produced, it should not be a difficult thing at all for storage and disposal solutions for the long term to be developed as technology advances.

The splitting of an atom releases energy in the forms of both heat and light. Atomic power plants control the fission reactions so that they don’t result in the devastating explosions that are brought forth in atomic and hydrogen bombs. There is no chance of an atomic power plant exploding like a nuclear bomb, as the specialized conditions and the pure Plutonium used to unleash an atomic bomb’s vicious force simply don’t exist inside a nuclear power plant.

The risk of a meltdown is very low. Although this latter event has happened a couple of times, when one considers that there are over 430 nuclear reactors spread out across 33 nations, and that nuclear reactors have been in use since the early 1950s, these are rare occurrences, and the events of that nature which have taken place were the fault of outdated materials which should have been properly kept up.

Indeed, if nuclear energy could become a more widely accepted form of alternative energy, there would be little question of their upkeep being maintained. Currently, six states in America generate more than half of all their electrical energy needs through nuclear power, and the media are not filled with gruesome horror stories of the power plants constantly having problems.

On April 1st, 1979, the Islamic Republic of Iran was born under the leadership of Ayatollah Khomeini. The Ayatollah returned to Iran at the end of the Islamic Revolution, after having spent 14 years in exile. This past month Iran commemorated these events by showcasing its military strength. It conducted a series of missile tests and large-scale military maneuvers involving tens of thousands of troops and over 1500 naval vessels.

Iran launched its arms development program during the 1980-88 war with Iraq to compensate for a U.S. weapons embargo. Since 1992, Iran has produced its own tanks, armored personnel carriers, missiles and a fighter plane. Recently, they have test-fired a new radar-dodging and multi-targeting missile, an underwater high-speed missile and a new medium-range land-to-sea missile.

Iran has also successfully tested what it calls a ‘’supermodern flying boat.” Iran claims that the flying boat was entirely ”made in Iran” and that it can move at high speeds and avoid radar detection. The United States said it was possible Iran had developed weapons that could evade sonar and radar but warned the Islamic Republic had a tendency to ”boast and exaggerate.”

Nuclear Iran

These recent missile tests and war games coincide with increasing tensions between Iran and the West over Tehran’s controversial nuclear program. The United States and its allies believe Iran is seeking to develop nuclear weapons, but Tehran denies this, saying its program is for peaceful purposes. The UN Security Council has demanded that Iran halt its uranium enrichment activities, but so far Tehran has refused.

The Shkval

Military experts have taken particular interest in Iran’s test of a high-speed underwater missile. Iran claims the missile is capable of carrying multiple warheads at speeds of up to 225 mph. Speaking on state television, a high-ranking Iranian military commander said the missile has been in development for six years, and ”even if an enemy warship’s sonar can detect the missile, no warship can escape from this missile because of its high speed.”

He called it the fastest underwater missile in the world - but it has the same speed as the Russian-made Shkval (”Squall”), developed in 1995 and believed to be the world’s fastest, three or four times faster than a torpedo. Many experts believe that Iran’s underwater missile - called the ”Hoot” or ”Whale” - is in fact Russian made, or at the very least its design is based on the Shkval.

The Russian Shkval is an exceptionally high-speed underwater torpedo. It is reported to attain almost 200 knots, giving its target little opportunity for evasive maneuvers. Apparently fired from standard 533mm torpedo tubes, the Shkval has a range of about 7,500 yards. The weapon clears the tube at 50 knots, after which its rocket fires. By creating a local ”envelope” of supercavitating bubbles, the weapon can achieve its spectacular speed.

Examining Iran’s Motives

Iran has announced plans to start building a new nuclear plant in an undisclosed location. Construction on the plant will begin this year, and it will contain 3,000 enrichment centrifuges - small for the production of nuclear fuel but ample to make fissile material for nuclear weapons.

Iran claims that under Article 4 of the Non-Proliferation Treaty they have the right to develop nuclear technology. Iran insists that it is pursuing nuclear technology for peaceful energy purposes, but that leads to the obvious question: why would a nation with immense oil and gas reserves need nuclear energy? Iran claims it is building costly nuclear fuel-cycle facilities to meet future electricity needs, while preserving oil and gas for export, but Iran’s uranium reserves are minuscule, accounting for less than one percent of its vast oil reserves. Iran controls 11 percent of the world’s oil reserves and its natural gas reserves are the second largest in the world. Iran does not have enough indigenous uranium resources to fuel even one power-generating reactor over its lifetime, but it does have enough uranium to make several nuclear bombs.

According to a report by the U.S. State Department on Iran’s nuclear program: ”…The costly infrastructure needed to perform all of these activities goes well beyond any conceivable peaceful nuclear program. No comparable oil-rich nation has ever engaged, or would be engaged, in this set of activities - or would pursue them for nearly two decades behind a continuing cloud of secrecy and lies to IAEA inspectors and the international community - unless it was dead set on building nuclear weapons.”

Enrichment Breakthrough

On April 11th, Iran declared that it had ”joined the nuclear club.” Iranian officials announced that they had, for the first time, successfully enriched uranium to make nuclear fuel. The announcement marks a major breakthrough in Iran’s nuclear program. Iran stated publicly that it had achieved a 3.5 percent level of uranium enrichment.

Again, Iran has said that its goal is not to make nuclear weapons, but to develop nuclear energy. This leads us to another important question: If Iran does develop a peaceful nuclear energy program, how difficult would it be to use that same technology to make nuclear weapons? Nuclear power plants need 3 to 4 percent enriched uranium for fuel, but natural uranium only contains 0.7 percent. Thus uranium must be processed in a uranium enrichment facility before it can be used as fuel for nuclear power.

What most people don’t realize is the exact same technology and equipment used to enrich uranium for fuel can be used to enrich uranium for nuclear weapons; it simply requires more passes through the enrichment plant. A nuclear bomb requires about 90 percent enriched uranium, which is high compared to the percentage found in fuel, but according to experts it requires more energy to convert natural uranium to fuel than it takes to convert fuel into weapons-grade uranium.

The Fallout

Iran is governed by Shiite Muslim clerics committed to a stern interpretation of Islamic law. Hatred of the United States has been a key component of Iranian foreign policy since the 1978 Islamic revolution, and Iran’s leaders often refer to the United States as the ”Great Satan.”

Iran’s distaste for the United States is surpassed only by their utter loathing of Israel. Iran’s political and religious leaders have repeatedly called for Israel to be ”wiped off the map.” They have also denounced any attempts to recognize Israel or normalize relations with it.

A nuclear-armed Iran would be a serious threat to our security. However, with troops already deployed in Iraq and Afghanistan, President Bush appears - at least for the time being - to be committed to finding a diplomatic solution to the standoff. Some experts have speculated that Israel may be planning a preemptive strike, although military action would most likely be used as a last resort.

In 1981, Israel bombed Iraq’s Osirak nuclear reactor when it believed Saddam Hussein was close to producing a nuclear bomb. If Israel does attack Iran it would undoubtedly bring about a firestorm in the Middle East. Unfortunately we are running out of time, and neither Israel nor the United States is willing to accept the possibility of a nuclear-armed Iran. What happens if diplomacy continues to fail? Will military action become our only option?

Australia has one of the worlds largest supplies of Uranium. It is therefore ironic that Australia has not taken advantage of this resource to produce power. Australia only has one nuclear reactor and this is mainly for scientific use/research not the production of power. This is because Australia also has huge cheaply access coal reserves. Australia therefore has numerous coal plants for the production of power, the majority of power production coming from this source. Being a dry continent currently in the grip of a record drought the options for hydro power is limited and largely already exploited.

The problem with being so reliant on coal is the amount of CO2 and other gases produced that are contributing to global warming. Australia which continues to has a growing economy and population has increasing power demands like most of the world. Australia which has not sign the Kyoto agreement (rightly so as Kyoto is a mere band aid measure and will not seriously change our environmental problems).

Thus the Australian prime minister, John Howard, is pushing Australians to consider the nuclear option to meet future power needs as nuclear power plants don’t emit CO2 or other greenhouse gases. However there are a number of problems with this option.

Firstly nuclear power is more expensive power. Australians already complain about the size of their power bills (an average family in Brisbane spends about $500-$800 a quarter or over $2000 a year). This is particularly felt most by those who rely on air conditioning to counter Australia’s hot climate. They are not willing to accept more expensive options.

Secondly although there are thousands of nuclear power plants operating without incident and although it happened on the other side of the world Australians are well aware of the Chernobyl disaster and the shocking consequences that continue to be felt. Australia although a large continent is essentially like a giant island with a belt of green extending only a few hundred kilometers inland from the sea with the rest being in a vast desert or near desert condition for much of the time. Australia couldn’t afford to have any section of this ‘green’ band destroyed or a no go zone, such a result would have a greater impact in event of a disaster than in other ‘normal’ countries. It has already been made clear for nuclear power to be a option is must be near a water source and near to power users to cut down on transmission costs.

The vast majority of Australian would have the view of “not in my back yard”. Whilst most wouldn’t care if a power plant in the middle of the desert a couple of thousand of kilometers away, the lack of water and transmission costs for make this an unrealistic option. With a power plant in their back yard there is the higher risk of radiation from the transport of nuclear waste to a holding facility (likely to be somewhere in the outback). Although Australian could easily have a nucealr waste facility with no threat to people due to extreme isolation and geological stablity in the outback, the problem lies in transporting the stuff there. Road and Rail transport are both subject to regular accidents. A heavy vehicle carrying waste could result in a mini-chernobyl with nuclear waste entering the environment from such an accident possibly endangering a large area and having long term consequences.

Such waste from a nuclear power plant would also give Australia the potential to immediately make nuclear weapons in a very short space of time. Australia is already recognised has having the technological know how to produce the require missle and warhead technology. Such an outcome would be very worrying for our neighbours and lessen our argument against nations such as North Korea having nuclear weapons.

Likewise such nuclear power plants would be a magnet for terrorists and the like.

The final nail in the coffin for the prime ministers idea is that the states have made it clear they have no interest in nuclear power. Such a battle over energy would be over the very survival of states and their rights. If the states lost such a battle the point of having individual state parliments would be mute, they would be useless overhangs from federation with the Federal government in fact taking over all government in Australia should such an eventually occur. Some would argue this process of the destruction of the state government is already well underway, with the federal government grabbing ever more power, but further on this is for another article.

Whilst nuclear power presents a vison of greenhouse gase free energy production it doesn’t present a realistic future for Australia. Australia has other options to explore, both wind and solar, possibly geothermal and even the real future for a cleaner world - H2 - Hydrogen power. Perhaps putting research and money into this field will produce better and more politically acceptable results.

The year gone by was the warmest in England since 1659. Australia may be doomed to suffer the country’s worst drought since the Federation Drought of 1894 – 1902, and at least one Dun & Bradstreet consultant believes if conditions do not improve, the country’s Reserve bank may be forced to lower interest rates. Abrupt weather changes could increasingly become a significant element in determining business expectations and national growth. (While Florida didn’t have the hurricanes the weatherman forecast, Asia got the brunt instead with typhoons.)

The green light for accelerated demand of nuclear energy could come about because of a potential loss of up to 20 percent global gross domestic product annually. This estimate was courtesy of Sir Nicholas Stern, a senior UK economist, who calculated the impact of climate change. And 2007 might pass 1998 by as the world’s warmest year on record. Eight of the twelve warmest years on record have occurred since 1990.

This must be welcome news to uranium speculators, especially those holding the physical metal. Speculators outsmarted U.S. utility fuel managers and industry consultants by hoarding yellowcake in anticipation of the supply deficits now growing. That’s why they are the smart money. But will the nearly 200 consecutive weeks of a rising uranium price sustain through 2007?

By all accounts, uranium miners and future developers should be ecstatic over the $72/pound announcement of the spot uranium price. The latest long-term uranium contract brought $69/pound. Many of the new uranium projects, which we have been tracking since mid 2004, are likely to be economic at or below $60/pound. The broad purpose of a rising uranium price was to dust off the old uranium projects and reopen previously explored, nearly developed uranium mines. This is in the process of bearing fruit.

So why do we see continued hoopla for a higher uranium price? It’s because the speculators need the excitement and panic buying by utilities to unload their uranium stockpile.

Speculators holding physical uranium hope to make a king’s ransom should the uranium price zip through the inflation-adjusted record of approximately $111/pound and race even higher. Uranium oxide, or U3O8, very well could race to $100/pound and beyond. The momentum and panic leading to a much higher uranium price is evident in our research and discussions with industry insiders, but the pendulum might also swing backward later in 2007.

According to Treva Klingbiel, editor of TradeTech’s Nuclear Market Review, which first publishes the weekly spot uranium price on Fridays, “Speculators are holding about 24 million pounds of U3O8 equivalent.” This amounts to about eight times the current U.S. uranium production, more than double the Kazakh 2006 production – some 22 percent of global uranium production in 2005. The speculator’s hoard easily outnumbers the U.S. Department of Energy’s announcement of 5+ million pounds of annual sales.

Smart money got the uranium the utilities previously thought they could get on the cheap, by accumulating it fair and square in the marketplace. And by squeezing on an already tight pipeline, the speculators drove the price to a record high this past December. While the kings that the speculators are holding for ransom are the utilities, at some point we anticipate a backlash.

The Downside of A Rising Uranium Price

There should be fireworks through 2007 as the uranium price approaches and probably crosses the $100/pound threshold, perhaps as early as late spring. While there will be bumps before and after the century mark, anxieties over energy disputes could help sustain a production-friendly uranium price well beyond 2007.

One powerful example of an energy dispute is the ongoing struggle between Russia and its former Soviet states. The Gazprom-Belarus gas dispute, settled on this past New Year’s Day, suddenly evolved into Russia’s Monday cutoff of the Druzhba oil pipeline across Belarus to Germany. Although it is likely to be settled without much fanfare, European leaders again question Russia’s reliability as an energy supplier, especially of oil and gas.

This event reminded Europe of last year’s Ukraine-Russia gas dispute and subsequent soaring energy prices. While not endorsing nuclear power, as this would anger her Social Democrat coalition partners, German Chancellor Angela Merkel announced in a television interview, “…one must consider well what consequences there would be if we shut down nuclear power plants.” Germany plans to shut down four nuclear reactors by 2009 and may close an additional thirteen by 2020.

As we have seen since 2005, the political climate toward a continued nuclear renaissance has grown more favorable. But with all politics, one must expect downsides, too. One such downside for the uranium price cheerleaders could be Russia.

If one looks for the “trigger on the horizon,” as Merrill Lynch mentioned in a December research report, the hiccup in uranium’s price rise could become the U.S. Commerce Department settlement with Russia’s Tekhsnabexport. We discussed this in an article written before last July’s G-8 Summit in St. Petersburg, when we forecast uranium could run between $55 and $100 during 2006 (“Even Higher Uranium Prices This Summer”).

On December 27th, RIA Novosti and others reported upon statements made by the head of Russian-owned Tekhsnabexport that a ‘civilian nuclear power deal’ between Russia and the United States was imminent. Vladimir Smirnov, announced, “I think that in the first quarter of 2007, or by the summer of 2007 at the latest, we will sign an agreement with the U.S.”

At this time, Russia can only sell into the United States through publicly traded United States Enrichment Corporation unless it pays a 116-percent import duty. In mid July, the U.S. International Trade Commission voted to keep the import duty on Russian uranium products. The commission claimed that lifting the anti-dumping restrictions “would seriously harm the American economy.”

Those clamoring for Russian enriched uranium are the U.S. utilities. Last spring, 85 percent of the nuclear power plants formed AHUG (Ad Hoc Utility Group) to lobby the U.S. Commerce Department about loosening up those restrictions. Head of Russia’s Federal Agency for Nuclear Power Sergei Kiriyenko wants a maximum 25-percent share of the U.S. uranium market. He wants to directly deliver the enriched uranium to the U.S. utilities, bypassing USEC at market prices. In December, Kiriyenko said, “We would like to provide direct deliveries to the U.S. nuclear market now and after 2013 (when the HEU-LEU contract is terminated with USEC).”

Russia’s direct sales to U.S. utilities might minimize the current panic. Perhaps it would stimulate some anxiety on the weaker uranium price speculators? Smart money weighs the risks and rewards on an investment. After a steep price appreciation – nearly 100 percent during 2006 – and up by more than 1000 percent since Christmas 2000.

The loan rate for uranium has also jumped since the year 2000. According to TradeTech’s Loan Rate for uranium purchases, the carrying cost is the highest since September 1978. It is one-half-percent lower than the peak months of 1974.

Speculative upside expectations on price appreciation for yellowcake may be limited. For the past year, it was an easy ride. Dwindling inventories, inadequate new mining production and increased demand for new nuclear power plants made 2006 an easy year for speculators. Nonetheless, interest had begun waning during the fourth quarter, before Cameco’s Cigar Lake flooding.

DC-based energy consultant Julian Steyn, who helped co-author A Brighter Tomorrow with U.S. Senator Domenici (R-NM), had told us in May 2006 that interest about uranium mining companies had nearly vanished. In the early months of this past year, he remarked of the large number of phone calls he received from institutions and investors. Judging from the refusal of Florida Power and Light to participate in last summer’s U.S. Department of Energy auction (“because the price was too expensive at $50/pound”), many believed uranium’s price rise would eventually tank. We were told uranium would peak at about $55/pound, perhaps higher, in the fourth quarter of 2006.

Where is the upside and how does that compare to the downside?

The positive development is the changing political climate worldwide. For example, Australia’s Labor Party may allow expansion in this country. This will benefit a large number of Australian-based and Canadian-based exploration and development companies for a short period of time. As we have come to expect, Western Australia is very unlikely to change its uranium mining policy ban. The coal unions overpower the state’s politicians; the loss of jobs would probably prevent this western state from allowing uranium mining.

This spring, the hoopla over uranium mining expansion should create a bubble frenzy for the smaller Aussie uranium miners. The excitement should spill over to the Canadian, U.S. and U.K. traded uranium mining stocks. However, as professional speculators know, the time to sell is “on the news.” Until now, the Australian story remains a mystery, but when the news comes out, it is history. And this gives the speculators another reason to begin unloading their physical uranium.

Conclusion

Between the invasion of Russian-enriched uranium, which may reach a settlement before Labor Day 2007, and the anxiety of speculators now hoarding physical uranium, which we believe has a limited upside potential, 2007 may be remembered as the year of wild uranium price swings. We nicknamed it the ‘Year of the Hiccup,’ because although the uranium price won’t collapse, it will not provide the near-triple-digit appreciation experienced over the past year.

The spectacular price rise convinced Rio Tinto to rescind its offer to sell its Sweetwater Mill and U.S. assets to SXR Uranium One. This confirmed Rio felt the uranium price rise was sustainable above production costs for its assets. (Again, the purpose of the uranium price rise was to encourage the development of new uranium mines – dusting off projects which had been mothballed during the twenty-year uranium drought.) With the current forward momentum, it is very possible the price of uranium will surpass the inflation-adjusted high before edging backward.

Despite the Russian invasion, do not believe the Russians will roll over and flood U.S. utilities with ‘sweet deals.’ Believing this is foolishness. Comparing how the Russian energy companies have played hardball with the former Soviet states, U.S. utilities may later wish they’d not lobbied as fiercely as they have. If you investigate more closely, the Russian companies tend to demand stock shares, as well as increased cash, in the deals they’ve cut with the state-owned energy companies of other countries. What is to stop the Russians from asking for shares in U.S. utility companies?

How does this impact the uranium mining exploration and development companies? For the rational investor and institutions it should have only a short-term negative influence. Professional speculators like to call such down cycles in the secular energy bull market ‘buying opportunities.’ For the smaller exploration companies, many will move onto the next ‘greener’ pasture as they are so fond of doing. The less-financed ones will jump sooner.

Those uranium companies with stronger property portfolios, who are also well-financed, will afford the bumps along this great uranium bull market. It won’t end in 2007 or 2008, or anytime soon. This year will just be a hiccup. But enough of one that many of the 400+ junior uranium companies may be considering a name change around this time a year from now.

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