Uranium Mining and Exploration

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Forbes Article: Going Nuclear

On The Cover/Top Stories
Going Nuclear
Tatiana Serafin, 11.28.05

Atomic power is coming back, so Robert Mitchell is investing in everything from uranium mining to reactor building.
Money manager Robert Mitchell had turned radioactive in, of all places, a meeting of uranium suppliers and buyers. Attendees were leery of him. The moderator dismissively introduced him as a representative from those strange entities called "investment funds, hedge funds, whatever." His speech about nuclear investing, delivered with energetic verve, drew tepid applause. Afterward Mitchell sighed and said, "They don't want me here."

Reason: Industry regulars fear he will somehow take advantage of them, as nukes finally are coming back to life and uranium prices soaring. Some of their leeriness is cultural--a fast-talking money guy horning in on an insular society. This Santa Fe conclave, near the atomic haven of Los Alamos National Laboratory, has for years been a clubby group, suspicious of outsiders.

Following the 1979 near-meltdown of a reactor at Pennsylvania's Three Mile Island, the nuclear power industry suddenly had all the appeal of Dr. Strangelove in his doomsday bunker. The 1986 explosion at the Soviet Union's Chernobyl plant made the business even scarier. Before Three Mile Island, plans were under way for 50 more nuclear plants in the U.S.; in the wake of the accident all those plans were scrapped. The nuke crowd learned to hunker down.

You'd think they would have been happy to see Mitchell in their midst since his presence signals a shift in the nuclear industry's fortunes. Amid surging oil prices and talk of fossil fuels running out, nukes have lost a lot of their taint. The industry's stocks are hot, up between 44% and 153% over the past 12 months. Companies from miners to reactor makers are now showing double-digit sales increases. The price of concentrated uranium ore (called yellowcake) has doubled from a year ago, to $33 a pound.

And there's more growth ahead, says the ever-enthusiastic Mitchell, who buys both uranium and stock in companies that use it. Worldwide, 30 new atomic plants are under construction in 11 countries; the global inventory of 441 plants has hardly budged for years. Of the 103 existing units in the U.S., 13 are getting upgraded; in addition three consortia are seeking licenses for new plants. Antinuke activists have lost a lot of their old fire and clout (see "The Silence of the Nuke Protesters," Jan. 31). Mitchell and others expect to see $45 uranium in the next two years.

Mitchell has stocks in four veteran nuke companies and one upstart, UEX, on his buy list, but steers clear of two fledgling issues and one former government entity, USEC (see table). Yes, the run-ups on some industry stocks make them pricey: Canada's Cameco, which does everything from mine uranium to run plants, trades at 68 times trailing earnings. But he contends the industry's growth prospects are so good that the shares are fairly priced. That's much like arguing in the late 1980s for buying newly public Microsoft despite its high P/E.

Yellowcake, which is chemically an oxide of uranium metal, went for $45 a pound in the 1970s (that's $137 in today's dollars), until TMI and Chernobyl sent the price skidding. After a small recovery it got slammed anew by the collapse of the Soviet Union in the 1990s. Russia, eager for cash, flooded the world with its vast stores of yellowcake, and many producers in the West were forced out of business. The price hit a low of $7 in 2000.

For individual investors the way to play the nuke sector is via stock in companies like Cameco. Forget owning uranium itself. There's no yellowcake futures market. Mitchell's Portland, Ore. hedge fund, Adit Capital (assets: $50 million), has to physically store the material, a dauntingly costly and worrisome undertaking. That means paying for lead-lined storage, security, insurance.

One reason the price of uranium should keep escalating is that producers are only starting to ramp up to meet the strong demand. Utilities globally need 180 million pounds of uranium annually, but at this point a mere 108 million pounds are coming out of the ground. The difference has been made up from utility stockpiles and Russian reserves. Nobody knows, however, how much the Russians have, and supply agreements with them expire in 2013.

The uncertainty surrounding uranium supply has many industry hands wondering if sharpies like Mitchell will screw them. Last December Mitchell bought 100,000 pounds of uranium for $19.50 a pound and has been sitting on it as it appreciates. Industry newsletter FreshFuel labels Mitchell's endeavors "speculative" and portrays him as someone who doesn't care what the industry thinks. "They think I'm an opportunist," says Mitchell.

In fairness, he has hardly cornered the uranium market. Adit controls 2 million pounds, and two other funds have 4.5 million between them.

Mitchell, 51, formed Adit only last year, after a long career in institutional sales. He noticed that nuke industry behemoth Cameco was locked into long-term uranium contracts of $15 per pound when the spot price was moving much higher. Cameco, France's Areva and Britain's Rio Tinto among them control 60% of the world's uranium supply, so he pondered if they understood that the rising prices weren't a blip.

What convinced him that this was a trend with legs was a visit to a tiny Texas mine called Vasquez, whose anticipated 400,000-pound yearly output was a pittance. Buyers from two huge utility companies, Duke Energy and Dominion Resources, were on hand. He wondered: Why were these big utilities showing up at such a small mine if they weren't fretting about supply?

A quick study, Mitchell got up to speed on nuclear arcana and scraped capital together from wealthy investors. Ironically, his choice of investment target is as out of place in green-crazed Portland as he was at the Santa Fe conference. His office is not far from the old Trojan nuclear plant, closed in 1992.

Adit aims to put 70% of its assets into uranium, the rest into nuclear companies. These range from miners, such as Canada's UEX, to suppliers of turbines and other plant gear (Japan's Mitsubishi Heavy Industries and Russia's United Heavy Machinery) to the all-purpose giants (Cameco and Areva). The last two run the gamut from mining ore to building reactors to making fuel rods. Mitchell doesn't favor Rio Tinto as merely a minor part of its operations is in nukes.

Cameco leads Mitchell's recommended list because it is the "Saudi Arabia of uranium." Cameco controls 20% of world uranium supply from mining to production and is widely respected by industry insiders. Cameco also runs four Canadian nuclear reactors through its investment in Bruce Power. Earnings are off 44% for this year's first three quarters, to $116 million, a lot of that stemming from higher exploration costs. Meanwhile sales are up 15%, to $675 million. Cameco's stock has risen 83% year to date.

He is high on all-purpose Areva for similar reasons, despite its lofty (27) P/E. For the year's first half Areva's net income rose 3% to $363 million on $6.5 billion in revenue. Areva controls one of the most lucrative uranium deposits in the Athabasca Basin in Saskatchewan, a province accounting for 30% of global uranium production. French public-sector entities, with a 95% stake in Areva, have put off fully privatizing the investment. In bulls' eyes Areva's tiny float makes it all the more desirable.

Mitsubishi Heavy, which makes things like ships and air conditioners, has run in the red lately. Rising steel prices and a ruinous fire in a shipyard are blamed. Its nuclear unit is doing well, however, with new contracts for plants throughout Asia. It projects black ink for the fiscal year ending March 2006.

But Mitchell says shun the "juniors," as they're known in the trade. These new mining firms, like Paladin Resources and Strathmore Minerals, have yet to show earnings or revenue. Mitchell also dislikes USEC, the lone domestic uranium enricher, formerly government owned. He labels its gaseous diffusion technology "outmoded" (centrifuges are the way to go) and says USEC hasn't financed its $1.7 billion American Centrifuge project still under regulatory review.

Fifty years ago, at the dawn of nuclear power, Wall Street was in the grip of a uranium-mining fever, with stocks and even mutual funds cropping up to take investors' money. Those hot stocks turned out to have a half-life not much longer than iodine-131's. Why will it be different this time? Mitchell says this is not an investment craze like in the 1950s, or in the 1990s with the Internet. He expects prices to stabilize over the long term as the world's ample uranium supply comes on line. "The world is not running out of uranium. It's everywhere."

Diversified Performances
A mix of properties brings mixed results. Of the six largest diversified REITs, only three have outrun the industry in five-year investor returns or earnings growth: Lexington, Vornado and Washington.
- - - - - - PRICE - - - - - -
COMPANY/Country RECENT 52-WEEK HIGH P/E Business
Picks
Areva/France $445.33 $576.62 27 all-purpose, from mining to reactor building
Cameco/Canada 48.12 56.24 68 all-purpose, from mining to running nukes
Mitsubishi Heavy/Japan 3.78 3.91 NM steam turbines
UEX/Canada 3.20 4.25 NM mining
United Heavy Machinery/Russia 5.05 5.70 7 reactor parts
Pans
Paladin Resources/Australia 1.49 2.00 NM mining
Strathmore minerals/Canada 1.23 2.42 NM mining
USEC/U.S. 10.04 18.69 37 enrichment
Prices as of Oct. 28. Figures in U.S. dollars. NM: Not meaningful. Source: Reuters Fundamentals via FactSet Research Systems.


Source:
http://www.forbes.com/forbes/2005/1128/097_print.html