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In his February, 2007 Letter, Deepcaster indicated that there is “One Bull Run That Is Not Done.” That “Bull Market ” for Uranium continues today. The question for investors, and the one which Deepcaster addresses here, is how to profitably participate in this Bull Market. But before we examine the “how” to profitably participate question, it is important to examine “why” it appears very likely to continue for the next few years. Uranium production from mines currently in operation is only about 60% of the annual consumption for the existing 450 nuclear reactors around the world. Moreover, “about 130 new nuclear plants will likely be built in the next 15 years” according to a report by the International Atomic Energy Agency. Understandably, the uranium supply shortage continues to increase. Not only have commercial reserves of uranium above ground fallen by 50% from 1985 to 2003, but other existing sources are also being depleted. One of the most important supply sources is via the Megatons-to-Megawatts Agreement whereby Russia has been transforming weapons grade uranium from decommissioned nuclear warheads and selling the reactor grade fuel to U.S. utilities. But that Agreement is scheduled to terminate in 2013. Yet the Megatons-to-Megawatts program currently supplies about 1/3 of the fuel used in U.S. reactors annually. If there were a threat to terminate or revise that Agreement, prices could skyrocket. Given the deterioration of Russian-U.S. relations, The Threat of non-renewal, or renewal on very different terms, is very real. By the way, the M-to-M Agreement determines the price by a weighted 3-year average of the uranium spot price, which now is about $70/lb. for U308. A key fact is that current demand for uranium is about 170,000,000 pounds per year and increasing, yet only about 100,000,000 pounds per year are provided from mines. That is a huge supply/demand shortfall. And of course, the demand is skyrocketing. China recently committed $50 billion to build 30 new reactors and its demand is projected to increase by over 2,000,000 pounds a year. And the pressure to “go nuclear” can only increase not only because of energy supply pressures, but also because of global warming concerns. China, for example, currently builds two coal-fired power plants per week. Each such plant adds carbon emissions equivalent to 2 million cars annually. China has now “surpassed” the United States as the Number One Greenhouse Gas Producer, according to the BBC. But there are many significant pitfalls that must be avoided in order to profitably ride the uranium bull. Fortunately for investors, Deepcaster has identified a vehicle (in its July Letter posted at www.deepcaster.com) which provides great upside profit potential while avoiding many of those pitfalls. So let us first consider the pitfalls. One major challenge in finding the “right” investment in Uranium is finding the “right” companies. Among the junior explorers, for example, Paladin has had a spectacular and, for early investors, very profitable, run-up. But for every Paladin there are dozens of penny stock busts. Yet a few of these have potential…maybe…someday. And even buying major producers and processors can be fraught with peril. The largest producer/processor in North America – Cameco (CCJ) – fell on hard times several months ago when its flagship mine Cigar Lake in Canada (said to have the richest reserves in North America) was flooded. Of course Cameco’s stock took a tremendous hit when the flooding was announced, dropping into the mid-30s. Subsequently, upon the report that the Cigar Lake mine might be “saved,” and the realization that, even without Cigar Lake, Cameco is a profitable producer and processor, the stock re-ascended to over $50. Even so, there are still risks. Suppose Cigar Lake cannot, in the final analysis, be saved. The stock could then revisit the $30s. It should thus be clear that among virtually all the companies in the uranium sector there is significant risk. Yet the investment vehicle recommended in Deepcaster’s July Letter avoids many (but not all) of the risks or problems suffered by the aforementioned companies and their ilk, yet allows participation in the great upside potential of uranium itself. When it comes to making an investment selection in any resource extractive company, uranium explorers and producers are much like those in the oil & gas and gold & silver sectors. If one selects wisely one can profit greatly. If not, one can suffer substantial losses.
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