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
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
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
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
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
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.
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.
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
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
April 9, 2007
CORRECTING and REPLACING
Uranium Resources, Inc. Reports Second Quarter 2008
Inc. - August 11, 2008