POWERTECH STOCK: DOWN, DOWN, DOWN
PWE's slide leaves it a penny above 52-week low at $1.45 CAD
P8A.F drops 18% in one day to 0.90 euros; blows through previous 52-week low
Posted August 16, 2007
The company is listed on the Canadian TSX Venture Exchange under the symbol PWE and on the Frankfurt Exchange under the symbol P8A.F.
PWE share price: $1.45 CAD (August 16, 2007 - Down 4.61% from previous day)
52-week high: $4.50 CAD
52-week low: $1.44 CAD
Shares outstanding: 32,313,999
Market cap: $46,855,299 CAD
P8A.F share price: €0.90 EUR (August 16, 2007 - Down 18.27% from previous day)
52-week high: €2.94 EUR
52-week low: €1.02 EUR
Jubak's Journal 8/17/2007 12:01 AM ET
Now's no time to jump into uranium stocks. Here's a look at the fundamentals and why I'd wait for an opening later in the year.
By Jim Jubak
When speculative bulls collide with speculative bears, investors stand a good chance of getting crushed.
I think that's what's happening in the market for uranium stocks right now. On the hype, a big uranium stock such as Cameco soared 38% from Dec. 29 to June 15, and a more-speculative uranium miner such as First Uranium rocketed ahead by 81% from Jan. 10, its first day of trading, to May 22.
But recently, the bears have counterattacked. As of Aug. 15, Cameco had fallen 33% from its high, and First Uranium had fallen 34%.
I like to stand back in a battle like this to avoid being painfully trampled by one side or the other. And then when both are exhausted, I like to step in and buy on the fundamentals, maybe even at a bargain price. I think we'll get the opportunity to do that in uranium stocks later this year.
In the meantime, we've got some time to brush up on the fundamentals of the case.
Why nuclear is coming back
The bulls began running with what's being called the renaissance of nuclear power. Because of soaring prices for fossil fuels and calls for an immediate reduction in carbon emissions to fight global warming, the world is building nuclear power plants again:
In August 2005, Finland began construction on the first nuclear plant to be built in Europe since 1991.
China has started construction on four nuclear plants, begun planning on 23 others and announced proposals for 54 more.
Globally, as of May 2007, 30 nuclear plants are under construction, an additional 70 are planned and 150 more are proposed.
Even the United States is edging into the game. The Nuclear Regulatory Commission has granted two early site permits to U.S. utilities, and it looks like the Tennessee Valley Authority will complete its Watts Bar Unit 2, which was 80% finished when construction was halted in 1985, and become the first to bring new nuclear generating capacity on line in the United States.
Uranium bulls said, "Do the math." The world's 437 nuclear power reactors use about 67,000 metric tons of uranium each year. Uranium mines produced only 42,000 metric tons of uranium in 2005, with the rest of global demand being met from utility stockpiles or from decommissioned nuclear weapons.
Add the 30 plants under construction to the total, a 7% increase, immediately, and then add 220 not too far down the road, for a total increase of 250 reactors, or 57%, and even with the increased fuel efficiency of new reactors, you're looking at a huge shortfall in uranium production.
The shortfall gets even bigger when you take into account the projected decline in the amount of uranium available from decommissioned nuclear weapons over the next 20 years.
Frustration in Finland
No wonder that the price of uranium for immediate delivery -- the spot price -- had doubled in the 12 months that ended in July 2006 and doubled again, to $136 a pound, by late June 2007.
Or that uranium stock prices soared with it.
And then the bears bit back. Using, specifically, the horror stories surrounding the construction of the Olkiluoto 3 reactor in Finland, the very reactor that started the bulls running when it was first announced.
Construction of the reactor hasn't gone smoothly. Areva and Siemens, the French and German companies building the reactor, have had to reforge legs of the reactor and pieces of the pressure vessel. Substandard concrete has been ripped out and replaced. It's turned out to be harder to manufacture the structural steel plates for the reactor than expected.
How much demand for uranium?
As a result, the Olkiluoto 3 reactor, originally scheduled to start producing power in May 2009, is now projected to come on line a year and a half late, in December 2010. It's also going to be significantly more expensive to build than the $4.1 billion originally budgeted.
The extra time is crippling to projections for higher uranium prices, the bears have argued.
The case for higher uranium prices isn't nearly as straightforward as the bulls would have it. Higher prices for uranium will bring more uranium exploration, more uranium mining and more uranium supply. The effect of this new supply means that higher uranium prices depend on timing. If the addition of new supply lags the addition of new demand from new reactors, then the price of uranium will climb. If, however, the new supply comes on line before the new reactors do, then the price will tumble.
Cameco, a Canadian company that produces 20% of the world's uranium, projects a net increase of 77 nuclear reactors globally from 2006 to 2016 -- a much more conservative total than many bullish investors use. In the company's opinion, that will result in an increase in uranium demand of about 2% to 3% a year.
Plenty of uranium
In the long term, the world has plenty of uranium to meet that added demand -- and then some.
The world has about 4.7 million metric tons of identified uranium resources, according to International Atomic Energy Agency. In addition, there are another 10 million metric tons of more speculative resources and 22 million metric tons of unconventional resources. This entire total, 600 years of supply, can be profitably mined when uranium prices are at June's spot price of $130 a pound.
The international agency projects that production will increase by 60% from 2005 to 2010 if prices hold near $130 a pound. That's roughly a 10%-a-year increase in supply.
Of course, the bears say, if demand is rising at 3% a year and supply at 10% a year, the price of uranium won't stay at $130 a pound and some of that supply won't come on line. So far, it looks like the bears are right, as uranium prices have fallen in the past two months to about $105 per pound.
Peaks and valleys in uranium prices
The bullish argument for substantially higher prices from the peak at $136 a pound, the bears argue, works only if there's a temporary lack of uranium supply caused by a lag in getting new mines into production.
If you agree with the bearish argument, however, you get a very different scenario for uranium prices. To a bear, $136 marks a peak, and we're looking at a descent from here back to a sustainable price closer to $45 a pound by 2008.
Now mind you $45 a pound doesn't sound so bad, since uranium sold for $7 a pound not all that long ago. That is, until you realize that just about every analyst on or off Wall Street has a "buy" out on uranium stocks based on a continued climb in uranium prices. A new peak is priced into the current prices of these shares.
So, for example, RBC Capital Markets projects uranium prices will rise on scarce supply and robust demand to an average $120 a pound in 2007, up from $48 in 2006, and then climb to $145 in 2008 before beginning a gradual decline (as more supply comes on line) to $130 in 2009, $115 in 2010 and $100 in 2011.
Canaccord Adams sets the peak higher, at $166 in 2008, but says the drop will be steeper, too, to $81.25 in 2011.
I won't take the bulls' bet
I can find only a very few analysts who profess to anything like the bearish argument. On the other end of the spectrum, Desjardins Securities, another Canadian investment house that I'd put in the bearish camp, sees the recent decline in uranium prices continuing until prices fall to $45 a pound in 2008. Do I have to say that Desjardins finds uranium-sector big boy Cameco fully priced at current levels?
If you buy at today's prices, then, you're betting that everything the bulls are hoping for will go right and that the bears are wrong in all their doubts.
Sorry, bulls, but that's a bet I won't take. There's enough real trouble at Finland's Olkiluoto 3 reactor to put the bullish timetable for reactor startups in deep trouble.
The delays at that reactor weren't caused by the bungling of some rogue bad contractor. They're symptomatic of problems in the nuclear renaissance story.
First, it's clear that the 15 years since anyone built a nuclear reactor in Europe have seen a major erosion of the engineering skills needed to build a reactor. Areva may have kept its hand in by servicing the huge fleet of operating reactors in its home country of France, but when it came to building a reactor from scratch, the company wound up working with inexperienced subcontractors in Finland because there just weren't any around with experience. And Finland is a country with four operating reactors.
The problem isn't limited to the Finnish subcontractors pouring the concrete. Areva has had trouble finding companies anywhere in the world capable of specialized work such as forging the steam generator tubes. There are only two companies in the world, one in France and one in Japan that can produce forged reactor vessels.
Second, the lack of experienced contractors and subcontractors will produce a huge bottleneck that will stretch out delivery times and drive up costs. The projected expansion of global nuclear construction capacity is staggering, from a recent five reactors a year to a projected 50 a year. This is at a time when the oil industry, the mining industry and projects for airlines, railroads and shipping companies are all drawing upon the same pool of construction engineers and limited supplies of the same raw materials.
Areva just revised the cost of its new reactor at Flamanville in France by 10% due to rising costs of raw materials. And remember, the bulk of new reactors planned for construction over the next few years is in Asian countries, such as China and India, that are building nuclear-engineering systems from scratch.
Can nuclear industry clear the hurdles?
And, third, the nuclear industry is trying to reintroduce a new generation of designs at the same time as it ramps up construction. Some of these, such as the Westinghouse reactor with its passive gravity-controlled safety systems, do seem to mark a huge advance in reactor safety. But no one has ever built one of those reactors or one of General Electric's new-generation designs.
Even the relatively conventional Areva design incorporates enough new features that Finnish regulators say that they didn't have a detailed design of the project when Finnish utility TVO signed the contract.
For the bullish case for the price of uranium mining stocks to play out from here, the nuclear industry has to cleanly clear all three of these hurdles -- and on time. I just don't see that happening, and I don't like the idea of risking my cash in these stocks priced as if it's certain that the industry will win that trifecta.
On the other hand, I certainly wouldn't mind picking up shares of Cameco and other uranium miners after the bulls and the bears exhaust themselves and leave the stocks at something like fundamental value. Somewhere around $23-$27 would be about right.
Editor's note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest rate environment, see Jim Jubak's portfolio of Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at firstname.lastname@example.org.
At the time of publication, Jim Jubak did not own or control shares of any of the equities mentioned in this column. He did not own short positions in any stock mentioned in this column.
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Powertech releases FY2007 financial statements:
No operating revenue, $4.9 mil loss for year, accumulated losses of $15.8 mil, $17.8 mil of common stock sold