Market Outlook Journal
by James Finch - Please email your feedback to jfinch@stockinterview.com
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May 18, 2006

U.S. Uranium Sector Glowed in 2005: An Even Brighter Future Ahead   The U.S. Department of Energy’s record-keeping arm issued very encouraging data this week, which should give a boost to many of the companies developing their uranium properties in the United States. Front-runners, with the more solid outlook, include Strathmore Minerals (TSX: STM; Other OTC: STHJF), UR-Energy (TSX: URE), Uranerz Energy (OTC BB: URNZ) and Energy Metals (TSX: EMC). The U.S. government’s uranium annual report should also help bolster the aspirations of the more speculative uranium explorers and developers we have previously written about, including Kilgore Minerals (TSX: KAU), Max Resources (TSX: MAX; OTC BB: MXROF), and Northwestern Minerals Ventures (TSX: NWT; OTC BB: NWTF), which also plan to explore their U.S. uranium-mineralized assets.   The Energy Information Administration (EIA) released its Annual Domestic Uranium Production Report on Monday, showing the U.S. uranium production industry’s turnaround continued through 2005. Drilling, mining, concentrate production, employment and expenditures all increased over 2003 and 2004. While some companies withheld reporting data about certain of their activities, one can definitely see an uptrend forming in this sector. U.S. uranium mine production was the highest since the year 2000, but well below the period of 1995-1999.  Sources: Energy Information Administration: 1993-2002-Uranium Industry Annual 2002 (May 2003), Table H1 and Table 2. 2003-2005-Form EIA-851A, "Domestic Uranium Production Report" (2003-2005) U.S. uranium mined produced an estimated 3 million pounds of uranium oxide (U3O8), 24 percent more than in 2004. Estimated U.S. uranium concentrate (yellowcake) production in 2005 was 2.7 million pounds U3O8, 18 percent more than 2004. Domestic production mills and in-situ recovery facilities shipped an estimated 2.7 million pounds of uranium concentrate, this past year. Employment in the U.S. Uranium Production Industry by Category, 1993-2005.   Sources: Energy Information Administration: 1993-2002-Uranium Industry Annual 2002 (May 2003), Table H1 and Table 2. 2003-2005-Form EIA-851A, "Domestic Uranium Production Report" (2003-2005) In 2005, employment in the uranium industry increased by 52 percent, over the previous year. Drilling for uranium, production, land and other expenditures jumped by 54 percent, in 2005 compared to 2004. Companies spent an estimated $16.4 million in 2005, the most since 1997 – 1998. Surface drilling as measured in millions of feet was 1.7 million feet, the most since 1999. Employment in person-years was estimated at 638, the largest employment figure since 1999, but far below the four-digit employment numbers of 1995 – 1998. The greatest employment percentage increase came from Arizona, Utah and Washington State, but the largest employment number in person-years came from Colorado and Texas. Wyoming, New Mexico, and Nebraska showed modest increases in employment numbers.   Exploration activity was also up. The number of drill holes exploring for uranium, in 2005, grew by 47 percent over 2004.  Land expenses nearly doubles since 2003. These were expenditures for land acquisitions, geological research, geochemical, geophysical surveys, and costs incurred by field personnel in the course of exploration, reclamation and restoration work (plus overhead and administrative costs associated with supervising and supporting field activities).   The largest percentage and dollar increase came from production expenditures, which include mining, milling, uranium processing and running the facilities. The estimated expenditure more than doubled in 2005, compared to the previous year. This jump in expenses confirms that uranium exploration, development and production companies are preparing for a banner year in 2006 and beyond. Uranium Loaded into U.S. Civilian Nuclear Power Reactors, 1994-2005. Sources: Energy Information Administration: 1994-2002-Uranium Industry Annual reports. 2003-2005-Form EIA-858, "Uranium Marketing Annual Survey" (2003-2005) While production was modest compared to the world’s powerhouse producers, such as Athabasca and Australia, the EIA report reminded us of the production capacity of the various U.S. facilities. While U.S. utilities require between 50 and 60 million pounds of uranium to fuel reactors, the domestic uranium industry is producing but a fraction of what is needed. Total “existing” production capacity from permitted In Situ uranium recovery stands at 8.8 million pounds annually. U.S. utilities need to begin looking beyond next year’s annual report. The time is now to foster and encourage the small domestic uranium industry before everyone but the United States has available uranium supplies to power their nuclear fleets. Maximum Contracted Purchases of Uranium from Suppliers by Owners and Operators of U.S. Civilian Nuclear Power Reactors, in Effect at the End of 2005, by Delivery Year, 2006-2010. Source: Energy Information Administration: Form EIA-858 "Uranium Marketing Annual Survey" (2005). An interesting EIA report, issued last Thursday, confirms what we’ve been writing about. For 2006, U.S. utilities have contracted for more than 60 million pounds of uranium to fuel the country’s nuclear fleet. Looking forward to 2007, they have only contracted for 45 million pounds. By 2008, the contracted number dives below 30 million pounds.  For the period of 2009 – 2010, U.S. utilities have contracted for about 10 million pounds per year, averaged over those two years. That is far below the minimum uranium requirements necessary to fuel the country’s nuclear reactors. This should again confirm that the uranium bull market has barely begun.   Ironically, Chapter Six of StockInterview’s soon-to-be-released book is entitled “The Great Uranium Shortage of 2012 – 2015.” This should bode very well for uranium exploration and development stocks, who plan to operate production facilities in the United States. Please see the EIA table and figure below. Unfilled Uranium Requirements of Owners and Operators of U.S. Civilian Nuclear Power Reactors, 2005-2015 (Thousand Pounds U3O8 Equivalent) Year As of December 31,2004 As of December 31, 2005 Annual Cumulative Annual Cumulative 2005 3,302 3,302 NR - 2006 6,641 9,942 1,585 1,585 2007 12,823 22,765 6,093 7,678 2008 26,303 49,068 6,636 14,313 2009 W W 28,631 42,944 2010 W W 41,847 84,791 2011 W W 38,418 123,210 2012 57,941 262,669 54,942 178,152 2013 53,822 316,491 49,845 227,997 2014 48,969 365,460 44,888 272,885 2015 NR - 55,137 328,023 W = Data withheld to avoid disclosure. NR = Not Reported. -- = Not available. Note: Totals may not equal sum of components because of independent rounding. Source: Energy Information Administration: Form EIA-858 "Uranium Marketing Annual Survey" (2004-2005). Annual Unfilled Uranium Requirements of Owners and Operators of U.S. Civilian Nuclear Power Reactors, as of 12/31/2004 and 12/31/2005. Source: Energy Information Administration: Form EIA-858 "Uranium Marketing Annual Survey" (2004 - 2005).

May 16, 2006

Saudi Arabia’s Entry into Nuclear Will Accelerate the Uranium Renaissance   While a growing number of countries have announced their civilian nuclear energy ambitions over the past twelve months, no other country is likely to have more of a psychological impact on the nuclear energy picture than Saudi Arabia. We believe the Kingdom’s natural gas and water problems will lead them to nuclear, sooner rather than later, probably as early as this year.   After our interview with Kevin Bambrough, which resulted in the widely read article, ‘Explosion in Nuclear Energy Demand Coming,’ we began more deeply researching Bambrough’s conclusion. He believes the overwhelming growth in nuclear energy will continue to drive the uranium bull market much higher than is suspected. He believes the uranium renaissance has gone beyond the envelope of just a mining inventory shortage. We researched this further during the course of our investigation into uranium and geopolitics. We were surprised by what we discovered, and continue to be stunned by how accurate Mr. Bambrough’s forecast is likely to play out.   What follows is a small sub-section from Chapter Six of our full-length book, A Practical Investor’s Guide to Uranium Stocks. This book will first be available to our subscribers in June. *************************************************   An April 2006 UPI news item confirmed what many have long believed. It won’t be long before Saudi Arabia launches a nuclear project. Kuwaiti researcher Abdullah al-Nufaisi told seminar attendees in Qatar that Saudi Arabia is preparing a nuclear program. He said the government was being urged to launch a nuclear project by Saudi scientists, but had not yet received the blessing by the royal family. Social, not energy, issues could help the Saudi royals embark on a large-scale nuclear program.   Of the Kingdom of Saudi Arabia’s 24 million subjects, more than 40 percent are under 18 years of age. While still manageable, the country’s infrastructure is not prepared to deal with its explosive population growth. The two biggest problems facing Saudi Arabia are potential water and electricity shortages. True, its super oilfields may also have peaked in production and might move into tertiary recovery, but that is unknown. An Islamic revolution, similar to what Iran suffered in the 1970s is probably foremost in the King’s mind. Civil unrest might come about should his subjects suffer from insufficient electricity and inadequate water supplies. One need only look at the widespread electricity shortages Syria experienced in the 1980s and early 1990s.   As reported in the October 14, 2004 issue of Arab Oil and Gas, the Saudis lag well behind Bahrain, Kuwait, Qatar, and the United Arab Emirates in per capita energy consumption. The rate of natural gas consumption, which produces Saudi’s electricity, increased less than Egypt and Syria. Total energy consumption dropped by 3.5 percent in 1999 and 2000.   The internationally heralded “Gas Initiative” of 1998 was the Kingdom’s attempt to lure major western oil companies back into the country to help develop its natural gas reserves. After major oil companies spent $100 million in due diligence to evaluate the Saudi natural gas reserves, the initiative quietly dropped off the world’s radar screen. A Shell Oil executive, whose company is exploring for gas in the country’s Empty Quarter, told Bloomberg Daily Energy News that this was a high-risk venture with a low probability of finding sizeable reserves. In Matthew Simmons’ Twilight of the Desert, he repeated what he was told by an anonymous senior oil executive, “The reservoirs are crummy.”   The Saudis need water and electricity to match their population growth. Nuclear energy is likely to be the solution to both problems. Continued dependence upon natural gas may prove a fatal economic and social error for the royal family. Our research forecasts the Saudis should announce a large-scale civilian nuclear energy program in the near future. Saudi Arabia’ desalination plants account for more than 20 percent of the world’s total. Let’s discuss the water problem first. In a 2002 story reported in the Oil & Gas Journal, Saudi Arabia's 30 desalination plants produce about 21 percent of the world's total desalinated water production.Nearly 70 percent of the local water drunk in cities comes from desalinated sea water. As the population grows, Saudi Arabia may spend another $40 billion to build more desalination plants.   Half of the world’s desalination plants are in the Middle East. Most are powered by fossil fuels, especially natural gas. Converting sea water to potable water is energy intensive. The commonly used desalination method of multi-stage flash (MSF) distillation with steam requires heat at 70 to 130 degrees centigrade and consumes up to 200 kilowatt hours of electricity for every cubic meter of water (about 264 gallons). MSF is the most popular technology, but some are turning to reverse osmosis (RO). RO consumes about 6 kilowatt hours of electricity for every cubic meter of water.   Desalination is very expensive. The cost to generate this electricity through natural gas explains why Saudi Arabia spends about $4 billion in operating and annual maintenance costs.   There are numerous precedents in combining water desalination with nuclear energy for electrical generation. The World Nuclear Association highlights the BN-350 fast reactor in Kazakhstan, which has produced 135 MWe of electricity and 80,000 cubic meters per day of potable water for nearly 30 years. In Japan, ten desalination facilities are linked to pressurized water reactors producing electricity. The International Atomic Energy Agency is working closely with about 20 countries to implement dual-use nuclear reactors, which would also desalinate water.   According to the World Nuclear Association’s website, “Small and medium sized nuclear reactors are suitable for desalination, often with cogeneration of electricity using low-pressure steam from the turbine and hot sea water feed from the final cooling system. The main opportunities for nuclear plants have been identified as the 80-100,000 cubic meters per day and 200-500,000 cubic meters per day ranges.” There are numerous examples of nuclear desalination being considered. In 1977, Iran’s Bushehr nuclear facility was to also have a 200,000 cubic meters per day MSF desalination plant. Construction delays, and the subsequent Islamic revolution, prevented this from occurring. Perhaps when Iran commences its civilian nuclear program, the desalination plant will be revived. China is reviewing the feasibility of a nuclear seawater desalination plant in the Yantai area. Russia has advanced a nuclear desalination project with barge-mounted marine reactors using Canadian reverse-osmosis technology. India has begun operating a nuclear desalination demonstration plant at the Madras Atomic Power Station in southeast India. Another one may soon follow in the southern Indian state of Tamil Nadu, which perpetually suffers from water shortages. Pakistan continues its efforts to set up a demonstration desalination plant. South Korea has developed a small nuclear reactor design for cogeneration of electricity and water. It may first be tested on Madura Island in Indonesia. Argentina has also developed a small nuclear reactor design for electricity cogeneration or solely for desalination.   The Saudis have investigated dual use for nearly thirty years. Since 1978, Saudi scientists have studied nuclear desalination plants in Kazakhstan and Japan. Both studies positively assessed the feasibility of bringing the first dual-use nuclear reactor in Saudi Arabia. Since the mid 1980s, scientists and researchers at the Saudi’s Nuclear Engineering Department at King Abdulaziz University, the College of Engineering at the University of Riyadh, the Chemical Engineering Department of King Saud University, and the Atomic Energy Research Institute have researched and evaluated nuclear desalination. Saudi scientists presented their paper, entitled, ‘Role of Nuclear Desalination in the Kingdom of Saudi Arabia,’ at the First International Conference on Nuclear Desalination in Morocco in October 2002.   The country possesses a tandetron accelerator and a cyclotron capable of isotope production for medical purposes. Saudi’s nuclear scientists have been involved with many countries to help their country develop a bonafide nuclear energy program. In late March 2006, a German magazine reported Saudi Arabia has been secretly working on a nuclear program with help from Pakistani scientists. Ironically, many believe Saudi Arabia helped finance Pakistan’s nuclear program. Because Saudi scientists lack the proven experience of the entire nuclear fuel cycle, Pakistan’s expertise, over the past decade, could help accelerate the Kingdom’s pursuit of a civilian nuclear program.   While lacking proven uranium deposits, the country’s Tabuk region has low-grade amounts of uranium and thorium. However, Saudi Arabia has significant phosphate deposits, which some believe could be exploited. The country’s two largest deposits reportedly measure about 750 million metric tons, averaging between 19 and 21 percent P2O5. Mined by the Saudi Arabian Mining Company and the Saudi Basic Industrial Corporation, fertilizer plants at the Al Jubail Industrial City produce about 4.5 metric tons of P2O5 annually. While extraction of uranium from phosphates can be an expensive proposition, the phosphates could provide a ready supply of uranium fuel for the country’s nuclear desalination plants. Then, it would be a matter of uranium enrichment, of which both the Russians and the French would be scrambling to provide the Kingdom.   While the Saudi program may not directly impact world uranium prices, the Kingdom’s decision to advance its nuclear program, beyond the research and medical stage, would signal to the entire world that nuclear energy programs will be a primary growth sector for the next fifty to one hundred years. Should the Saudis also commence desalination projects using dual-use nuclear reactors, this could change the entire landscape of the water situation for the Middle East and also impact Africa. It would most likely spark a significant stampede of the Kingdom’s neighbors into the global nuclear renaissance.

May 11, 2006

Will China’s New Five-Year Plan Force U.S. Utilities to Ration Your Electricity?   China's New Five Year Plan Could Provoke A Blackout or Rolling Brownouts According to China’s Ministry of Land Resources, China plans to build up “sufficient reserves” of uranium and other minerals, in a new five-year government plan. The ministry said it would be stockpiling strategic reserves of uranium, copper, aluminum and other key minerals because of rising demand for those commodities. The Chinese also wish to avoid supply disruptions by hoarding uranium and other minerals, over the next few years.   Until now, you’ve probably taken for granted a steady, reliable source of electricity. A large part of your dependable energy came about because of the nuclear energy generated by the 103 nuclear reactors in 30 states. Without a steady supply of uranium to power those nuclear reactors, the U.S. electrical transmission network suffers a 20 percent loss. China’s new five-year plan to stockpile uranium had better be a Wake-Up Call to U.S. utilities. If they missed the import of China’s announcement, we are all going to be in a heck of lot of trouble before this decade ends.   Since June 2004, we have warned of supply disruptions for uranium. David Miller, who has since become President and Chief Operating Officer of Strathmore Minerals, argued at the time, “In my opinion, no one has any extra uranium to sell on the spot market. There’s just not excess inventory that people are unloading in the spot market.” We interviewed Miller again in November 2005, for an article entitled, “China Demand for Uranium, World Growth in Electricity Demand to Drive Uranium Price Higher.” Miller warned us, “China is the future wild card… what they are planning for nuclear is probably the most aggressive program in the world.” Miller added in his explanation, “All the new production is already factored into the future market for uranium. We’re underwater right now without building one more nuclear power plant.”   In mid April, during an interview with Sprott Asset Management Market Strategist Kevin Bambrough, we asked him about the Chinese. He answered, “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.” And now, the Chinese plan to build up a strategic reserve of uranium for their aggressive nuclear program.   In another interview, also published in April, Gene Clark, CEO of TradeTech LLC warned us, “In reality, the U.S. utilities, which tend to wait longer to contract, may be the ones on the losing end because the Chinese and the Indians will contract early. The implication of current group-think is that the Chinese and Indians are not going to be able to find enough uranium for their new plants. But, they are committing for supplies way out into the future. When the U.S. utilities come to the market, they’re going to look around say, ‘Oh blankety- blank, what happened? Where’s the uranium?’ They’ll be the ones that sat around. I think that is what’s going to happen unless things really change in the way contracting is done in the United States.”   U.S. utilities have been cautioned, warned and advised that the Chinese demand for uranium could very well create a serious energy crisis for the U.S. grid. Nuclear reactors help supply the baseload generation for the U.S. electrical grid. Nuclear power plants provide stability to the electricity transmission network. About one-fifth of electrical generation is derived from nuclear power. Nuclear plants are running at more than 89 percent capacity. U.S. utilities are fiddling around like Nero, who watched Rome burn, hoping that promises of increased uranium production will stem the dramatic uranium price rise.   Severe strains in natural gas supplies, combined with the ongoing uranium supply squeeze, could very well put U.S. consumers on rations for their electricity. Can’t happen, you say? Ask the Brits about how business was conducted in their country, in late 1973 and early 1974, during the Arab oil embargo crisis. Or more recently, California’s rolling brownouts.   An electrical energy crisis is in the making, while U.S. utilities are patiently hoping or praying the price of uranium stop climbing. UxC President Jeff Combs wasn’t kidding when he urged U.S. utilities, during our interview, to “support the expansion of (uranium) production in the United States.” And if you don’t let your local utility know about the upcoming electrical energy crisis, then perhaps it will be your lights they may someday be turning out. The irony of ironies: All of those sweet anti-nuclear folks in Vermont, who depend upon nuclear energy for more than 70 percent of their electricity? They'll be the first to suffer the most, if U.S. utilities don't respond to China's five-year plan.

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