| y"> | | | | in nuclear plants. The company has manufactured |
| We thought by now we'd heard it all. But the | | | | about 130 reactor vessels now used around the |
| quote which follows, given to us in a | | | | world - nearly 30 percent. |
| tape-recorded telephone interview by the man | | | | The company recently announced it would |
| who obtains nuclear fuel for the largest nuclear | | | | increase investments in manufacturing capacity to |
| utility in the United States, surprised even us. | | | | meet the global demand. One of the company's |
| "From the point of view of today's price, they did | | | | main targets is to supply new nuclear pressure |
| us a favor by sending a really strong signal to the | | | | vessels to the U.S. and Chinese markets. JSW |
| production-side community that it was time to get | | | | anticipates orders for 25 pressure vessels and 31 |
| out there and start looking to get stuff back into | | | | from the U.S. Some wonder about the challenges |
| production," Exelon Corp nuclear fuels vice | | | | increased activity in the nuclear sector holds for |
| president James Malone told StockInterview. | | | | the supply chain's growing demand for heavy |
| Malone was referring to the uranium speculators | | | | forgings and other major components. |
| and financial community, who have driven | | | | According to the Nuclear Energy Institute (NEI), |
| long-term uranium contracts to US$85/pound and | | | | license applications for more than 18 new reactors |
| the weekly spot price to $125/pound. "It may not | | | | could be filed by a dozen energy companies by |
| have happened as quickly without this strong | | | | 2009. |
| signal." | | | | On Wednesday, Richmond, Virginia-based |
| And then we talked about the widening spread | | | | Dominion Resources reportedly asked Hitachi and |
| between the weekly spot and long-term uranium | | | | General Electric to build its third nuclear-powered |
| price. | | | | electric generating unit at the company's North |
| "I think the sellers have the perception that prices | | | | Anna power station in Mineral, Virginia. Earlier this |
| should be higher in the spot market, but obviously | | | | month, Dominion awarded GE Energy's nuclear |
| the buyers aren't sharing that perception right | | | | business a contract to secure critical, 'long-lead' |
| now," Malone told us. Hence the pricing stalemate. | | | | components for the nuclear power unit. This order |
| "There isn't any long-term activity to base a | | | | included large forgings required for GE's ESBWR |
| change in that price. It's been flat for several | | | | reactor design. The forgings would likely come |
| weeks." | | | | from Japan Steelworks. |
| Although the spot uranium price continues to set | | | | A long lead time is required for the forgings. "It's a |
| new records, many utilities are comfortable with | | | | long haul to get all the pieces," Malone told us. |
| the amount of U3O8 equivalent they have | | | | "Right now, the facilities even for assembling a |
| stockpiled. In his previous media interviews, Malone | | | | reactor in the United States are limited in their |
| gave the impression that Exelon did not lack for | | | | capabilities." |
| the nuclear fuel to power the company's 17 | | | | A bottleneck could result in obtaining heavy |
| reactors, which produce about 20 percent of the | | | | forgings as well as assembling them. In August |
| U.S. nuclear electricity. | | | | 2006, Constellation Energy announced it had |
| We asked if this were true. "That's correct," he | | | | entered into an agreement with AREVA to |
| responded. Others such as Entergy and FPL may | | | | procure 44 heavy forgings - needed for the |
| not be as fortunate. The rumored scramble by at | | | | reactor pressure vessel and steam generators - |
| least three utilities for uranium equivalent could be | | | | to construct the first potential nuclear power plant |
| one driver for the higher spot price. | | | | of a planned U.S. EPR fleet. The forgings will |
| And this brought us back to the uranium | | | | reportedly be manufactured into the final |
| speculators. In late April, Malone wrote a guest | | | | components at the BWX Technologies facility in |
| commentary, which appeared in Fuel Cycle Week. | | | | Mount Vernon, Indiana or AREVA's facility in |
| In that issue Malone contended uranium | | | | Chalon-St. Marcel. |
| speculators were driving up the spot price of | | | | Construction on the Dominion plant could start as |
| uranium to make their investments in mining | | | | early as 2010. It could go into production by 2014. |
| stocks more valuable. | | | | This matches the timetable Malone cautioned us |
| We confirmed he continued to believe this. "I am | | | | about. He pointed to progress made by NRG |
| not knocking the guys who are in it for financial | | | | Energy made at the company's South Texas |
| gain. I can't blame them for wanting to make | | | | project. |
| money, but you have to understand what it is | | | | On April 27th, NRG announced an agreement with |
| they are doing," he said. | | | | Tokyo Electric Power Company (TEPCO) to help |
| Malone cited the strong correlation between the | | | | develop the combined construction and operating |
| stocks of junior mining companies and the | | | | license for NRG Energy's application to the U.S. |
| uranium price. "The R squared is somewhere | | | | Nuclear Regulatory Commission later in 2007. "The |
| around 0.95," he explained. R-square is a statistical | | | | good news is that the ABWR (Advanced Boiling |
| coefficient of determination, which provides | | | | Water Reactor) has been built in Japan and is |
| information about the validity of a model. This | | | | under construction in Taiwan," Malone said. The |
| compares with TradeTech's evaluation of the | | | | NRC has already certified General Electric's ABWR |
| relationship to uranium stock share prices to the | | | | design. "It's a known entity and licensed in the |
| uranium price, which Gene Clark explained in an | | | | United States," Malone explained. |
| interview about a year ago. | | | | Doesn't this appear like enormous momentum |
| Again he surprised us, having taken the time to | | | | moving forward? "I think it's going to be a slow |
| meticulously study the 'sell-side' of the uranium | | | | build up," he told us. "It's like one of those curves |
| market. But Malone admitted, "We didn't look at all | | | | that's kind of slow, then has the knee out there - |
| 450 of them." | | | | the hockey stick - and then it starts to go up." |
| And why should he? Malone agreed with our | | | | But he also warned, "We have to have the folks |
| premise that more than 90 percent of the | | | | to operate them. We have to have the |
| 'uranium' companies are likely to disintegrate at | | | | infrastructure to build them. We have to have the |
| some point. "Some of the smaller folks that are | | | | regulatory oversight. If we go at it the right way |
| out there, really shouldn't be there because they | | | | as an industry, I think it can be terribly successful." |
| are not going to make it," he said. "The other | | | | He believes the renaissance will emerge several |
| folks are going to fill the gap so that we'll get a | | | | years down the road. "Probably on the order of |
| last marginal pound in at a reasonable price." | | | | five to ten years to get the real production to |
| When would we reach this 'reasonable' price? "It | | | | where we want it to be," Malone said. |
| depends upon how some things like Cigar Lake | | | | Malone firmly believes there will be a nuclear |
| come back to life because that's such a large | | | | renaissance in the United States. "We need |
| component of production," Malone said. "Whether | | | | electricity, there's a tremendous amount of |
| Shea Creek comes in during that timeframe - | | | | emotion with respect to greenhouse gases, and |
| which will pretty much make a big dent - there's | | | | nuclear can be base load electricity without the |
| several smaller ones. There's a raft of properties | | | | greenhouse gases," he told us. "A lot of people |
| people want to bring back into production. They | | | | are realizing that now, especially when James |
| may be able to only produce one or two million | | | | Lovelock takes the position that nuclear power is |
| pounds a year." | | | | a good thing to do for electricity production. I |
| He agreed with our evaluation that many of those | | | | think he's got the right message." |
| projections are falling short, especially on the | | | | Our final surprise was that Malone had a copy of |
| smaller projects. But what about BHP Billiton's | | | | Investing in the Great Uranium Bull Market. "I was |
| Olympic Dam? "I think Olympic Dam is so big that | | | | impressed by the fact that he (James Lovelock) |
| they can't rush it," he said. After we pointed out | | | | was right in the foreword." Dr. Lovelock actually |
| this could become the biggest open crater on | | | | wrote the foreword for this publication and |
| earth, we both broke into laughter. "I think | | | | personally endorsed our book, writing, "'I |
| they've got to be reasonable in their approach to | | | | unhesitatingly recommend it to politicians, |
| it," he added. | | | | environmentalists and all those concerned about |
| We speculated about when hedge funds might | | | | our future." |
| begin selling uranium. Over the next few weeks, | | | | And finally we asked whether or not Exelon Corp |
| both Mestena Uranium LLC and an unnamed | | | | would participate in NYMEX futures trading. "That's |
| hedge fund plan to offer the largest amount of | | | | too early to say," Malone responded. "My position |
| spot U3O8 and equivalent into the market in any | | | | on that is we need to digest what we were told, |
| single instance since last September. Dr. Robert | | | | learn how it works, observe it - and if we believe |
| Rich, a director of Yellowcake Mining, cautioned of | | | | there's some advantage or some useful purpose |
| a uranium 'price adjustment' at an unspecified | | | | for us participating, then we would consider it." |
| time. "Bob and I used to share an office together | | | | And finally we asked whether or not Exelon Corp |
| when we were young and worked at Yankee | | | | would participate in NYMEX futures trading. "That's |
| Atomic," Malone said. | | | | too early to say," Malone responded. "My position |
| He agrees there could be an adjustment. "It could | | | | on that is we need to digest what we were told, |
| be a two-phase thing. Some of the hedge funds | | | | learn how it works, observe it - and if we believe |
| may exit and just move on. Others may hang on | | | | there's some advantage or some useful purpose |
| and the market could stay above where it ought | | | | for us participating, then we would consider it." |
| to be because it's not yet fully rationalized with | | | | But what about the safety of nuclear reactors, |
| respect to the balance between supply and | | | | especially from terrorist attacks? After |
| demand." He added, "But, you could see some | | | | September 11th the U.S. Nuclear Regulatory |
| kind of adjustment that would bring it down a bit, | | | | Commission mandated new security measures at |
| and then take a longer time for it to reach a true | | | | U.S. nuclear power plants. These measures |
| rational equilibrium level." | | | | included altered or new physical barriers, increased |
| Malone's conclusion? "The market fundamentals, if | | | | security personnel, training enhancements and |
| you simply look at the macro situation of supply | | | | additional surveillance equipment. According to |
| and demand, it simply doesn't support those kinds | | | | Exelon Corp's website, the total cost of these |
| of numbers, especially in that time frame," he said. | | | | enhancements exceeded $150 million in capital |
| "It is really a puzzle why some people have such | | | | spending and now includes approximately $20 |
| a strong bullish position." | | | | million in additional annual operating expenses each |
| And what does Malone believe is wrong with the | | | | year. |
| time frame? | | | | How do these enhancements hold up? |
| BOTTLENECK IN THE NUCLEAR RENAISSANCE? | | | | In a recent note from the Nuclear Energy |
| Malone doesn't think the nuclear renaissance is as | | | | Institute, legendary actor Paul Newman (and now |
| imminent as many have forecast. "This is one of | | | | also becoming a legend for his line of food |
| the things that frustrates me a little bit," he | | | | products) toured Entergy's Indian Point nuclear |
| started. "I think people need to understand: | | | | plant outside New York City this past Monday (by |
| There's an expectation of a tremendous number | | | | the way, Paul Newman also has our book, |
| of plants around the world coming online real fast, | | | | Investing in the Great Uranium Bull Market). Mr. |
| and therefore driving demand up. Eventually, there | | | | Newman reported as follows: |
| will be that many plants. I just don't think they | | | | "I recently toured the Indian Point nuclear plant |
| can come on as fast as some people think they | | | | and I expected to be shown safety and security |
| can." | | | | at the plant. But what I saw exceeded my |
| Where, then, is the obstacle? "You've got to get | | | | expectations. No Army or Navy base I've ever |
| the forging to build the power plants," Malone | | | | visited has been more armored and I couldn't |
| pointed out. "There are only a few places in the | | | | walk 30 feet inside the plant without swiping my |
| world that can do that right now." He cited Japan | | | | key card to go through another security check |
| Steelworks as the predominant supplier, and two | | | | point. There was security at every turn, and the |
| others - one is South Korea and another in | | | | commitment to safety is clear." |
| France. "There's nobody in the U.S.," he said. | | | | We agree with both Mr. Malone and Mr. Newman |
| "It's a long haul to get all the pieces," Malone | | | | that nuclear power will be more important for the |
| explained. "Japan Steelworks is putting out a | | | | anticipated dramatic electricity growth in the |
| slightly greater than 100 percent increase in their | | | | future. And no one really knows precisely how |
| capacity to produce the forgings. The process is | | | | much longer the spot uranium price could continue |
| going to take several years, probably on the | | | | higher, where it will peak and at which price level |
| order of five to ten to get the real production up | | | | would be sustainable. But everyone likes to guess |
| to where we want it to be." | | | | about these matters. |
| Since 1974, Japan Steelworks (JSW) has | | | | COPYRIGHT© 2007 by StockInterview, Inc. |
| manufactured the forgings of components found | | | | ALL RIGHTS RESERVED. |