The Rude Awakening
Gaithersburg, Maryland
Wednesday, May 30, 2007 ------------------------- - The art of arresting value in unlikely areas,
- Too much of not enough for uranium,
- Camping in Pennsylvania (eh?) and plenty more…
------------------------- Joel Bowman, briefly, from Scotland… About a year ago I sent an unashamedly patriotic email to a few of the editors of Agora Financial. In it, I thought aloud about the possibility of Australia becoming rich beyond my wildest dreams on the back of a uranium boom. Our proximity to the Chinese and Indian consumers up north paired with our unrivaled reserves of yellowcake (the world's largest) seemed to make the case. You can imagine my excitement then when I read one of my favorite writers thinking along similar lines. There is one sentence in Chris Mayer's column below that literally made my chest swell. You'll know it when you see it. Enjoy… ----------------------------------- The Abundant Value of Scarcity
By Chris Mayer Buying scarcity is usually a good idea. Beachfront properties, mint condition coins and limited production automobiles all testify to the enduring value of scarcity. But sometimes scarcity is temporary, especially in the commodity markets. For months or years at a time demand will swamp supplies of a given energy product or metal or grain. Eventually, however, production catches up with demand and scarcity yields to excess. As investors, we should always be on the lookout for scarcity, whether that scarcity be enduring or temporary. Scarcity creates opportunity, as my anecdote below illustrates… I just returned from a weekend of camping in Pennsylvania. There was a pile of newspapers waiting for me. Lots of stuff in the mail too - newsletters, research, magazines and more. The e-mail box was even more loaded. Amazing what happens when you're gone even for only a few days.So today I'm easing back into the routine. First, after quickly digesting the pile of newsprint in front of me, I wrote up a quick comment for my daily blog. You can find it here: www.agorafinancial.com/capital&crisis.php Usually, I'll pick out what I think is the most compelling story of the day - one that also ties in with what I'm doing in my investment letters. There is always something going on somewhere that makes me sit up and go, "hmmm."Lots of times I don't even know where a story might lead. Investment ideas don't usually leap off the page and grab me around the neck. More often, I just clip out bits and pieces of things of interest and file them away in my office. After awhile, certain threads and themes emerge. Sometimes an actionable investment idea comes out of all of this. Today's blog post is about China's massive plan to build many more nuclear power plants. China's nuclear ambitions stagger the mind: $50 billion and 32 plants by 2020. The "whisper" number of 300 more by the middle of the century is even more mind-blowing. Something of a nuclear renaissance has been in the works for some time now. Perhaps the best testament to that fact is the price of uranium. In 2004, the price of a pound of processed uranium ore was only $14.40. Today, it's more like $120. You might think the soaring uranium price would put a brake on new plants. But that's obviously not the case. One of my camping buddies works for the Department of Energy. He oversees several research projects related to nuclear power. Over a campfire one evening, we chatted about the nuclear renaissance. When I mentioned the price of uranium, he said there was plenty of uranium. "We know where it is," he said. "We can make the Australians very rich, like the Saudis with oil." The Canadians produce quite a bit of it, as does Kazakhstan. The problem is that there is not plenty of uranium right now. There are about 4.7 million tons of identified resources of uranium that companies can mine for less than $60 per pound, according to a recent OECD/IAEA report. "At 2004 nuclear generation rates," the report states, "that would be enough [uranium] to supply the world's reactors for 85 years." But uranium in the ground is not the same thing as uranium at the power plant. It takes time to build a new mine, especially when the world's largest uranium producer, Australia, continues to impede the development of new mines. So uranium prices might continue climbing for several more years, especially because higher prices are unlikely to curb demand. Even at $100 a pound, uranium is not a huge component of the cost of nuclear powered-energy. "Fuel accounts for only 26 percent of the production cost for nuclear-generated electricity," the Nuclear Energy Institute explains. "In contrast, fuel accounts for more than three-quarters of the cost of coal-, gas- or oil-generated electricity." This pricing advantage is one reason why nuclear energy is relatively cheap. "U.S. nuclear power plants have the lowest production costs of any large-scale source of electricity, except hydroelectric," the Nuclear Energy Institute continues. "In 2005, the production cost for nuclear-generated electricity was 1.72 cents per kilowatt-hour (kWh), compared with 2.21 cents per kWh for coal, 7.51 cents for natural gas and 8.09 cents for oil." So even if uranium prices double over the next few years, nuclear energy would remain an extremely competitive energy source. Eventually, of course, new uranium mines will come on line. And eventually, of course, the price of uranium might retreat. But so what, the price might soar in the meantime, especially because demand seems certain to increase sharply. Only 103 reactors are online in the United States right now. But these plants deliver about 20% of the U.S. energy supply. France is the leader, getting nearly 80% of its power from nuclear reactors. But many other countries get a third or more of their power from nuclear plants. China, ironically, is near the bottom: 2.3%. Given what China's demand for other commodities has done for the prices of those commodities, we should take note of its new surge into nuclear power. It would seem to bode well for the price of uranium and the profits of those who sell it. I'm not saying investors should run out and buy uranium mining stocks. Those stocks have had a great run already. I'd say it would be hard to find a "hidden gem" in that lot. But I'd also say that the uranium bull market has probably not run its course. Uranium, however, is not the only scarce resource in the nuclear energy market at the moment. Skilled labor is also scarce. I told my friend about what I had read about the lack of nuclear physicists and other qualified scientists in the field. Most are either very old or very young. There was a long time when the nuclear industry was dead and few wanted to go into the field. He agreed with me and pointed out that two of the most valuable employees in his department are both over 70 years old. For about a year, I followed a company called Washington Group International (WNG: NYSE). The company had a niche in nuclear power and many qualified people on its payroll, not to mention an accumulation of institutional knowledge gained over the years. I came very close to recommending this company several times. Yesterday, I noticed that URS bought the company. So the stock is up more than 45% since I put it on my watch list about a year ago. I'm sorry I missed that one. But this buyout speaks to the growing need for experts on nuclear issues…and also to the value of scarcity. The shares of Washington Group International were never cheap on the basis of their earnings. But URS bought out the company anyway, apparently because nuclear expertise is very scarce at the moment, and therefore, very valuable.When I give a casual glance at the companies I've recommended to the readers of Mayer's Special Situations, focusing specifically on the companies that benefit from some kind of scarcity, Cresud (CRESY: Nasdaq) stands out. Talk about unique assets and scarcity! Cresud owns acres of valuable farmland in Argentina and the know-how to vastly increase the yield and productivity of its farms. Not much has changed from my original write-up and it remains a good long-term holding. [Chris examined the parent company of Cresud in the October 27, 2006 edition of the Rude Awakening: Asset-Kicking Growth Somewhere, sometime on this big blue globe of ours, there are assets of a kind in short supply and high demand. Finding assets that are scarce and likely to get scarcer - and not paying too much for them - is probably not a bad investment formula.
--- Chris Mayer's Special Situations Newsletter ---
"[This strategy] has historically generated far better returns than the overall stock market and… continues to shine." - Barron's "There's big money to be made if you can identify the next targets and buy in before everyone else does…" - CNNMoney Six "Invisible" Investments Wall Street's Elite Love to Own Wall Street's "Big Dogs" build fortunes using 6 hidden kinds of investments the rest of us rarely discover. Today, I'm spilling their secrets…Check them out here: Mayer's Special Situations - The "Invisible" Report -------------------------------------- Did You Notice? Buying Into Global Warming
By Joel Bowman The weather used to be a polite, if mundane, topic of conversation. Talking about today's sunshine or tomorrow's rain or the weekend's balmy temperatures used to be a default conversation for awkward moments at dinner parties or in deli lines. How times have changed! Now that the globe is warming (or cooling) due (or not due) to man's increasing use of fossil fuels, the subject of rain or shine evokes a partisan anger, usually reserved for Scottish pubs and Australian football fields. All of a sudden, the world is endowed with six-and-a-half billion climatologists, each more willing than the last to offer an expert opinion on the latest temperature trends. We here at the Rude Awakening have offered no theories about whether the earth is warming or cooling (We restrict our theory-mongering to those that pertain to making money in the stock market), but we have presented a few of the theories and divided opinions of our readers. In fact, we recently ran a "letters to the editor" exclusively devoted to climate change. (If you happened to miss some of the colorful remarks, you can find them right here, "The Saturation" Recently, UBS Investment Bank took advantage of the furor over this testy subject by introducing the Global Warming Index (GWI). The GWI is an index like any other and trades on the Chicago Mercantile Exchange. Simply speaking, if you are a global warming flag bearer and believe the temperature will rise in the coming years, you can buy the index. Conversely, if you are of the inclination that Al Gore is a fool and the weather will cool, you can sell it. At present, the GWI is a little like "World" Series baseball in that only U.S. cities are invited to play. In its initial incarnation, the index tracks 15 major U.S. cities but there are plans to include European and Asian cities in the near future, making the GWI truly "global." There is certainly the demand for it, too. Between the periods 2004-05 and 2005-06, weather derivatives trading on the CME rose from $9.7bn to $45bn. As one Rude reader casually observed in our climate change mailbag last week, "The weathermen get paid whether they are right or wrong, so why not you? Take advantage of trends that create money in the short run. Who cares if it's bogus?" Not everybody is on the same page when it comes to being "green" about the environment…Few, however, disagree about the color of the money they hope to take to the bank. Cheers, Joel
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