Friday, March 17, 2017

Rick Rule on resource markets and uranium market

Sprott Thoughts:

(snip)

Those of you who have been around for the long time know, however, that bear markets are the authors of bull markets, just as the spectacular bull market we enjoyed last decade was the author of the bear market that we just suffered. If past is prologue, this incredible decline sets the place for a very handsome recovery. And certainly 2016 saw the down payment on that recovery where the gold or precious metals sub-index of the TSX was up by at least 100%

(snip)

So, let’s look at the uranium market today and where we are. You’ll recall in the last market that the price of uranium ran from $8 a pound in 1999 to a high in excess of $135 a pound in 2006. And although it hasn’t round-tripped, it has come pretty close. Subsequent to the tragic events in Fukushima, the uranium price fell from $85 a pound all the way down to a low of $18 a pound. It has settled out now as we speak in the spot market of $24 a pound.

Let’s look at uranium industry economics and talk about where the price of uranium is likely to go in the intermediate, that is, 2- to 5-year timeframe. The International Energy Agency estimates that the global total cost of production—this includes issuer working capital and adding back or subtracting, if you will, the value of prior exploration and production write-downs—that the total cost to produce a pound of uranium today is about US$60 on a global basis. So, worldwide, we spend $60 a pound to make uranium and we sell it for $24 a pound. We lose $36 a pound and being minors we try and make it up on volume.

What this means is that the industry is in liquidation. Why would anybody invest in an industry in liquidation? How much should one pay for the privilege of losing $36 a pound on volume? The reason is, of course, that either the uranium price goes up or the lights go out. Well, uranium is a politically unpalatable source of energy. It’s a widespread source of energy, nonetheless. Responsible at the present time for between 15% and 16% of total US base load demand after 2 decades of very strong investment in a variety of alternatives including wind, solar and natural gas.

Good stuff from Rick Rule. The guy is a billionaire exclusively from speculating in the resource markets. Listening to what he has to say is highly advisable. The main theme is that these are cyclical highly volatile markets. Using that cyclicality and volatility to your advantage is the key to success in resource market speculating.

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