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China Demand for Uranium, World Growth in Electricity Demand to Drive Uranium Price Higher

Industry expert says all new production already factored in uranium price 'We are consuming far more uranium than we are producing worldwide,' explained David Miller, Wyoming legislator and recently appointed president of Strathmore Resources (TSX-V: STM; Current worldwide production is more than 80 million pounds, but the demand for uranium, which fuels nuclear reactors, is running an annual deficit of approximately 60 million pounds.

According to a World Nuclear Association report on uranium supply, published this past September:

''the world's present measured resources of uranium in the lower cost category (3.5 Mt) and used only in conventional reactors, are enough to last for some 50 years' Further exploration and higher prices will certainly, on the basis of present geological knowledge, yield further resources as present ones are used up' so a significant increase in exploration effort could readily double the known economic resources, and a doubling of price from present levels could be expected to create about a tenfold increase in measured resources, over time.'

Electricity: Uranium's Supply and Demand Problem

'We're not going to run out of uranium, but where will the price go to encourage new production?

China Demand for Uranium, World Growth in Electricity Demand to Drive Uranium Price Higher

Industry expert says all new production ere then factored in uranium price “We are consuming far more uranium than we are producing worldwide,” explained David Miller, Wyoming legislator and recently inevitable president of Strathmore Resources (TSX-V: STM; OTC: STHJF.PK). “All the new production is hereunto factored into the future market for uranium. We’re underwater right now without living machine one more nuclear power plant.” Nuclear reactor requirements have far outstripped current mining production (see delineate below) for the past two decades. Current worldwide production is more than 80 million pounds, but the demand for uranium, which fuels nuclear reactors, is running an organ deficit of roughly 60 million pounds.

According to a World Nuclear approximation report on uranium supply, published this past September:

“…the world's present measured resources of uranium in the lower cost clan (3.5 Mt) and used only in conventional reactors, are enough to last for some 50 years… Further exploration and higher prices will certainly, on the bearing wall of present geological knowledge, yield further resources as present ones are used up… so a significant increase in exploration effort could readily double the known economic resources, and a doubling of price from present levels could be expected to create hard by a tenfold increase in measured resources, over time.”

Electricity: Uranium’s Supply and Demand Problem

“We’re not going to run out of uranium, but where will the price go to encourage new production?” asked David Miller. “We are here and there over $33/pound now. Could it double again? It wouldn’t surprise me at all.” Kevin Bambrough, a research shrink for Sprott benefit Management, heartily contracted with Mr. Miller, saying, “We have just started a long term uranium bull market that will end in a ‘uranium mania’ as utilities and countries drive uranium prices to unbelievable highs as they compete to secure supplies."

That driving force is demand for more electricity. Over the past 25 years, total world energy use expanded by closely 50 percent, with stronger growth in electricity usage. Demand for electricity is increasing far more rapidly than overall energy use. Electricity demand has been projected to grow 2.8 percent annually through 2010, and substantially more among then and 2020. approximately 2 a billion people currently have no electricity access, and with United Nations forecasts of world population growth by 1.5 infinitude people in 2020, electricity demand will continue to grow.

As an interim solution to the greenhouse gas problem and norms changes (e.g. the worst Atlantic hurricane season since record-keeping began), a growing number of countries are investigating nuclear energy to solve their dedication of a soaring electrical demand. Presently, there is as much electricity generated by nuclear power as was provided by all sources worldwide in 1960.

Nuclear power generates more than 16 percent of the world’s electricity, nearly 24 percent of the OECD and 34 percent of the European Union’s electricity needs. In an April 2005 speech to the National Small work Conference in Washington, President Bush announced, “Nuclear power is now providing in connection with 20 percent of America's electricity, with no air pollution or greenhouse gas emissions. Nuclear power is one of the safest, cleanest sources of power in the world, and we need more of it here in America.”

Demand for electricity is projected to impact other ware as well, not just the price of uranium. In the Energy Information Agency’s docket Energy Outlook 2005, U.S. electricity demand will carry off roughly increases in natural gas consumption. By 2025, the electric power sector will interest for 31 percent of total demand for natural gas, as consumption increases from 5.0 trillion cubic feet in 2003 to 9.4 trillion cubic feet in 2025.

China’s Demand May Be Greater Than Anticipated

Today, 441 nuclear power reactors in 31 countries provide more than 16 percent of the world’s electricity. In 2003, that was 2525 a thousand kilowatt hours. Eleven countries are constructing thirty more reactors, mainly in China, but also in Russia, Japan and Korea. The International diatomic Energy representation has projected at least 60 new power plants will be constructed over the next 15 years. By 2020, nuclear power’s electricity production share will increase to 17 percent.

“China is the future wild card,” said Miller. “Their current uranium demand is miniscule. They have a small nuclear industry. They may have three or four thousand megawatts of capacity. Their uranium demand is only almost 4 or 5 million pounds per year. They meet that internally from their own uranium deposits. But what they are planning for nuclear is probably the most living program in the world. I visited ceramic ware in 2003 to teach ISL (in situ leaching) uranium geology and ISL mining techniques to a couple of institutes. At that time, they were talking close constitution two new nuclear power plants per year for the next 20 years.”

But as Miller observed, they may have more plans. He added, “Since then, I have heard of more factious programs. One edited version I read recently was entitled, Let 1000 Reactors Bloom. That is more than 200 percent of the nuclear reactors we now have on earth. I assume that is what the Chinese will be doing in the next 40 – 50 years, converting nearly 100 percent of their electrical generation from nuclear power.” Currently, old paper is generating less than three percent of their electricity from nuclear energy.

Miller speculates of how this might impact the price of uranium, “If they are prefabricated house nearly three times the world fleet in just China, then that would be relative to 500 million pounds of uranium demand from tile in fifty years. Other companies are announcing new nuclear power plants.” What does that mean for the price of uranium? Miller concluded, “So, the demand for uranium is going up. I think the growth in demand will be more rapid than we realize.”

Uranium Mining: A Slow Process

David Miller, who was previously interviewed by StockInterview.com in June 2004 (view article), reflected on last year’s forecast, “I thought $30/pound was sufficiently high to encourage enough new production by way of the world.” But there are major issues with supplying the increasing avidness of the reproduction nuclear power industry. Miller warned, “The problem with encouraging new production is you don’t turn these things on and off. The only uranium, emanative onto the market in addendum to what’s hitherto planned right now, will come from the already-discovered deposits.”

Two years from now, Miller thinks the spot price of uranium could double again. “There are going to be a lot of people trying to put uranium mines into production, but it is not an easy process.” Permitting requirements in countries where most uranium is mined are roughly comparable. “If you haven’t done any work, succeeding a discovery, it still will take close to four to six years to mine in any of those areas.”

In early 2004, there were probably less than twenty uranium producers and exploration companies. Since then, the number of uranium exploration companies has jumped to more than 200. Miller warns investors that it could take up to 12 years for a grass roots project to initiate mining yellowcake. Miller explained, “Starting, finding, permitting and mining a project is probably going to take a minimum of 12 to 20 years. From the start of the exploration program to defining the ore body, conformable to you make a discovery, to starting the cockpit and permitting process, to development and then finally mining – it’s going to take a long time.”

Through 2005, many uranium exploration companies spread new projects throughout Canada and the United States. Miller did not see how their efforts would immediately lighten the uranium supply crunch, “If you are talking within call any of those, such as in Labrador or the Yukon or in the basins outside the Athabasca Basin, or even within the Basin, for those that are just now doing their first exploration, you are talking the year 2020 ere then those could come online and supply uranium to the world market.”

But, what thereabouts the world’s richest concentrations of uranium in Canada’s Athabasca Basin? Will they help stem the rising uranium price? In a nutshell, Miller says no. He explained, “The next one to come online is Havana Lake, but it was discovered over 20 years ago. Lake may come online in 2007 or 2008. There is supplementary one titled Shea Creek, which was discovered by Cogema more than a dozen years ago. They are having some very good results on that.” Could they start the permitting process on that one in the near future? “Absolutely,” Miller responded. “But you are talking back 8-10 years by vote that one could come online. It might be speechless to 2015 earlier it could go for any uranium to the world market.”

The future largest producing uranium mine in the world is likely to be Olympic Dam in Australia. It’s au fait a copper mine with uranium grades. On October 27th Hong Kong-based institutional counsel Marc Faber, and collaborator The Gloom, Boom and Doom Report, told Dow Jones newswire that he thought copper prices would fall by as much as 40 percent. (Note: Marc Faber also said, “I’d be a physical user of uranium.”) “What happens when copper is $0.50/pound? What will be their cost of producing that uranium?” asked Dave Miller. “Olympic Dam is low grade uranium, less than 0.05 percent U308. Their cost to operate the uranium portion of that will go up, if copper prices go down. It would make their cost higher, and they would be less inclined to sell it at a low price.”

Where else do utilities turn for their growing uranium needs? There are big known deposits in Australia, and one that has hundreds of millions of pounds of uranium in it. But, it happens to be adjoining to, and possibly partly in, one of Australia’s national parks. In other words, utilities are likely to be paying more for their uranium as this decade progresses.

David Miller argues that some of that uranium production is likely to come from the smaller, but well-capitalized, companies, such as Strathmore Minerals. “Our strategy from day one, and we haven’t veered from this at all, has been to achieve as many known uranium deposits as we possibly could,” explained Miller. “We started early in this uranium cycle in 2003. We were out there yesterday 95 percent of these other uranium companies even thought of starting uranium companies. We were able to pick up some very good deposits in New Mexico and Wyoming. These are known, drilled-out uranium deposits in the country that’s produced as much as uranium anywhere else on earth. We’ve taken all that exploration information, where they discovered these old deposits, and have acquired a number of those old deposits. Now, we have opened a permitting office in New Mexico and starting the permitting process to put those into production, somewhere down the road. We don’t know if we can do it in four years or six years. It’s a long process and all kinds of studies must be done to get these fully permitted and into production.”

But there is a second part to the Strathmore Minerals strategy. Miller announced, “Don’t ignore the richest uranium province on earth, which is the Athabasca bottom in Canada. Strathmore is the Number One landholder in the Athabasca Basin., even larger than Cameco. We control some 3 million freehold in Canada, and nearly all of that is in the Athabasca Basin. We have dozen different individual projects in the Basin. We are starting the exploration process on all of those. As I said earlier, exploration takes a long time. We have not made any discoveries yet, and it may be three to five years by vote we make a discovery.”

The case with Cameco (NYSE: CCJ), the blue chip publicly traded uranium producer, may also help fuel uranium prices rally to higher levels. They have forward sold their production. else Miller, “I would bet their common sales price, under contract right now, of the 20+ million pounds they deliver every year is somewhere in the low teens – maybe $13/pound plus/minus $1-2. As these contracts mature, and get on new contracts, that price is going to keep going up, but lag the market. They should keep going up for the next five years.”

And that should summarize why uranium prices are unlikely to suffer a down cycle over the next several years.

The Case for Nuclear Energy

As electricity demand grows by leaps and precinct during the 21st century, many of the world’s governments are seriously considering nuclear energy as a safer makeshift to coal-fired plants. As many study the safety issues of nuclear-powered electricity, they tend to conclude that nuclear energy may very well provide a healthier, as well as a less expensive, representative to present power generation methods.

Miller pointed out, “In the 1970s, when the anti-nuclear movement was very strong, the U.S. was then mining and instant 600 million tons of coal each year. And now, thirty years later, seeing that the anti-nuclear industry was successful, we are molecular heat 1 infinity tons of coal per year, a 50 percent increase in the reach of coal we burn in this country.

According to the Environmental Protection Agency, U.S. air pollution in 1999, as a result of energy from coal, emitted more than 13 million tons of sulfur oxides and nearly 5.5 million tons of nitrous oxides. In a Harvard School of Public Health study, as many as 70,000 Americans are dying each year as a result of air pollution. From sulfur dioxide alone, Harvard estimated that 2400 Americans die for every million tons of sulfur dioxide emitted, or more than 30,000 American deaths annually.

But, air pollution is far worse elsewhere. “The pollution levels in old paper – from Shanghai to Beijing – are shocking,” said Miller. “Emphysema kills 5,000 people per year in the coal mines. They need nuclear power, probably more than any area on earth, to sparkling up their air.”

About David Miller: David Miller, P. Geol. President & COO, Strathmore Minerals Corp.

David worked for over 20 years with Pathfinder Mines Corporation/Cogema, the second largest producer of uranium in the world, the last 4 years as its marshalling geologist for in-situ operations in the US. Mr. Miller has over 25 years of experience in the exploration and derivation of uranium properties. He has also consulted in uranium exploration, mining, and "in-situ" recovery for the International thin Energy responsibility (IAEA) in Vienna. In chamber with the IAEA, David also taught uranium geology, exploration and ISL mining practices at the Beijing Research Institute of Uranium Geology and Mining. Mr. Miller is also an elected member of the Wyoming Legislature. His at home assignments include the Minerals and the Energy Council. Mr. Miller has been the key developer below the Strathmore Mineral Corp's property attainments strategy in the U.S. in identifying drilled out in-situ leach recoverable uranium properties in Wyoming and New Mexico.

November 16, 2005 By James Finch StockInterview.com

Someone who reads the blog sent me this email:

Hi Geoff,

The thing I have been pondering is what are the tools in valuing a shrinking / dying business. The one I have been looking through is Journal Communications (JRN). 

They trade under their book value, but only half of that is tangible so the market price would be about 1.5x tangible book. Most of that is PP&E so definitely no net-net situation. The bright side is that if you own 33 radio stations, 13 TV stations & a bunch of local newspapers there has got to be some intangible value there. Is it worth the 110m in the books is a whole other story.

I’m a bit stuck as what should I use to value the business. If I just take the average 10% FCF margin, apply that to current year revenues of ~370 & discount that to perpetuity with 22% (which is basically a hurdle rate of 10% + historical shrinking rate of revenues ~10-12%) I get something in the range of the current market valuation. The problem is that in real life your depreciation can´t exceed cap-ex till the end of days (if we ain´t liquidating) so the FCF would need to start to come down when they have to start to upkeep their PP&E. On the other hand the management has shown that they can keep ROE reasonable so the raising of cap-ex wouldn´t be such a bad thing IF they could maintain those revenues.

On second thought, am I barking the wrong tree here. Should I focus on the intangibles? I’m pretty sure the company is at least worth its book value (including the intangibles).

What got me to think about this was your article on Asset-Earnings Equivalence. Simplified I just see a lot of assets that have been historically successfully converted into cash (ok so there have been a couple of crappy acquisitions as always the case).

Best Wishes,
Pekka

One of the people I email back and forth with quite a bit is Gurpreet Narang. Here is his write-up on Journal Communications.

Gurpreet Narang's Report on Journal Communications (JRN)

And now my thoughts.

You're absolutely right when you say:

On second thought, am I barking up the wrong tree here. Should I focus on the intangibles? I’m pretty sure the company is at least worth its book value (including the intangibles).

What got me to think about this was your article on Asset-Earnings Equivalence. Simplified I just see a lot of assets that have been historically successfully converted into cash (ok so there have been a couple of crappy acquisitions as always the case). 

That's really where you turned your thinking in the right direction. Asset-earnings equivalence is the way to understand Journal Communications (JRN). This is both good and bad. On the good side, the asset values – when you actually go out and look at what radio stations and TV stations sell for – are well above the value of the company's stock in the market.

But now the bad news. A company doesn't just earn money on its assets. Its earnings often become more assets. Over time, earnings are reinvested in the business as assets. This is not true of all businesses. The best businesses do not require much reinvestment. But – even when a company does not require reinvestment – management often chooses to reinvest in the field it sees itself operating in.

Many companies don’t define themselves in terms of what drives their profits. We call Google, Microsoft, and Apple tech companies. Really, Google is an advertiser supported media company. Microsoft is a business services company. And Apple is a luxury consumer goods business.

That’s how they make their money. But it’s not where they intend to put their money. They see themselves as tech companies. That tells you what new assets they will buy with their old earnings.

One of the concerns with any business is where the cash thrown off by the assets will eventually end up.

I have no special love for dividend paying stocks. But I do like it when you know – or think you know – where a company will put its cash. I write about a company like Birner Dental Management (BDMS) or Omnicom (OMC) or Fair Isaac (FICO) because I think I know the assets they have and the cash flows they will produce. That’s true.

But there's a bigger point. I think I know where they will put that cash. I think investment outside of their narrow field will be limited. I think BDMS will pay dividends, buy back stock, and buy or open some dentist offices every year. I think Omnicom will acquire some ad agencies – but will ultimately decide it can't reinvest most of its earnings. I definitely think that is true at FICO. Especially under the management that came in a couple years back.

What does this have to do with Journal Communications?

Everything.

Journal Communications is named for the Milwaukee Journal Sentinel. It is largely owned by employees. It only became a publicly traded company – with different classes of stock – in the last decade.

This is a business tied to newspapers. If you could separate that newspaper I would feel fine about the business. If you had Warren Buffett or Henry Singleton running the place, I'd feel fine.

The theory that you could reallocate cash flows from the newspaper, radio, and TV stations into buying more TV stations – that’s a great theory.

The math on that theory works.

But it's a theory. And I worry that it won't pan out in practice.

The key here – as in my Barnes & Noble (BKS) mistake – is the human element.

Just how much were they willing to sink into the Nook? As it turns out, B&N seems willing to sink years of free cash flow from the stores into the Nook if that's what it takes. They'll end up spending a good portion of the entire market cap of the company on this device. And you may have noticed Amazon came out with something even newer and better called the Kindle Fire. Amazon will keep doing this every year. Barnes & Noble will need to spend a lot to stay in place. That’s not the kind of business you want to own.

It will earn a lot. But then it will go out and blow those earnings.

We have the same sort of problem here.

The newspaper is making money. But it won't keep making money.

Newspapers in the U.S. only work as dominant local papers. They are advertiser supported. The death of classified advertising as much as circulation declines killed these papers.

This is sometimes misunderstood. People say that you have to make Americans learn to pay for their news again. The problem with that idea is that Americans never paid for general news. No one in the U.S. actually paid for the cost of their news. Subscribers paid maybe 25 cents per dollar of a newspaper company's revenues. That's less than half what it cost to produce the paper. You would've had to more than double the price of papers just to run them as non-profit enterprises. It was never about readers alone. Readers never valued newspapers enough to make them profitable. Advertisers valued readers. And newspapers had readers. So advertisers valued newspapers.

It was about having the biggest megaphone in town. And renting that megaphone out to advertisers. That's how profitable papers worked.

Online media works the same way. The business of Google, Facebook, etc. looks exactly like the business of local media. It just isn’t local. But you still have to be either broad and dominant or narrow and necessary.

The Milwaukee Journal Sentinel was broad and dominant. It was the Buffalo Evening News of Milwaukee.

That’s changed. The advertisers have moved on. The readers have moved on. The paper is making money for now. But it’ll start losing money soon. It could conceivably lose a lot of money. Exactly how much money it loses depends on how much the parent company is willing to subsidize losses in the newspaper with profits in TV and radio.

That's the question you should focus on here.

Do I understand this company? Its management? The culture?

How do they see themselves?

Do they have an interest in running a money losing paper for years and years as long as shareholders can subsidize those losses with TV and radio?

That's the question.

As for the value, it definitely exceeds the stock price.

If you had control of the company, you could profitably increase its value far beyond the current market cap. All you need to do is starve the newspaper, keep the balance sheet clean (a big advantage over JRN's competitors), and take the cash flow from radio and TV and direct it away from newspapers and toward intangible media assets that might actually hold their value over time.

This news about McGraw-Hill selling their TV stations to Scripps for $212 million might help you value that part of JRN's business.

Scripps says the effective price is really $190 million because of tax benefits. Scripps also says this is 8 times cash flow.

I would look at the price-to-sales multiple for something like a TV station. Free cash flow margins are very high at TV stations. The amount that needs to be reinvested is minimal. It's like having a government charter to exploit an area.

The multiple here is basically 2 times sales. If you believe Scripps about tax advantages the $190 million price tag is 1.96 times the $97 million in revenue those stations had. We can apply the same roughly 2 times multiple to JRN's TV stations – which had revenue of $105 million last year – and get a value of about $210 million for the TV stations JRN owns.

That just gives you some idea of how much these properties might be worth. You can do the same thing with the radio assets by searching Google News for reports of radio station sales or by checking the enterprise value to sales ratio for pure play radio station companies in the U.S.

All of these companies are heavily indebted. That's one of JRN's big advantages. Almost no one who just owns TV stations or radio stations in the U.S. has a clean balance sheet. They are totally unprepared for any long-term downward trend in station revenues. And they may become motivated sellers at some point.

This would be a big plus for JRN. If they were going the route of shutting down the newspaper when its time came and focusing on other media assets.

That’s the big question in this investment.

It's easy to fool yourself into thinking people will do the rational thing. Businesses are alleged to be much more rationally self-interested than they really are.

The truthth is: businesses have crazy hopes and fears just like the rest of us.

And they can be just as self-destructive when their identity is threatened.

Talk to Geoff About Journal Communications (JRN)

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