This is the last of a three-part interview with Paul van Eeden (www.paulvaneeden.com) conducted on March 8, 2005 during the PDAC Conference. Paul, formerly Managing Editor for Doug Casey’s International Speculator and now the publisher of his own weekly stock alert service for high net worth investors, is one of the most original thinkers and analysts working in the resource business today.
Let’s change tacks a little bit, Paul. What are your thoughts on uranium?
PVE: I’m very bullish on uranium. During the 1970s, there was massive expansion of nuclear power production. Demand for uranium for these nuclear plants was increasing and supply wasn’t keeping up. The utilities started panicking because in a nuclear power facility, your biggest cost is the capital to build it. The actual fuel cost for uranium is a very, very small component of your production cost. So, to the utilities, it’s fairly irrelevant what the price of uranium is. What’s relevant is the fact that you cannot run out of fuel. In the ‘70s, the utilities panicked because they saw that current uranium mine supply was not keeping up with the growth in demand. They started buying uranium in the market and stockpiling it so that they wouldn’t run out. And the price of uranium obviously skyrocketed. Now, the interesting thing is that uranium price peaked in 1979 at an average price of $43 per pound. It peaked in 1979 because that was the first year that mine production met current demand. Right now, we’re consuming around 170 million pounds of uranium annually. We’re producing on the order of 80 or 90 million pounds. Let’s say we produce 85 and we consume 170. That’s 50 percent. We need to double uranium production before we meet today’s demand. And in the United States since 1979, uranium demand has increased 35 percent without one additional reactor being built.
Why is that?
PVE: Because the reactors, when they were built, were over-designed. And so they figured out that they could increase capacity. The utilization could increase. By the way, these uranium reactors were all slated to be shut down, but because they were so over-designed, they’re now finding that these things have a lifespan far in excess of original designs. Most of these things are giving extensions on their projected lives. About 16 percent of the world’s electricity is being generated from nuclear power. 20 percent of U.S. electricity comes from nuclear power. 25 percent of Japan’s electricity comes from nuclear. 40 percent for South Korea. 80 percent in France. I was flying through London and I picked up a newspaper and the front was an article that reported a study commissioned by the British government to figure out how they were going to meet the Kyoto protocol. The commission found unequivocally that there’s no way they can do it without going nuclear. Canada conducted a similar study with similar results. China has stated that it is their goal to get either 24 or 26 percent, I can’t remember exactly, of their electricity from nuclear in the next 20 years or so. They’ve also stated that they’re going to build between one and two nuclear power plants every year for the next 20 years.
That’s an incredible increase in consumption.
We’re 50 percent short of demand already. The uranium price will not stop rising until current supply meets current demand. Just like in the ‘70s. Nothing has changed – utilities still cannot run out of nuclear fuel. Nuclear power generation is increasing, not decreasing. The drawdown of U.S. government inventories has basically come to an end. We’ve used up probably 50 percent of U.S. government inventories over the last 25 years and I don’t think we’re going to see any further drawdowns. The U.S. now wants to become self-sufficient in the nuclear industry. That means production, conversion and enrichment all within U.S. borders. Right now, there’s no conversion facility in the U.S., but they’re building one. That means uranium is becoming strategically important to the U.S. If you think in the context of nuclear fuel economics, utilities will not allow themselves to get caught without nuclear fuel. The uranium price will rise until sufficient production comes to market to meet demand. At $20 per pound, which is about what we’re at right now, most uranium deposits are uneconomical. We’ll need to see $30 or $40 per pound to bring a significant amount of uranium into production. So, I think we’re going to see uranium go much, much higher. If you think about $43 in 1979, go back and adjust that for inflation. I don’t know exactly what the number is, but it’s probably somewhere between $80 and $120 per pound.
A figure of 10 years is often quoted as the time it takes to bring a uranium deposit to production. It’s not like you can just turn this stuff on overnight.
PVE: Easily 10 years. It’s not easy to bring any mine on-line. If you made a gold discovery today, by the time you’ve drilled it off, done your feasibility study, done your environmental impact study and got your permits, you’re probably 5 to 10 years down the road. And uranium is more difficult. Uranium takes longer because the environmental impact studies are more sensitive and the materials handling processes are more intensive.
But even to delineate a uranium deposit is extremely tough, isn’t it? We’ve been told it takes 300 drill holes just to locate a uranium ore body in the subsurface.
PVE: Well, that’s true in places like the Athabasca Basin [in Saskatchewan]. Those deposits are very high-grade, very small, and very deep. It’s not the same if you’re looking at near-surface, open-pit-type deposits. You can’t generalize – the Athabasca Basin is a fairly unique beast. Uranium, by the way, is far more abundant than something like gold. Finding uranium is not a problem. There’s actually a lot of uranium in the world. The problem is that most uranium deposits are not high grade like the Athabasca Basin, and so the economics of mining the uranium is what’s problematic. But those economics get fixed by higher uranium prices. If uranium goes to $40 or $50 per pound, there’s a lot of uranium that could come into production. We don’t have a shortage of uranium in the world. We just have a uranium price that’s too low to make these things viable. This is fairly simple arithmetic. The utilities will not allow themselves to run out of uranium, and most uranium is uneconomical at today’s prices, which means that the uranium price will rise until these things come into production. It’s as simple as that.
Isn’t it true that there’s a lot of known uranium sitting in the ground in the U.S.? In Colorado and Wyoming?
PVE: All over the western states.
Right. People know about these deposits and have been sitting on the claims for a long time in some cases.
PVE: They’re just uneconomical. The point is that there’s a lot of uranium. The price will rise until these things are produced.
Do you like the Athabasca Basin as an investment right now?
PVE: I think it’s great, but it’s tough to find good projects and it’s very expensive exploration.
It seems like everyone and their dog are up there now.
PVE: Right. And I don’t particularly like investing in the dogs. I’ll answer that question the same way I answered about Africa – I like the Basin a lot, but I haven’t found anything there to invest in. If I wanted to invest in the Basin, I’d buy Cameco.
In general, are there any companies you like right now that people can read more about in your newsletter?
PVE: What my newsletter is, is a running commentary on what I do with my own capital. I write about the stocks that I buy, I tell subscribers why I buy them. I tell subscribers when I sell them, and why I sold them.
Any new companies you’ve seen here at the PDAC that you’ll be looking at in more detail?
PVE: It’s tough to find good investments. There’s a lot of companies you can buy, and when the market rises, all boats float higher. You can throw a dart at the dartboard when the market is going up and have a reasonable shot at making money. But to actually find something that I want to put money in is a lot more difficult. There are a couple of things that have come up at the conference that are interesting.
If we do see a correction in the global economy, as you’ve mentioned may happen, and if base metals and a lot of other things come off, would that be a time to buy in while they’re cheap?
PVE: No. If we see a worldwide economic downturn, I wouldn’t jump into the commodities market. If that happens, it will be years before we see an upturn again. I would most certainly not be in a hurry to buy base metals. If we see a counter-cyclical rally in the U.S. dollar this year, which means the gold price in dollars drops, I would buy that. I would be an aggressive buyer.
Of physical gold?
PVE: Of any gold-related investments. I would be an aggressive buyer in the gold sector if we see a downturn in the gold price this year.
Is there better value out there in the gold companies given that we’ve seen the dollar gain some strength as of late? Are these juniors perhaps cheaper now?
PVE: There’s no such thing as value in the gold mining sector! People talk about value, but it doesn’t exist in the mining sector. The mining companies themselves are trading at two or three times net asset value. If I sell you a dollar for two or three dollars and you think that’s good value… hey, I’ve got a lot of dollars to sell you. In the junior exploration sector, there’s no such thing as value. It’s all speculation. With the small companies, you’re speculating on exploration success. With the mining companies, you’re speculating on the gold price itself. It’s all just gambling.
What strategy do you use then to pick companies to invest in?
PVE: It’s a gambling philosophy. It’s risk management. I invest in very, very risky businesses – almost exclusively these little exploration companies – and when you do that, the key is risk management. Doug Casey will tell you, and he’s said this many times, rule number one in investing is “Don’t lose your money.” That’s important. If you do invest in these little companies, you will lose money on some of them. The trick is to make more money than you lose. That’s why, as I said earlier, it’s so difficult to find companies that I want to put my own money into. There’s a lot of stuff here at the conference that I could put money into, but not much that I want to.
Out of all the companies here, how many would you see that look promising?
PVE: I’ve found one company that I’m very excited about and that I most certainly will talk about later in the newsletter, and I found a couple of other interesting ideas. Whether or not I’ll do anything about them, I don’t know.
One definite buy out of thousands.
PVE: If I find one good investment every two or three months, I’m actually quite happy. Four good investments a year is a good year.