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Hedge funds ignite uranium price

Date: Wednesday, December 20, 2006
Author: Andy Hoffman and John Partridge, Globe and Mail

The price of uranium surged to a record high this week, capping an extraordinary run for the radioactive metal, which has doubled in value over the past year on interest from hedge funds, financial firms and speculative buyers.

The spot price for the material used to fuel nuclear reactors jumped 9.9 per cent from $65.50 (U.S.) a pound to $72, the biggest weekly gain yet, according to Ux Consulting Co. of Roswell, Ga., which publishes a uranium spot price each week.

"One of the things you have now is that the hedge funds are involved in the market, so you have some additional demand," Ux Consulting president Jeff Combs said in an interview.

Hedge funds and financial investors now account for roughly a third of the uranium spot market purchases, according to Mr. Combs and other industry experts.

About 35 million pounds of uranium changes hands on the spot market each year, they said. Hedge funds and investment firms have purchased between 20 million and 25 million pounds of uranium during the past two years that is now sitting in licensed storage facilities.

"It's a feeding frenzy. Any time material becomes available on the spot market, you have all these types of players willing to pay whatever it takes," said Gene Clark, CEO of industry consulting firm Trade Tech in Denver. Mr. Clark said his firm is anticipating an eventual retreat in uranium prices as "fickle" financial investors find other areas to deploy their capital.

"If uranium starts to flatten out and another commodity starts to come up in some other market, they'll say 'let's take these dollars we have in uranium and throw them somewhere else,' " he said.

Dustin Garrow, the president of ZB Marketing, a consultancy based in Littleton, Colo., facilitated the auction last week that led to the record price. A single buyer purchased 260,000 pounds of uranium from Mestena Uranium LLC, a privately held producer based in Corpus Christi, Tex.

"I think the next deal we'll see $75 a pound," Mr. Garrow said an interview. He declined to identify the buyer, but said it was made by a "non-utility, non-uranium producer." He has conducted 11 auctions this year for Mestena, selling roughly one million pounds of uranium.

Among the first financial players to begin buying actual uranium was Robert Mitchell, who heads Adit Capital in Portland, Ore., and began buying on the spot market in 2004. Despite the surging price, he sees little risk of a significant increase in uranium supply in the short term. "This is not as easy a metal to mine as many had presupposed," he said.

In October, the world's largest uranium producer, Cameco Corp. of Saskatoon, said it would delay production at its Cigar Lake mine by at least a year because of flooding. The mine was supposed to begin production in 2008 and eventually supply up to 10 per cent of the world's uranium needs.

"The Earth's crust is abundant with uranium and at some point that supply will get to market. My point is, it ain't going to be any time soon," Mr. Mitchell said.

Slightly more than 108 million pounds of uranium were produced worldwide last year. Demand was roughly 165 million pounds, but the shortage was easily covered by existing supplies. By 2020, demand could top 220 million pounds, according to Trade Tech.

Investors have flocked to uranium stocks in the belief demand will soar as more nuclear power stations are built in what has been dubbed the "nuclear renaissance." China has said it wants to build two new nuclear plants a year.

Hundreds of uranium firms have sprung up in hopes of joining the handful of actual uranium producers. Some, including Paladin Resources Ltd. and sxr Uranium One Inc., are within months of production. Most juniors are years, if not decades, away from production.

"Nothing in this industry happens quickly, except the uranium price going up. It takes years to build mines and nuclear facilities," Mr. Combs said.