ing to understand price formation and movement, is whether “secondary demand” is merely a minor perturbation at any given time in the market, or whether it is a major determinant of spot prices. And, if the latter, what impact does secondary demand have on long-term prices?

Before proceeding, let me state that I, personally and professionally—as well as TradeTech as an organization—have no inherent interest in which direction the uranium market moves. We are merely students of the market. We derive our income wholly from reporting and analyzing the market’s events and prices, rather than uranium brokering and trading or investing in nuclear companies. For that reason, our success lies in the ability to provide unbiased, accurate and detailed market information t

This past weekend, spot uranium prices jumped to $52/pound, as first announced by TradeTech LLC. Uranium miners were celebrating. When the spot price traded below $40/pound, some U.S. uranium mining projects may have been uneconomic. Because U.S. electric utilities have now begun purchasing above $50/pound, new hope emerges for many junior uranium development companies. The question is: Will uranium stay at these levels. To answer our question, we turned to Gene Clark, Chief Executive of TradeTech. At our request, he wrote the essay, which follows, describing what may lie ahead and whether or not investors should consider junior uranium stocks for investment purposes.

Gene Clark: Speculating on the $50 Uranium Barrier

On August 31, 2006, the NUEXCO Exchange Value soared through the $50 level for the first time in its history, reaching $52 per pound U3O8. The Exchange Value is the longest running price indicator in the uranium market – in continuous publication since August 1968. The last era in which the spot price was anywhere near this level was in the 1970s, when the Exchange Value peaked at $43.40. That price, however, equates to over $100 in today’s dollars. So, in real terms, the current price of $52 is only half-way to matching its historical high.

Although it is tempting to compare the two eras, the situation today is vastly different from that of the 1970s. The 1970s were characterized by spurious demand, minuscule secondary supply, and a huge world-wide excess uranium production capacity—left over from the U.S. military production-incentive program. But perhaps the most important factor was the total embargo on importation of uranium for use in the United States. In contrast, today’s market has firm and predictable primary demand, very large secondary supply, large secondary demand, and marginally adequate uranium production capacity.

The large secondary supply (uranium not produced from mines and mills in that year) is currently about 40% of world supply. It has such components as excess inventory, enrichment tails stripping, recycling of used fuel components, and—most importantly—dismantled Russian nuclear warheads.

Let me explain what I mean by “secondary demand,” since I believe this might be the first time this phrase has been used in our industry. We have historically treated “uranium demand” as the requirement for fueling nuclear power plants: for natural uranium, the base requirements for feeding the enrichment process required for most nuclear power plants; in the case of natural uranium reactors, the input for fuel fabrication.

This treatment of uranium demand, although historically not too inaccurate, has become na?ve, in view of the evolving sophistication of the market’s participants. This previous definition of demand can technically be labeled as “primary demand” and is also commonly referred to as “reactor requirements.”

Secondary demand, then, is uranium purchased from the market for purposes other than immediate use as nuclear power plant fuel. The real question, from the standpoint of trying to understand price formation and movement, is whether “secondary demand” is merely a minor perturbation at any given time in the market, or whether it is a major determinant of spot prices. And, if the latter, what impact does secondary demand have on long-term prices?

Before proceeding, let me state that I, personally and professionally—as well as TradeTech as an organization—have no inherent interest in which direction the uranium market moves. We are merely students of the market. We derive our income wholly from reporting and analyzing the market’s events and prices, rather than uranium brokering and trading or investing in nuclear companies. For that reason, our success lies in the ability to provide unbiased, accurate and detailed market information to

e Value soared through the $50 level for the first time in its history, reaching $52 per pound U3O8. The Exchange Value is the longest running price indicator in the uranium market – in continuous publication since August 1968. The last era in which the spot price was anywhere near this level was in the 1970s, when the Exchange Value peaked at $43.40. That price, however, equates to over $100 in today’s dollars. So, in real terms, the current price of $52 is only half-way to matching its historical high.

Although it is tempting to compare the two eras, the situation today is vastly different from that of the 1970s. The 1970s were characterized by spurious demand, minuscule secondary supply, and a huge world-wide excess uranium production capacity—left over from the U.S. military production-incentive program. But perhaps the most important factor was the total embargo on importation of uranium for use in the United States. In contrast, today’s market has firm and predictable primary demand, very large secondary supply, large secondary demand, and marginally adequate uranium production capacity.

The large secondary supply (uranium not produced from mines and mills in that year) is currently about 40% of world supply. It has such components as excess inventory, enrichment tails stripping, recycling of used fuel components, and—most importantly—dismantled Russian nuclear warheads.

Let me explain what I mean by “secondary demand,” since I believe this might be the first time this phrase has been used in our industry. We have historically treated “uranium demand” as the requirement for fueling nuclear power plants: for natural uranium, the base requirements for feeding the enrichment process required for most nuclear power plants; in the case of natural uranium reactors, the input for fuel fabrication.

This treatment of uranium demand, although historically not too inaccurate, has become na?ve, in view of the evolving sophistication of the market’s participants. This previous definition of demand can technically be labeled as “primary demand” and is also commonly referred to as “reactor requirements.”

Secondary demand, then, is uranium purchased from the market for purposes other than immediate use as nuclear power plant fuel. The real question, from the standpoint of trying to understand price formation and movement, is whether “secondary demand” is merely a minor perturbation at any given time in the market, or whether it is a major determinant of spot prices. And, if the latter, what impact does secondary demand have on long-term prices?

Before proceeding, let me state that I, personally and professionally—as well as TradeTech as an organization—have no inherent interest in which direction the uranium market moves. We are merely students of the market. We derive our income wholly from reporting and analyzing the market’s events and prices, rather than uranium brokering and trading or investing in nuclear companies. For that reason, our success lies in the ability to provide unbiased, accurate and detailed market information t

he U.S. military production-incentive program. But perhaps the most important factor was the total embargo on importation of uranium for use in the United States. In contrast, today’s market has firm and predictable primary demand, very large secondary supply, large secondary demand, and marginally adequate uranium production capacity.

The large secondary supply (uranium not produced from mines and mills in that year) is currently about 40% of world supply. It has such components as excess inventory, enrichment tails stripping, recycling of used fuel components, and—most importantly—dismantled Russian nuclear warheads.

Let me explain what I mean by “secondary demand,” since I believe this might be the first time this phrase has been used in our industry. We have historically treated “uranium demand” as the requirement for fueling nuclear power plants: for natural uranium, the base requirements for feeding the enrichment process required for most nuclear power plants; in the case of natural uranium reactors, the input for fuel fabrication.

This treatment of uranium demand, although historically not too inaccurate, has become na?ve, in view of the evolving sophistication of the market’s participants. This previous definition of demand can technically be labeled as “primary demand” and is also commonly referred to as “reactor requirements.”

Secondary demand, then, is uranium purchased from the market for purposes other than immediate use as nuclear power plant fuel. The real question, from the standpoint of trying to understand price formation and movement, is whether “secondary demand” is merely a minor perturbation at any given time in the market, or whether it is a major determinant of spot prices. And, if the latter, what impact does secondary demand have on long-term prices?

Before proceeding, let me state that I, personally and professionally—as well as TradeTech as an organization—have no inherent interest in which direction the uranium market moves. We are merely students of the market. We derive our income wholly from reporting and analyzing the market’s events and prices, rather than uranium brokering and trading or investing in nuclear companies. For that reason, our success lies in the ability to provide unbiased, accurate and detailed market information t

e have historically treated “uranium demand” as the requirement for fueling nuclear power plants: for natural uranium, the base requirements for feeding the enrichment process required for most nuclear power plants; in the case of natural uranium reactors, the input for fuel fabrication.

This treatment of uranium demand, although historically not too inaccurate, has become na?ve, in view of the evolving sophistication of the market’s participants. This previous definition of demand can technically be labeled as “primary demand” and is also commonly referred to as “reactor requirements.”

Secondary demand, then, is uranium purchased from the market for purposes other than immediate use as nuclear power plant fuel. The real question, from the standpoint of trying to understand price formation and movement, is whether “secondary demand” is merely a minor perturbation at any given time in the market, or whether it is a major determinant of spot prices. And, if the latter, what impact does secondary demand have on long-term prices?

Before proceeding, let me state that I, personally and professionally—as well as TradeTech as an organization—have no inherent interest in which direction the uranium market moves. We are merely students of the market. We derive our income wholly from reporting and analyzing the market’s events and prices, rather than uranium brokering and trading or investing in nuclear companies. For that reason, our success lies in the ability to provide unbiased, accurate and detailed market information t

ing to understand price formation and movement, is whether “secondary demand” is merely a minor perturbation at any given time in the market, or whether it is a major determinant of spot prices. And, if the latter, what impact does secondary demand have on long-term prices?

Before proceeding, let me state that I, personally and professionally—as well as TradeTech as an organization—have no inherent interest in which direction the uranium market moves. We are merely students of the market. We derive our income wholly from reporting and analyzing the market’s events and prices, rather than uranium brokering and trading or investing in nuclear companies. For that reason, our success lies in the ability to provide unbiased, accurate and detailed market information to our clients—those buyers, sellers, and investors.

Those who believe it is hopeless to analyze the markets may have adopted the point of view, expressed by the economist John Gay some 300 years ago:

The market’s mind oft shifts her passions, like th’ inconstant wind; Sudden she rages, like the troubled main, Now sinks the storm, and all is calm again.

But, is the uranium market really that incomprehensible? Have we made such little intellectual progress in the past 300 years that we cannot even try to understand the market?

In uranium, we have a commodity for which there is no underlying substitute. Uranium is used for fueling nuclear power plants—plain and simple. (Technically, an electric utility could choose to dispatch a coal-fired power plant or a gas-fired one instead of its nuclear plant, but that would not be economical until the uranium price reaches $200 for the coal alternative or about $750 for the gas alternative.) Given that we know the entire roster of nuclear power plants likely to be in operation over the next ten years, we have a good chance of being able to project the world “primary demand” for natural uranium, to within a ±15% variation, at the extreme.

But, there is a “secondary demand” just as there is a “secondary supply” in this market. In the long run, the market’s trend is driven by primary demand, balanced against the supply from both primary uranium production and secondary sources. But, in the short run, we may have a situation not unlike the classic quip about the statistician who drowned in a river with an average depth of three feet. Knowing the average doesn’t necessarily help in survival! Likewise, knowing the trend that uranium prices should seem to take does not necessarily result in sound market decisions.

So, what is the nature of this secondary demand? Some of its facets are straightforward, and some are not:

Over-purchasing (by utilities) from “take-or-pay” long-term contracts during periods of unexpectedly low nuclear plant performance; Purchases by uranium producers during periods in which market prices are below their cost of production; Over-purchasing from optional upward flexibility in long-term contracts, during periods when market prices exceed the embedded prices in these long-term contracts (“buy and hold”); Large primary producers making strategic purchases that act to prop up market prices for new sales or to leverage sale prices in their existing long-term market-price-related contracts; and Purchases by self-designated “hedge funds” to buy and hold for gains under anticipated future sales at higher market prices.

Given the intellectual acumen of today’s market participants, I cannot rule out other secondary demand categories that have not yet been identified. Also, I believe the above list is in increasing order of current influence on spot market prices.

I mention above that uranium has no substitute market—that is, no other significant use than as fuel for nuclear power plants. While this is true in a primary sense, in the secondary demand mar