[NukeNet] Uranium Speculators Drive Up Price - Irking Utilities

[Mike Ewall]

New Exotic Focus For Hedge Funds: Uranium Market Speculators Drive Up 
Price, Irking Utilities; Adit Capital's Big Bet

Wall Street Journal
By ANN DAVIS
March 5, 2007; Page A1

In a new type of nuclear-arms race, hedge funds and other 
institutional investors in search of higher returns are competing 
with energy companies to amass scarce fuel-grade uranium, hoping to 
profit from revived interest in nuclear power.

The intense quest for uranium by speculators has sparked a debate 
over private investors driving up the price and increasing the 
scarcity of the world's most sensitive natural resource.

Since investors first delved into the market two years ago, the price 
of processed uranium yellowcake powder -- the most commonly traded 
form of processed uranium -- has skyrocketed more than fourfold, from 
about $21 a pound, traders say. They say uranium prices climbed to 
$85 from $75 in February due to bidding for supplies offered by a 
tiny mining company in Corpus Christi, Texas, Mesteña Uranium LLC. 
The privately held company regularly includes hedge funds and other 
speculators in sales.

Uranium isn't traded on any exchanges. The somewhat infrequent sales 
of the commodity in the open market are private, so the price depends 
on the terms of any given transaction.

Financial investors aren't licensed to possess the radioactive 
mineral, which is subject to tight government controls aimed at 
keeping it out of the hands of terrorists and rogue states. Instead, 
several of those investors have secured access to ownership rights of 
material stored at licensed repositories in North America and Europe, 
exploiting legal channels previously used only by utilities and suppliers.

But even with only paper rights to the material, hedge funds are 
exacerbating what was already the biggest nuclear-fuel supply crunch 
in decades, according to utilities, miners and large traders. The 
market represents the latest corner in which hedge funds -- private 
partnerships that cater to wealthy investors and large institutions 
-- are seeking outsize returns, an increasingly challenging task as 
the number of funds multiplies.

Many funds say they are holding their uranium off the market because 
they expect the price to climb.

"They sweep the market clean. Every pound they can find," said 
nuclear-fuel broker Kevin Smith, who connects buyers and sellers of 
uranium for White Plains, N.Y., commodities-brokerage Evolution Markets.

Adit Capital, a small hedge fund in Portland, Ore., was an early 
uranium investor, buying millions of pounds for as little as $20 a 
pound beginning in December 2004, said Bob Mitchell, its founder.

It jumped into the uranium market after Mr. Mitchell noticed nuclear 
utilities allowing inventories to dwindle when the material was 
cheap, to avoid the cost of storing it. Meanwhile, some mining 
companies had been selling more future production than Mr. Mitchell 
figured they would be able to produce, and mines were closed when 
prices were depressed in the 1990s -- all evidence of a coming shortage.

QVT Financial LP, a $5 billion-plus New York hedge fund that was spun 
out of Deutsche Bank AG in 2003, won a big portion of a U.S. 
government stockpile of uranium gas at auction last August for $42.1 
million, people familiar with the sale said. Uranium gas is refined 
from yellowcake as part of the multistep process that produces fuel 
for nuclear power plants. (Making weapons-grade uranium involves a 
much more complicated process.)

Two new publicly traded uranium investment funds are adding to the 
competition. The funds are similar to gold and silver exchange-traded 
funds, raising money from investors in initial public offerings of 
shares to buy uranium.

Unlike other fuels and metals, there is no futures market for 
uranium, but the mined supply is so scarce that some utilities now 
are striking deals to buy it on future dates at whatever the 
prevailing market price is on delivery, said Mr. Smith. It's a 
perilous bargain: The uranium market hasn't had a down week since 
June 2003, according to Ux Consulting Co., a Roswell, Ga., 
price-reporting service.

Production shortfalls at uranium mines around the world are helping 
drive up the price, says Jim Cornell, president of Connecticut 
nuclear-fuel trading firm NUKEM Inc. Production fell last year, in 
part because a flood this past October collapsed the underground 
infrastructure of Cameco Corp.'s Cigar Lake project, a major mine in 
Canada, soon before it was to begin production.

The investors' arrival has spurred questions about the economic 
viability of nuclear energy as an alternative to fossil fuels, 
including coal, that produce global-warming greenhouse gases. About a 
quarter of the cost of producing nuclear power goes toward uranium 
fuel, and prices are skyrocketing just as safety concerns over 
reactors are ebbing. Although uranium is abundant in the earth's 
crust, bulls see prices climbing to $200 a pound before supply can 
catch up to push them back down.

Currently, some of the fuel used in reactors comes from U.S. 
Department of Energy stockpiles and a program run for the U.S. 
government by USEC Inc., a publicly traded Bethesda, Md., energy 
company originally formed as a government corporation, to convert old 
Soviet warheads back into fuel. The rest comes from private mining 
companies and other suppliers.

When selling uranium, the Energy Department makes no distinction 
between financial investors and end users, so long as it's held in 
authorized storage facilities. Bidders must disclose their identity 
and the nature of their business.

The Nuclear Energy Institute in Washington, which represents 
utilities and fuel processors and producers, asked the Energy 
Department on Feb. 5 to exclude anyone but end users from federal 
auctions. In a letter, the institute asked the government to "protect 
utilities that cannot procure sufficient uranium in the open market."

Marvin Fertel, senior vice president of the NEI, said in an interview 
that investor stockpiling isn't in the industry's best interest: "All 
it does is take what's somewhat scarce and make it a little bit 
scarcer," he said.

Financial investors say they are just seizing on buying opportunities 
that the nuclear industry missed. Moreover, industry players say, 
high prices are encouraging hedge funds and others to invest in 
mining companies, which will help finance increased production and 
possibly drive down prices.

The NEI's Mr. Fertel conceded as much. In the long run, "I think 
we're going to end up with a much better situation than we even had 
before," he said.

The market began taking off about two years ago. In May 2005, several 
months after Adit entered the market, Uranium Participation Corp. 
raised about $80 million for a uranium investment fund via an initial 
public offering on the Toronto Stock Exchange, and has raised roughly 
twice as much since. Managed by executives of the Canadian mining 
concern Denison Mines Corp., UPC controls more than 6.8 million 
pounds of uranium yellowcake or gas. It says its average yellowcake 
acquisition cost was $31.75 a pound.

A similar fund, Nufcor Uranium Ltd., went public last July on the 
London Stock Exchange's AIM small-stock market and now controls 2.3 
million pounds, the company says. Regulatory filings show that hedge 
funds invested in that IPO, including GLG Partners, Citadel 
Investment Group and QVT Financial LP.

Shares of both funds are trading at about 20% more than the current 
market price of their uranium, suggesting that investors see prices 
continuing to climb.

Ux says financial funds have purchased about 20 million pounds of 
yellowcake since entering the market in late 2004. That is roughly a 
fifth of the supply being mined each year. Such funds bought about 
25% of the uranium sold on the spot market in 2005 and 2006. They are 
husbanding most of their supplies, having sold only two million 
pounds so far, Ux officials say.

Today, while the value of some funds' uranium has quadrupled, Cameco 
and other large miners are stuck with commitments to sell future 
production for a small fraction of today's prices. In the last three 
months of 2006, Cameco got an average of just $22.35 a pound for its uranium.

Tension over the issue was evident at a February energy conference in 
Houston. After John Rowe, nuclear-power producer Exelon Corp.'s chief 
executive, addressed the gathering, a man in a rainbow-hued jacket 
rushed up to introduce himself as a potential seller of uranium.

The man was Mitchell Dong, a Cambridge, Mass., entrepreneur who last 
September launched the Solios Uranium Fund, which recently reported 
having assets worth $46 million.

"I know who you are!" Mr. Rowe shot back with a laugh. "Are you the 
biggest villain in the energy industry?" Mr. Rowe later explained in 
an interview that he believes hedge funds are helping run up uranium's price.

Mr. Dong declined to discuss his fund's recent activities. He told a 
newsletter last fall that he expected demand to exceed supply for 
five years. "We're going to buy it, hold it, and when the price is 
right we'll liquidate a position," he said.

Indeed, eventually "the price of uranium will collapse," said Adit's 
Mr. Mitchell. "I don't know when, but the mining companies of the 
world will get their act together. The guts of the trade was getting 
into it before anybody even knew you could. But the art of the trade 
will be getting out before the price turns over."

Write to Ann Davis at ann.davis at wsj.com1