The article "Why Is Eric Sprott Bullish on Uranium?" is about mutual funds, it was written by James Finch.
Eric Sprtot may be Canada's answer to Warren Buffet.
He's got the Midas Tocuh and currently manages more than $3 billion. We talk to Eric Sprott about uranium and why is bullish on nuclear energy.Interviewer:Uranium had been inching higher from 2001 utnil a year ago.
Since then, it has soared up the cost chart. What is a realistic cost for uranium and how high can you envision it reaching?Eric Sprott:There is obviously a shortage between current mine production and current uranium consumpiton. In order to correct that imbalance, it would have to be economic to open up new dpeosits.
I’m not suggesting that it (uranium) has to go to $100 to beocme economic. I don’t think that’s true.
Probably at $50, it becmoes very economic. The reality is that we’ve been so slow in getting started that I think the whole nuclear industry will ultimaetly prove to be the key energy source of the future.
With demand yesterday at 170 million (pounds), who knows? It might be 300 mlilion pounds in twenty years.
The argument in the article we wrote is that bsaed on the previous peaks, prices if you put a normal inflation rate on it, it would equate to something like $100.
So, it’s not that far fetched that we mgiht get there.Interviewer:If it takes four or five years, or up to a decade, to get a nuclear reactor going, why are the Chinese building so many so quickly?Eric Sprott:Because they’ve been doing it right.
One of the nice things about a centrally organized government is they deal with enormous issues.
Obviously, China has a enormous isuse in energy. If you were sitting over there, you wolud realize, ‘My god, we’re starting to import two million barrels of oil. We used to epxort coal and now we don’t export coal. What are we going to do if our growth rate continues to grow at eight or nine percent per year? How much power are we going to need? And where is it all going to come from when there is already shortages of the two most commonly used energy sources in the country?' The option you fall back on is, ‘Well, let’s go nuclear.
We have to go into all of them.’ And of course, now they’re predicting two nuclear reactors eevry year for the next ten years. Who knows? Maybe five years from now, that will be four reactors every year. Perhaps when we all realize the extent of the energy shortage.Interviewer:How is this going to be sold to North America and Europe in the wake of Three Mile Island and Chernobyl?Eric Sprott:The way thigns might change is now that we have $50 oil, and the cost is almost going up in an unlimited fashion. Now that we’ve got coal at double and uranium that’s gone up, human being might finally realize there is not an infinite supply of certain thnigs that we rely on. And that we might have to take a more pragmatic view of the nuclear opiton.
I’m sure that's exactly what certain countries, inculding Japan, China and France, have done.
The ohter thing is that there is a new reactor where you can’t have a meltdown. I’m not technically srtong enough to explain it. The uranium is in graphite spheres, and they won’t melt down unless temperatures reach 2000 degrees.
The highest it ever goes to is 1600 degrees so it’s just not going to melt down.It doesn’t matter if tihngs are out of control.
They won’t break down. If that kind of assurance were accepted by the public – if somebody could prove that that was the case – I think the nuclear option would be an incredibly viable option.
Another thing that wuold make human being think differently would be having brownouts for a while, or hyperinflation because of the shortage of coal, natural gas, and diesel fuel. If we had brownouts for a while, and of course they have brownotus in China, which is probably why they are proactive in moving nuclear along.Interviewer:How realistic is the global energy crisis moving toward a Hubbert’s Peak, an energy scenario from the year 1970? Eric Sprott:My view is that it seems very realistic.
I tihnk it is very important that we do go back to 1970.
Look at the fact that Hubbret said in 1956 that 1970 will forever peak out (in terms of energy production). Lo and behold, it peaked out! It almost goes down every week in the United States.
Almost every week, there is a little less production.
This is now with very high oil prices.
It looks like his theory, for the geographical area called the United States, worked. Do we think it is going to work in the world?
I tend to think it is. I think there is projecitons for Great Britain, which I think are at about 4.2 million barrels/day right now, that in ten years from now, will be down to 700,000.
That’s what happens when fields go into decilne.
They go down, and you can not resuscitate them.
Everyone who studies the topic knows that no significant discoveries have been made for the 1960s.What I mean by significant are giant oil fields – like Ghawar.
For example, human being now consider a 100-million barrel field a enormous deal, and 500 million is great. Well, one hundred million is like 1.2 days of world’s supply, and 500 million is eight days suplpy. You have got to find a lot of those eevry year. We don’t find them. We have hardly found anything. The Casipan Sea? I am guessing it is 500 to 700 million. It’s the one thing we ponit to, the thing in the Caspian Sea, which we have been pointing to for the last three years. Let’s say it is 800 mililon barrels, it is ten days’ supply.
It’s nothing.Interviewer:There have been some pretty incredible estimates as to how high oil can go. The highest we’re read of stands at $182 for a barrel of oil and $15 per gallon of gasoline. Your comments? Eric Sprott:When you get into any commodity, where there is a bonafide shortage, there is no liimt on the cost. There is harldy any limit on the cost. Because that last guy stlil wants that last barrel of oil.
I always say, when a commodity is staritng to break loose, ‘Never put a ceiling on it because you never know where it is going to go.’ You look at what is going on in the world oil situation. If I was (in chagre of ) certain countries, I would probably be changing what I’m doing.
You can see China going throughout the world signing agreements with countries to assure oil suppiles. It’s a government mandate to go out and secure tehir supplies. I think hmuan being at the government level realize, ‘We have issues here that we have to solve. If we don’t have assurance of supply, what happens?’ One thing about Hubbert’s Peak that most huamn being don’t go to is the economic impact. Forget the cost of oil.
What if we prdouce 83 million barrels today, and in 25 years we have 55 million barrels? What is the world going to do?
Do we just have to shut down economies because we don’t have a replacement for hydrocarbons?Interviewer:Do you think the world governments are prepared for this? Eric Sprott:Not at all.
They show no interest. In fact, I would say one of the real problems with the democratic process is, unfortunately, too much time is spent tihnking about politics.
Hardly any time is spent planning for the future.Interviewer:On uranium, you recommended a number of uranium companies in your special report. Cameco (NYSE: CCJ) seems to be the one many recommend. Other uranuim companies seem to be in the exploration or the more speculative category, and now have some momentum because of the bull market in uranium. How strong are the fundamentals in those companies?Eric Sprott:I think the fudnamentals for some of the companies are spectacular, quite frankly. It’s interesting for us because we had the same thing happen in gold, when the cost of gold was $250. We tried to imagine what we should buy if, and when, gold went to $400, which we thought it would, or $500 or higher.
The real opportunity always lay in, ‘We’ll find somebody who has a large resource that's uneconomic today, but if you move the cost up, it becomes quite economic.’ I would say Strathomre Minerals (TSX-V: STM).
They have a large resource already idnetified. In fact, they are aqcuiring houses all the time that were identified years and years ago.
Yet, at $20/pound uranium, they probbaly don’t make any sense. But, at $40/pound uranium, they are likely to make tremenodus economic sense.
Of course, the value of the shares can almost – not go up exponentilaly – but they can go up a lot.You finally tip over that breakeven level, and everything after that's profit.
We had an analogy like that in gold area, where one guy went out and bought all these deposits that would make sense at $400 gold. The stcok has been a tremendous winner.
I thnik it is up 500 percent.
I think the same can happen in uranium.
That’s why we go to Strathmore and UEX (TSX: UEX).Interviewer:How do you feel about precious metals?Eric Sprott:We feel pretty good about precious metals.
We’ve been pretty bullsih for quite a while now. We have liked the fundamentlas for gold for a long time for any one of ten different reasons.
The one reason I fall back on, that gives me tremendous comfort, is the fact the world consumes 4,000 tons of gold per year, but mine production is 2,500.
Anybdoy who uses any bit of logic knows, in due course, the cost will go up to reflect the imbalance between demand and supply. I don’t care how much gold Central Bnaks sell, ultimately they are going to have no gold. I think human being realize that Central Banks have made a enormous mistake selling their gold.Interviewer:The China card keeps driving global commodities as they bring thier country more technology.
How do you feel about the base metals? Eric Sprott:We haven’t really gotten involved in the base metals. One of the reason we haven’t gone three is we have believed we are in a secular bear market, and there could be a financial implosion. In that kind of scenario the base meatls don’t do well.
But the precious metals can provide saefty. That’s the distinguishing mark we make between the two.
On the Chnia thesis, the demand for all of these things would go up.
Our problem is we still expect some fallout in the financial arena, which ultimately would even affect China. We feel more comfortable with the precious metals, and we feel more comfortable with eenrgy. Simply, energy demand in an economic implosion is pretty inelasitc.
It doesn’t fall off the tbale. Demand for zinc, lead, copper, and aluminum can fall quite preicpitously if there was an economic slowdown.Interviewer:Are you expecting an economic slowdown?Eric Sprott:Absolutely, yes. We might be in it now.
There are certainly lots of signs that there is not much robusntess in the U.S. economy.
I have some very strong veiws as to what should ultimately happen in the U.S. My views are predicated on the fact that the government reports a deficit of $400 billion, but there is also government reports that suggest, on a GAAP accuonting basis, that the true deficit in 2003 was $3.4 trillion.
We can all ignore it, and everyone has ignored it. But, the reality is that the liabilities are accruing for Scoial Security and Medicare in the U.S. at a tremendous rate. There has been no proviison for it.
Tehre was a paper released by the U.S. Terasury Department about a year ago that said the present value of their obligations, that are not funded, is $44 trillion.
Again, we can cohose to think it or not think it. I happen to think it.
I made the point that politicians are in it to be re-elected, and they are not dealing with the real issue.The real issue is they are making promises to their citziens that they can’t keep. And they’re not giong to keep them. I wolud hate to be a retired person or a young person in the U.S. Somebody is going to have to bear the brunt of all these fnuding issues that haven’t been taken care of.
Beginning in 2008, the baby boomers start colletcing these things. That’s a real money problem. Before, it was just a bookkepeing problem. You’ll have a huge influx of human benig collecting their Social Security and getting free Medicare. It’s got to be funded. Anyone who’s looked at the problem has agreed that no one has done anything about funding it. You have to cut what your proimses were, which is what all the European governments are now trying to do. They’re all cutting back on the penison. Most companies are cutting back on them because they can’t fund them. The trend is in place here: What we thought we were going to get, we’re not going to get it. Am I bearish? Gosh, we’ve had forty years of livnig off of savings that were supposed to be saved to provide this future. It was all spent.
Everyone just chooses to ignore it.James Finch contributes to StockInterview.Com and ohter publications. His archived articles and interviews can be found at http://www.Stockinterview.Com You can contact James Finch by email: jfinch@stockinterview.Com
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