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Rick Rule: "The Price of This Commodity Goes Up — Or The Lights Go Out" (10/17/2018)

Rick Rule: "The Price of This Commodity Goes Up — Or The Lights Go Out" (10/17/2018)
By Sprott's Thoughts 2 years ago 10207 Views No comments

Oct. 17, 2018

“As a speculator, I’ve come to prefer questions … [that] begin with ‘when,’ not ‘if,’” Rick Rule, Chairman of Sprott U.S. Holdings explained. “And I believe that a question on the turnaround in the uranium market is a question where the answer begins with: ‘when’, not ‘if’.”

Sitting for an interview on the subject of uranium, Rule started by saying, “The IEA believes that the fully loaded cost to produce a pound of uranium (that includes that cost of capital), is about $60 [per] lb.,” Rule continued, “So right now the industry worldwide makes the stuff for about $60 [per] lb., and sells it for $25.00 [per] lb. — loses about $35.00 [per] lb., and of course, tries to make it up on volume. This doesn’t work well.”

“[So these] very low uranium prices have done a very important thing,” Rule explained. “They’ve begun to wreck supply.”

“Cameco, the most important uranium producer in the world, has shut down two very large mines, and they’ll be very expensive and time consuming to reopen. The Kazaks have reduced their capital expenditures which have reduced their production by about 10% — so we’re beginning to see supply destruction in the uranium space.”

Discussing the consequence of supply destruction, Rule added that, “When you have destroyed productive [mine] capacity, it can take as much as ten years to restart a mine — [and] it commonly takes 20 years to start a new mine between permitting, financing and construction.”

“So when you balance the supply and demand equation with supply destruction — the upside that you can see in commodity prices is much greater than otherwise would be the case,” Rule added, “because the industry doesn’t have the opportunity to increase supply [easily], relative to demand.”

In the case of uranium, the price response can be potentially explosive, “because the price of [uranium] is almost irrelevant in terms of the value of the [final] product produced. If you look at the cost of uranium as a component of the price of finished electricity from a nuclear power plant — it commonly runs between 3%-4% of the finished power price.”

“[So] if you and I have spent $5 billion on a power plant, and we’re using a million pounds of uranium a year … if the price of that uranium doubles … from $25 [per] lb. to $50 [per] lb. … it doesn’t matter at all, relative to the capital that we have already invested in the plant.”

Discussing the demand side, Rule reminded that, “For countries that think they’re wealthy enough to not have to rely on nuclear power, like the United States, nuclear power still provides 15% of baseload power — importantly it’s non-carbon generated power, so in an era where there’s concern about global warming, where you have a difficult time building new oil or gas or coal powered plants, uranium is part of the energy future, but importantly — it’s part of the energy present.”

As a final comment on the speculative appeal of the uranium market, Rule noted that, “If you have a circumstance where you know uranium is part of the energy future, and you know the industry loses money on every pound of uranium it produces, the question you have to ask yourself is: Will the price of uranium go up — or will the lights go out?”

To watch the full video interview with Rick Rule, Chairman of Sprott U.S. Holdings, Click here.

Sprott's Thoughts

Sprott Global Resource Investments Ltd. is a wholly-owned subsidiary of Sprott Inc., a public natural resources investment management firm listed on the Toronto Stock Exchange (Symbol SII). Sprott Money is pleased to bring selected writings from the financial experts at Sprott Global to our readers from their newsletter, Sprott's Thoughts.

The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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