China's Next Commodity Binge

Despite its five-year, 1,250% run, uranium isn't even close to peaking. In fact, from a fundamental standpoint, it's a bargain.

Dwindling supplies, coupled with surging demand, could push prices substantially higher over the next 6 to 12 months. And as the cost of production remains relatively fixed, companies like Cameco (NYSE: CCJ), the world's largest uranium producer, are looking ahead to record profits.

To be sure, the pursuit of an alternative to fossil fuels has provoked an unbridled increase in demand for this power-rich commodity. And much of that, of course, comes from China…

Yet Another Commodity "Gap"

China's prolonged growth spurt has created a number of profit opportunities in recent years. In the commodities market, they've come in the form of wide supply and demand gaps.

In the past three years, for example, China's:

Insatiable demand for steel caused prices to double. And investors made 553% on international Mittal Steel Company in 13 months.

Copper requirements pushed Phelps-Dodge, the world's largest miner, up 253% in 16 months.

Voracious need for oil drained supply from OPEC and pushed prices up by 63%… Investors in Valero Energy, the nation's largest refinery, made a tidy 431% in 24 months.

Coal demands launched Fording Canadian Coal 268%.

Aluminum demands, to supply its soaring appliance and auto factories, pushed Empire Resources higher by 1,257%…
If you didn't cash in on these opportunities, uranium is your "second chance."

A $50 Billion Nuclear Initiative

The tide of global opinion has turned toward a solution for climate change, and as the world's second largest contributor of greenhouse gas emissions, pressure has been put on China to clean up its act.

The health of the Chinese population is suffering from densely contaminated air. China burns more coal than the European Union, United States, and Japan combined, and pollutants from coal-fired power plants account for approximately 400,000 premature deaths a year.

So it comes as no surprise that China is making a massive effort to embrace alternative energy sources like nuclear power. In addition to the nine nuclear reactors already operating in China, the government in Beijing is looking to build 30 more plants.

That's the largest nuclear power initiative ever undertaken, and the price tag is likely to exceed $50 billion USD. For its money, China would end up with 11% of the world's nuclear energy capability.

What this all adds up to is a huge run on uranium…

At the end 2003, when China first announced its plan, uranium was valued at $14.50 per pound. Now it sells for $133 - a 820% increase. And it's not done yet…

According to the Australian Foreign Ministry, with whom China has been negotiating, imports of uranium to China are set to increase from 2.5 million pounds per year, to an unprecedented level of 44 million pounds per year. That would be an increase of 1,760%, and close to one-quarter of the world's total uranium supply.

Unfortunately, supplies are running out…

The Commodity Crunch Leading To Record Profits

The world's leading uranium-mining countries have both seen a decline in production in recent years. Between 2005 and 2006, production has dropped from 11,628 tons to 9,862 tons in Canada, and from 9,516 tons to 7,593 tons in Australia.

Last year, the world's largest undeveloped uranium deposit (Canada's Cigar Lake mine, owned by Cameco) was suddenly rendered useless by a flood. This disaster put a halt to the extraction of 7 million pounds of uranium that were expected to be made available this year. Even worse, another 12 million pounds of uranium will come off the market through 2009.

What used to be a uranium surplus has also evaporated…

In 1993, the United States and Russia agreed to dismantle nuclear warheads left over from the Cold War and use the uranium to power nuclear reactors. This resulted in an excess supply of uranium for more than a decade. Now, more than 80% of that excess has been used up.

The industry's leading journal, The Uranium Market Outlook, has stated that above-ground uranium is at an all-time low, citing 30 years of underinvestment, stringent regulations, and an overall lack of exploration of uranium deposits.

International Nuclear, Inc., has reported that commercial reserves of uranium fell by 50% from 1985 to 2003. It has also reported that in 2004, only 54% of the uranium consumed in the world came from mining. The rest came from the depletion of existing reserves.

Countries like Japan and France rely heavily on uranium as a power source and are determined to secure supplies. But China's future demand remains a challenge.

There simply isn't enough uranium to satisfy the world's current needs. Indeed, $133 a pound may seem cheap in a matter of months.

Golar LNG

Traders should concentrate all their long bets in the transportation sector around international shipping and avoid any stocks dependent on domestic traffic. One name that we find interesting here is Golar LNG , which is an international liquefied-natural-gas shipper. The company has seen an upswing in business and shipping rates from Asia.

Golar LNG

Click here for larger image.

GLNG has recently broken out of consolidation formation and surged higher. What looks interesting in this chart is the bullish continuation pattern off of the spike in the stock last week. This suggests that GLNG may be getting ready to make another push to the upside. It has moved quite a bit in the last month, so conservative investors may want to sit this one out, but traders who are looking for an aggressive play should consider GLNG at these level

Golar Enters Lucrative Market

September 21, 2007: 08:05 PM EST

Sep. 21, 2007 (Investor's Business Daily delivered by Newstex) --

Transporting fuel overseas takes special equipment and handling skills, so experience matters. Golar LNG (NASDAQ:GLNG) GLNG has been offering its marine transportation services for more than 35 years.

The Bermuda-based firm traces its roots back to 1946, when Gotaas-Larsen Shipping was founded. It entered the liquefied natural gas (LNG) business in 1970 after being acquired by Osprey Maritime.

World Shipholding now owns a majority stake in Golar. It first started buying the company in 2000.

The shipping firm has been expanding into more lucrative markets. Golar recently signed a contract with Petroleo Brasileiro (NYSE:PBR) PBR, then converted two of its LNG carriers into floating storage and regasification units (FSRU), which command a much higher day rate than traditional shipping.

The day rate for FSRU is more than $100,000 vs. $65,000 per day for traditional shipping services, according to Friedman Billings Ramsey, which began covering Golar earlier this month with an outperform rating.

Branching out may serve the company well. Two companies, U.K.-based BG Group (NYSE:BRG) BRG and Indonesia's Pertomina, made up more than half of Golar's 2006 revenue with six long-term contracts.

Cummins Inc. CMI

25 October I am flabbergasted by the reaction in Cummins Engine (CMI) today (as well as NII Holdings (NIHD

Precision Castparts Corp (PCP)

Precision Castparts Corp.
By Alex Kolb
Oct 26, 2007
Precision Castparts Corp. (PCP) is doing a great job of returning value to shareholders as evidenced by PCP’s return on equity (ROE) of 26%. This figure is more than double the industry’s average of 11%. The company recently delivered fiscal second-quarter net income of $1.68 per share, surpassing last year’s $1.03 and exceeding the consensus estimate by two cents. PCP’s earnings per share have outpaced Wall Street estimates over the past five consecutive quarters.

Full Analysis

Precision Castparts Corp. is a worldwide manufacturer of complex metal components and products. The company is a market leader in manufacturing large, complex structural investment castings and is a leading manufacturer of airfoil castings used in jet aircraft engines. In addition, the company has expanded into the industrial gas turbine, fluid management, industrial metalworking tools and machines and other metal products markets.

The company recently delivered fiscal second-quarter net income of $1.68 per share, surpassing last year’s $1.03 and exceeding the consensus estimate by two cents. PCP’s earnings per share have outpaced Wall Street estimates over the past five consecutive quarters.

Analysts are upbeat on the company. Current third-quarter earnings forecasts of $1.71 per share are five cents higher than last week’s estimates and six cents ahead of the analyst expectations that were issued two months ago. Full-year projections for the year ending March of 2008 stand at $6.86 per share, compared to last week’s expectations of $6.78. Two months ago, the consensus estimate was pegged at $6.74.

Precision Castparts Corp. offers a dividend yield of 0.1% right now. This is higher than its industry average dividend level of 0.0%.

The company is doing a great job of returning value to shareholders as evidenced by PCP’s return on equity (ROE) of 26%. This figure is more than double the industry’s average of 11%.

PCP Precision Cast Parts

If Precision Castparts is added to the S&P 500, about 12 million shares of the company would have to be bought by funds that replicate the performance of the index, the analyst wrote, adding that he expects the shares to rise as high as $130.

The Portland, Oregon-based company fell $1.06 to $113.98 at 4 p.m. in regular New York Stock Exchange composite trading. They have rise 90 percent over the past year.

Globally, the recent targets have focused on the non-sheet segment, in favor of structural steel products used in non-residential construction and the energy markets.



Zacks Equity Research submits: Precision Castparts Corp. (PCP) manufactures metal components and products for aerospace, power generation, general industrial and automotive markets. It operates in three segments: Investment Cast Products, Forged Products and Fastener Products. Also, the company was added to the S&P 500 in late May.

On May 9, the Zacks #1 Rank stock reported fiscal fourth-quarter earnings of $1.39 per share, up from 74 cents in the year-ago period and 12 cents above expectations. Continued strength in the commercial aerospace market drove revenues to $1,546 million, up 64% from the prior-year. All segments reported double-digit percentage increases in revenues. Investment Cast Products reported a 13.5% increase in sales to $477.3 million. Forged Products increased fourth quarter sales by 201.5% to $727.8 million. Lastly, the Fastener Products segment reported sales of $341.4 million, up 21.8% from last year.

A portion of the company’s most recent profits have been due to a successful acquisition strategy. Mark Donegan, CEO, commented, “Special Metals has certainly performed well beyond our initial projections and we have solid plans in place for continued upside. The company will remain relentlessly focused on cash…providing a solid platform for further profitable growth.”

On Jun 18, Precision Castparts announced that it will acquire Caledonian Alloys Group, a Scottish company that recycles nickel superalloy and titanium for the aerospace and industrial gas turbine industries. The acquisition is expected to close in the second quarter of fiscal 2008 and will add immediately to earnings.

Following the company’s sixteenth consecutive earnings surprise, full-year fiscal 2008 estimates were increased by 52 cents to $6.04. Since then, estimates have been raised two additional times, most recently by three cents to $6.08. Fiscal 2009 projections have been guiding higher as well and currently stand at $7.02, implying year-over-year earnings growth of 15.5%. Furthermore, the company is ranked number one out of 26 companies in the Aerospace-Defense Equipment category.

Over the last four years, PCP has returned an average of 60.2%. This impressive trend is looking to continue as PCP has climbed over 55% year-to-date and is trading against record highs. In support of renewed momentum, the MACD line made a convincing cross above the signal line on Jul 2:

Precision Castparts (PCP) makes metal components and products used in aircraft engines, industrial turbine engines, airframes, medical prostheses, and other industrial applications. If you're looking for the next big thing of the information age, this is not the stock for you. Investors looking for a well-established yet fast-growing business, on the other hand, might find Precision Castparts of interest. In its last quarterly earnings report, the company reported a 69% increase in earnings for the latest quarter on a 62% gain in sales. At $103.88 currently, the stock is up nearly $40 since we wrote about it last July.

This is a fairly large company with sales of $4.79 billion in the past year. Precision Castparts has a market capitalization of $14.2 billion. Profits are large as well, with the company expected to deliver earnings of $4.30 per share this fiscal year ending March 30. That's a 67% increase from ! FY2006 and up from $1.82 in FY2005. The consensus is for EPS of $5.41 next year.

Those are some big numbers driven by the cyclical upturn in the aircraft industry which it serves. The aerospace industry has very long and often severe ups and downs, so when the cycle starts to turn up as they are doing now, investors find stocks like PCP very attractive as they anticipate a multi-year boom for the business. Plane makers like Boeing (BA) and Airbus have received some big orders in the past few years, igniting a fire under aviation component suppliers.

Investors started pouring into this stock in early 2003. PCP has come from the low-teens then (split-adjusted) to triple digits now. Fortunately, Precision Castparts has the numbers to back up that performance. Earnings have averaged 64% annual growth over the past five years. The stock is trading at a Price/Earnings (P/E) ratio of 19.2 using for ward 12-month estimates.

In addition to the rebound for the commercial aerospace industry, military spending has been a source of strength for aircraft component suppliers. There is concern about the health of the U.S. airline industry, though. Most of the new plane orders have been from European and Asian carriers. The U.S. airlines are in very strained financial positions, so bankruptcies and consolidation are the order of the day rather than orders for new planes.

For the next few years, though, the business outlook for Precision Castparts looks very rosy indeed. Some analysts expect the commercial aircraft recovery to extend over the next four to five years. Annual sales for Precision Castparts are expected to swell to $5.3 billion for the fiscal year just ending and $6.2 billion next.

The company raised its dividend several times in the last two years, but it's not a high-yielder at just 0.10% currently. Income potential isn't what will draw investors to this stock, though, it's for those who are looking to the catch the powerful wave of a recovery in commercial aerospace and the big profits that a supplier like PCP can earn. This stock has already come a long way in the past few years, though, so investors should have a firm awareness of where we are in the cycle and how much of the future boom is already priced into the stock.

Invest in uranium? Not yet

34% DECLINE SINCE JULY 1
Uranium spot price could regain lost ground by year end - Haywood

Haywood Securities forecasts that, while uranium spot prices will continue to weaken “a tad more,” prices could regain much lost ground by year end.

Author: Dorothy Kosich
Posted: Friday , 24 Aug 2007

RENO, NV -

In an analysis published Thursday, Canada's Haywood Securities predicted that, by year end, the spot market for uranium could regain some of the ground it has lost since the metal reached a high of $136 in mid-June.

Analysts J.W. Mustard and Chris Thompson said the rapid price increase from April to June was generated more by speculative discretionary buying than by a demand from utilities companies.

Currently the spot price has declined 34% to the current $90/lb level. To compound the situation, the analysts noted that "as the utilities seem to have taken a collective summer break, in conjunction with a lack of discretionary buying, the price has a clear negative trend."

"Primary supply/demand issues have not changed over the past few months, and each week brings pronouncements of renewed emphasis on nuclear capacity to solve fundamental electrical needs," according to Mustard and Thompson.

"Perhaps a key insight into longer term trends is the possible impact of the recent spot price decline on those companies either at the advanced stage of development or in feasibility. With the market valuation of individual companies dropping by 35% to 50%, those most affected may curtail some expenditures, leading to a deceleration of project development-ultimately feeding into lower than forecasted long-term growth supply," they noted. "Also some companies seeking equity and debt financing may experience pushback, again affecting their project timelines."

"This, combined with production shortfalls year over year 2005 to 2006 and forecasted for 2007, upward price pressure is likely to persist for a longer period."

Haywood's analysts forecast that "while the spot price has weakened and could weaken a tad more, by the end of the year prices could regain much of the lost ground, setting the stage for a robust 2008 and beyond. With potential brownouts in some areas like India, it is possible that near-term spot could exceed the recent highs."

Meanwhile, Haywood's research found that since July 1, uranium producers have experienced an average 22% decline in equity value, compared to a 32% decline for explorers and a 37% drop for developers.

Canadian uranium miners Cameco (TSX: CCO) and Denison Mines (TSX: DML) have sold off 28% and 33% during the same time period, according to the analysts. Best performing producers during the period were France's Areva SA and Uranium One (TSX: SXR).

The analysts noted that "exploration companies, which participated the most in the upside caused by the rapid uranium price escalation, have corrected the sharpest in recent months. Share price performance within the exploration sector showed weakness even before the uranium spot price topped out at US$136/lb U3O8.

Now's no time to jump into uranium stocks. Here's a look at the fundamentals and why I'd wait for an opening later in the year.

By Jim Jubak

When speculative bulls collide with speculative bears, investors stand a good chance of getting crushed.

I think that's what's happening in the market for uranium stocks right now. On the hype, a big uranium stock such as Cameco soared 38% from Dec. 29 to June 15, and a more-speculative uranium miner such as First Uranium (FURAF) rocketed ahead by 81% from Jan. 10, its first day of trading, to May 22.

But recently, the bears have counterattacked. As of Aug. 15, Cameco had fallen 33% from its high, and First Uranium had fallen 34%.

I like to stand back in a battle like this to avoid being painfully trampled by one side or the other. And then when both are exhausted, I like to step in and buy on the fundamentals, maybe even at a bargain price. I think we'll get the opportunity to do that in uranium stocks later this year.

In the meantime, we've got some time to brush up on the fundamentals of the case.
Why nuclear is coming back

The bulls began running with what's being called the renaissance of nuclear power. Because of soaring prices for fossil fuels and calls for an immediate reduction in carbon emissions to fight global warming, the world is building nuclear power plants again:

• In August 2005, Finland began construction on the first nuclear plant to be built in Europe since 1991.
• China has started construction on four nuclear plants, begun planning on 23 others and announced proposals for 54 more.
• Globally, as of May 2007, 30 nuclear plants are under construction, an additional 70 are planned and 150 more are proposed.
• Even the United States is edging into the game. The Nuclear Regulatory Commission has granted two early site permits to U.S. utilities, and it looks like the Tennessee Valley Authority will complete its Watts Bar Unit 2, which was 80% finished when construction was halted in 1985, and become the first to bring new nuclear generating capacity on line in the United States.

Uranium bulls said, "Do the math." The world's 437 nuclear power reactors use about 67,000 metric tons of uranium each year. Uranium mines produced only 42,000 metric tons of uranium in 2005, with the rest of global demand being met from utility stockpiles or from decommissioned nuclear weapons.

Add the 30 plants under construction to the total, a 7% increase, immediately, and then add 220 not too far down the road, for a total increase of 250 reactors, or 57%, and even with the increased fuel efficiency of new reactors, you're looking at a huge shortfall in uranium production.

The shortfall gets even bigger when you take into account the projected decline in the amount of uranium available from decommissioned nuclear weapons over the next 20 years.
Frustration in Finland

No wonder that the price of uranium for immediate delivery -- the spot price -- had doubled in the 12 months that ended in July 2006 and doubled again, to $136 a pound, by late June 2007.

Or that uranium stock prices soared with it.

And then the bears bit back. Using, specifically, the horror stories surrounding the construction of the Olkiluoto 3 reactor in Finland, the very reactor that started the bulls running when it was first announced.

Construction of the reactor hasn't gone smoothly. Areva and Siemens , the French and German companies building the reactor, have had to reforge legs of the reactor and pieces of the pressure vessel. Substandard concrete has been ripped out and replaced. It's turned out to be harder to manufacture the structural steel plates for the reactor than expected.
How much demand for uranium?

As a result, the Olkiluoto 3 reactor, originally scheduled to start producing power in May 2009, is now projected to come on line a year and a half late, in December 2010. It's also going to be significantly more expensive to build than the $4.1 billion originally budgeted.

The extra time is crippling to projections for higher uranium prices, the bears have argued.

The case for higher uranium prices isn't nearly as straightforward as the bulls would have it. Higher prices for uranium will bring more uranium exploration, more uranium mining and more uranium supply. The effect of this new supply means that higher uranium prices depend on timing. If the addition of new supply lags the addition of new demand from new reactors, then the price of uranium will climb. If, however, the new supply comes on line before the new reactors do, then the price will tumble.

Cameco, a Canadian company that produces 20% of the world's uranium, projects a net increase of 77 nuclear reactors globally from 2006 to 2016 -- a much more conservative total than many bullish investors use. In the company's opinion, that will result in an increase in uranium demand of about 2% to 3% a year.
Plenty of uranium

In the long term, the world has plenty of uranium to meet that added demand -- and then some.

The world has about 4.7 million metric tons of identified uranium resources, according to International Atomic Energy Agency. In addition, there are another 10 million metric tons of more speculative resources and 22 million metric tons of unconventional resources. This entire total, 600 years of supply, can be profitably mined when uranium prices are at June's spot price of $130 a pound.

The international agency projects that production will increase by 60% from 2005 to 2010 if prices hold near $130 a pound. That's roughly a 10%-a-year increase in supply.

Of course, the bears say, if demand is rising at 3% a year and supply at 10% a year, the price of uranium won't stay at $130 a pound and some of that supply won't come on line. So far, it looks like the bears are right, as uranium prices have fallen in the past two months to about $105 per pound.
Peaks and valleys in uranium prices

The bullish argument for substantially higher prices from the peak at $136 a pound, the bears argue, works only if there's a temporary lack of uranium supply caused by a lag in getting new mines into production.

If you agree with the bearish argument, however, you get a very different scenario for uranium prices. To a bear, $136 marks a peak, and we're looking at a descent from here back to a sustainable price closer to $45 a pound by 2008.

Now mind you $45 a pound doesn't sound so bad, since uranium sold for $7 a pound not all that long ago. That is, until you realize that just about every analyst on or off Wall Street has a "buy" out on uranium stocks based on a continued climb in uranium prices. A new peak is priced into the current prices of these shares.

So, for example, RBC Capital Markets projects uranium prices will rise on scarce supply and robust demand to an average $120 a pound in 2007, up from $48 in 2006, and then climb to $145 in 2008 before beginning a gradual decline (as more supply comes on line) to $130 in 2009, $115 in 2010 and $100 in 2011.

Canaccord Adams sets the peak higher, at $166 in 2008, but says the drop will be steeper, too, to $81.25 in 2011.
I won't take the bulls' bet

I can find only a very few analysts who profess to anything like the bearish argument. On the other end of the spectrum, Desjardins Securities, another Canadian investment house that I'd put in the bearish camp, sees the recent decline in uranium prices continuing until prices fall to $45 a pound in 2008. Do I have to say that Desjardins finds uranium-sector big boy Cameco fully priced at current levels?

If you buy at today's prices, then, you're betting that everything the bulls are hoping for will go right and that the bears are wrong in all their doubts.

Sorry, bulls, but that's a bet I won't take. There's enough real trouble at Finland's Olkiluoto 3 reactor to put the bullish timetable for reactor startups in deep trouble.
Deeper problems

The delays at that reactor weren't caused by the bungling of some rogue bad contractor. They're symptomatic of problems in the nuclear renaissance story.

First, it's clear that the 15 years since anyone built a nuclear reactor in Europe have seen a major erosion of the engineering skills needed to build a reactor. Areva may have kept its hand in by servicing the huge fleet of operating reactors in its home country of France, but when it came to building a reactor from scratch, the company wound up working with inexperienced subcontractors in Finland because there just weren't any around with experience. And Finland is a country with four operating reactors.

The problem isn't limited to the Finnish subcontractors pouring the concrete. Areva has had trouble finding companies anywhere in the world capable of specialized work such as forging the steam generator tubes. There are only two companies in the world, one in France and one in Japan that can produce forged reactor vessels.

Second, the lack of experienced contractors and subcontractors will produce a huge bottleneck that will stretch out delivery times and drive up costs. The projected expansion of global nuclear construction capacity is staggering, from a recent five reactors a year to a projected 50 a year. This is at a time when the oil industry, the mining industry and projects for airlines, railroads and shipping companies are all drawing upon the same pool of construction engineers and limited supplies of the same raw materials.

Areva just revised the cost of its new reactor at Flamanville in France by 10% due to rising costs of raw materials. And remember, the bulk of new reactors planned for construction over the next few years is in Asian countries, such as China and India, that are building nuclear-engineering systems from scratch.
Can nuclear industry clear the hurdles?

And, third, the nuclear industry is trying to reintroduce a new generation of designs at the same time as it ramps up construction. Some of these, such as the Westinghouse reactor with its passive gravity-controlled safety systems, do seem to mark a huge advance in reactor safety. But no one has ever built one of those reactors or one of General Electric's new-generation designs.

Even the relatively conventional Areva design incorporates enough new features that Finnish regulators say that they didn't have a detailed design of the project when Finnish utility TVO signed the contract.

For the bullish case for the price of uranium mining stocks to play out from here, the nuclear industry has to cleanly clear all three of these hurdles -- and on time. I just don't see that happening, and I don't like the idea of risking my cash in these stocks priced as if it's certain that the industry will win that trifecta.

On the other hand, I certainly wouldn't mind picking up shares of Cameco and other uranium miners after the bulls and the bears exhaust themselves and leave the stocks at something like fundamental value. Somewhere around $23-$27 would be about right.