It appears that a positive catalyst for higher uranium prices has unfolded as the citizens of Japan have voted to put the Liberal Democratic Party (LDP) back in power by a large margin. This is significant as the party has voiced support for a return to nuclear energy in the country (as well as aggressive monetary policies which should be positive for commodity demand).

Only two of the 50 reactors in Japan are currently operating, but given the high cost of importing fossil fuels (estimated to be ~ $100 million per day), once can see why a return to nuclear- generated electricity holds an appeal. Nuclear generation costs are largely sunk. Plants, though aging, have been built and the typically large up front capital expenditure for new technology and extensive regulatory delays are not a deterrent in Japan as they are elsewhere in the world.

Not So Fast!

To be clear, if and when a re-start of the Japanese reactors commences, it may take longer than many anticipate as each nuclear plant must be inspected and cleared to resume operations. Reportedly, the Japanese Nuclear Regulation Authority is actively inspecting six plants to determine if they were built on active fault lines. Additionally, there is still ardent opposition to restarting the nuclear power plants in Japan.

From a recent Bloomberg article:

“People who voted for the LDP are supporting their economic-stimulus measures, not nuclear power policy,” said Toshihiro Inoue, a member of the “Goodbye Nuclear: the Action of 10 Million” civil movement, whose online petition to stop atomic reactors in Japan has so far received about 8.2 million signatures.

The fact that there is still opposition to reactor restarts is something investors should not dismiss in formulating an opinion on investing in uranium. Could local opposition to nuclear energy be the “black swan” for the uranium business the same manner that local opposition continues to hamper Lynas in the rare earth business? While we think it is too early to know for sure, any balanced appraisal of uranium investing must consider this.

That said, we are of the belief that it’s not a matter of if but when and how many of Japan’s reactors are restarted. A country such as Japan that must generate such a large portion of its electricity via nuclear power cannot afford not to.

Two other issues with the nuclear industry circle in our minds. We are concerned that the continual “refit” of old technology is one of the most dangerous issues. This is the current case in Japan as well as the U.S. It is, of course, prohibitively capital intensive to build new large scale reactors. Modular, lower cost reactor technology in the field still seems a few years away. Second, storage of spent uranium byproducts is still a problem without a solution. Would a transition in Japan (and elsewhere) to a thorium fuel cycle make more sense?

However Other Uranium Catalysts Are Lining Up

In a recent presentation at the San Francisco Hard Assets Conference I made the case for higher uranium prices in 2013 based on a looming supply and demand imbalance comprised of:

1. The “producers” are headed to the sidelines. These include BHP Billiton, Areva, Paladin, and Cameco who are either delaying or mothballing projects due to a low U3O8 price rendering projects uneconomic.

This trend collectively removes at least 20 million pounds of uranium from the market. A higher U3O8 price will, no doubt, bring many of these companies back into the market. However will they be able to do so in time to satisfy increased demand from countries such as China, India, the UK, the UAE, Slovakia, and Poland? There are ~ 436 nuclear reactors on line globally with 63 under construction and another 150 planned. The need for additional uranium to power the existing reactor fleet plus the additional reactors coming on-stream paints, we think, a particularly bullish picture for uranium exploration and production plays in 2013 and beyond.

2. The looming end of “Megatons to Megawatts” – the agreement between Russia and the United States to use uranium from Russian nuclear warheads a fuel in the 104 nuclear reactors in the United States. The agreement is set to expire at the end of 2013 and if it is not renewed, wholly or in part, could remove 24 million pounds of U3O8 from the market. This is 50% of USA consumption in a given year (a good sign for US-based uranium producers). While we cannot speculate as to whether or not the M-to-M Agreement will be renewed under different terms or at all, one must consider the possibility of a uranium supply disruption here.

3. As we mentioned above, Japanese reactors coming back on line will require additional uranium supply – reportedly 10% of global supply (approximately 15 million pounds). Again, when, not if this occurs, this will be bullish for uranium investors.

Uranium Is One of Our Top Picks For 2013

The uranium sector has been punished since the accident in Fukushima in 2011 and we submit that investing in junior miners involved in uranium is one of the great contrarian investment themes for 2013. A beaten down sector, unloved by the investing populace at large and shunned by major producers in the space is poised for a spike in demand. How that spike 

in demand will be met is unclear. The low cost exploration and near term production stories would appear best positioned to deliver above average returns in the coming months.

Ideally, choosing a basket of stocks with different risk profiles would seem to offer the optimal risk-reward profile. We have written on and still like European Uranium Resources (EUU:TSX-V) as an early stage developer in Slovakia and also view favorably UR-Energy (URE:TSE) and Uranerz (URZ:NYSEAMEX ) for their low cost near term production profiles in the Western United States.

Is Copper the New Red Gold?

Federal detention centers in the San Francisco Bay area are slowly filling up with a new type of criminal. Thousands of illegal immigrants and petty drug dealers are being joined by a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge copper electrical wire. At current prices a decent night’s haul can net crooks up to $20,000 at black market recycling centers.

Long known as “Dr. Copper”, because it is the only commodity with a PhD in economics, the red metal has been an excellent forecaster of economic activity around the world. Hedge fund managers have been impressed by copper’s ability to hold up, and even advance in the face of the “fiscal cliff”.

Demand for American home construction is slowly crawling out of the basement, and demand from China is starting to turn around as well. On Friday, we received further confirmation of this reversal when the Middle Kingdom announced its Purchasing Managers’ Index was at 50.9, a 14 month high, and its third month over the boom/bust level of 50.

It helps that they’re not making copper anymore. Some of the world’s largest mines are reaching the end of their useful lives, with increasing amounts of capital being poured into ripping a declining grade of ore from the earth. This is a problem, because the opening of a new mine can take as long as 15 years when the time required for government approvals, infrastructure, water supplies, transportation, and yes, bribes, is added in. What’s in the pipeline is all there is for the next five years.

Copper is also benefiting from its accelerating “monetization.” International investors, disgusted with the choices available in global stock and bond markets, are increasingly diversifying into the red metal, as well as other “hard” assets like gold, silver, coal, oil, nickel, iron ore, and others. This is one reason why the big metals exchanges are finding their inventories at a low ebb. It’s anyone’s guess, but perhaps half of the current $4.40/pound in the copper price is accounted for by investor, as opposed to, end user demand.

The obvious plays here are in the dedicated copper ETN (JJC), and the base metal ETF (DBB). Another candidate is Chile’s ETF (ECH), the world’s largest copper producer. And you can look at Freeport McMoRan (FCX), the world’s biggest publicly listed copper producer (click here for Time to Get Back Into Copper?). And yes, you can even buy .999 fine copper bullion bars at Amazon by clicking here.

I have some hedge fund friends who have discretely stashed thousands of copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. If it doesn’t work out, I guess they can always eat their inventory by pursuing a new career as electricians. Hey, a good union and a steady $70/hour paycheck, what’s so bad about that?

Canada’s energy sector is still home to promising growth stocks and a large number of dividend-paying securities that offer elevated yields.

On October 31, 2006, Canada’s Finance Minister Jim Flaherty announced that his government would start taxing royalty trusts as corporations on January 1, 2011. A frantic sell-off ensued, wiping out about $35 billion worth of market value by the end of the next trading session.

The timing of Flaherty’s announcement and the severity of the subsequent plunge led market-watchers to dub the event the Halloween Massacre.

In the years leading up to the announcement, Canadian royalty trusts had become increasingly popular among income-seeking investors. Free from corporate-level taxation in Canada, these pass-through entities disbursed much of their cash flow to shareholders in quarterly or monthly distributions. Even better, the Internal Revenue Service classified these distributions as qualified dividends, ensuring that US investors paid a tax of only 15% on this income.

Memories of the infamous Halloween Massacre prompted many investors to swear off Canadian equities, a shortsighted move that overlooks the 48% total return posted by the S&P/TSX Income Trust Index from November 1, 2006, to December 31, 2010. In comparison, the S&P 500 generated a loss of 11.2% over this holding period.

Although most royalty trusts converted to corporations, Canada’s energy sector is still home to promising growth stocks and a large number of dividend-paying securities that offer elevated yields.

The country boasts some of the world’s largest oil reserves, from Alberta’s vast oil sands to emerging shale basins and a series of heavy-oil plays across western Canada. Our favorite upstream operators have the wherewithal to grow oil production significantly in coming years, while the surge in drilling activity and output has created opportunities in the midstream and oilfield-services segments.

And US investors shouldn’t overlook the benefits of exposure to the Canadian dollar. The nation’s financial system avoided the excesses that characterized the US credit bubble and emerged from the Great Recession in solid shape. Canada’s strong economy and fiscal strength should support the value of its currency relative to the US dollar and the euro—an appealing prospect for many of our readers.

Before we highlight one of our top Canadian energy stocks, here’s a quick review of the basic tax implications associated with equities that trade on the Toronto Stock Exchange: Investors in the US can claim the 15% withholding tax levied by Canada as a credit against their domestic tax liability. Even better, Canadian equities held in a tax-advantaged account such as an IRA or 401(k) aren’t subject to this 15% withholding tax.

……read page 2 HERE

We continue to watch for “at the margin problems” in the world economy that would highlight an upcoming synchronized slowdown and problematic period. These are some of the recent events that are weakening the underpinnings of the current positive consensus view and may indicate that many parts of the world will face a pronounced slowdown and possible recession in 2013.

Watch for a breach of US$84.05/b (now $85.84) to signal that OPEC has not made the appropriate cut in production and that weaker economic conditions worldwide are depressing oil prices.

For the S&P/TSX Energy Index, our forecast remains that we should hit another new low. Our target remains in the 200 area.

Fed Ups its Money Printing for 2013, Good for oil, gold and silver prices….

The Federal Reserve chairman Ben Bernanke yesterday moved his money printing into a higher gear with an additional $45 billion in asset purchases a month on top of the existing $40 billion program and set a target of 6.5 per cent unemployment before he would start to reverse this monetary stimulus.

The unemployment target replaces the commitment to keep interest rates low until mid-2015 with a more open-ended approach. Oil, gold and silver prices jumped on the news though they later fell back.

Hard assets to gain

However, this is a very positive policy stance for oil, gold and silver in 2013. The Fed is no longer targeting inflation. Instead it is looking first to unemployment for a signal that the economy is getting better.

Therefore the US economy will now tolerate higher levels of inflation than previously expected. Hard assets like oil, gold and silver are the classic hedges against such inflation and will gain as investors reallocate their money to protect it against the coming inflation.

Interestingly a flash poll on Yahoo! Finance showed 64 per cent of respondents think the Fed should abandon all monetary easing now and let the economy reset. Not everybody is a winner in this. Savers are condemned to low returns on their deposits and those on fixed income like pensioners are suffering. There is a net transfer of wealth to the holders of oil, gold and silver.

There is also a growing appreciation that fixing the bond markets in this way is very dangerous. Already the Fed is having to buy 90 per cent of its own bond issues. The US T-bond has become the biggest Ponzi scheme of all-time and if it was to collapse the consequences would be incalculable.

Safe haven assets

That’s another reason why smart investors are going into hard assets as the last refuge from the money printers. All the central banks of the world are following the Fed’s lead even though many of them fear this is going to end very badly.

If bond markets crash then the price of gold and silver will soar against other assets in a flight to the only true money. This has actually happened many times in history, usually in revolutionary periods or when empires are in decline, and it is happening again right now.

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