Market Outlook Journal
by James Finch - Please email your feedback to jfinch@stockinterview.com
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August 4, 2006

Guest Commentary By Rudi Filapek-Vandyck Editor, FN Arena www.fnarena.com FN Arena supplies financial and economic news stories, analysis and commentary in the Australian and global financial markets. FN Arena - Passionate about Financial News FN Arena is building the future of financial news reporting at www.fnarena.com. Our daily news reports can be trialed at no cost and no obligation. Simply sign up and get a feel for what we are trying to achieve. Rudi Filapek-Vandyck Editor, FN Arena   Rudi on Wednesday Only a few months ago it seemed like the 2006 investment story would be simple and straightforward. After a few months of extreme bullishness, global markets experienced the correction that had become overdue as every cab driver and his dog were threatening to put all their savings in gold, uranium and several other commodities they'd never heard of but that were said would triple – at least - in price over the next few years. After that (or was it because of that?) we had to confront the inflation scare. Higher prices for commodities had finally caught up with the inevitable, but everything would remain just fine. At least, that's what the experts told us. Three months later I have to admit I am not so sure anymore. One of the reasons is the price of oil. Is the world underestimating the supportive factors underneath the price of oil? Well, for starters, ever since oil left the US$30s per barrel zone the global expert community has been slow to catch up with the new reality. It is not that long ago that many a securities analyst still put a long term price forecast of US$35 per barrel of crude oil through his or her sector valuation models. Most of the world has been in catch-up mode over the past three years and the process is still ongoing with a few experts having raised their price forecasts this week for the next two years. Expect more of them to follow in the weeks ahead. What this tells me is that inflation forecasts are likely to move higher as well. However, this is not just about oil. From the US, to Europe, to China and Australia input costs for businesses are squeezing margins. Prices for consumers will have to go up, or profits will come down. Company profits are already coming down. As pointed out by Merrill Lynch analysts this week, global expectations for corporate profits have now started to fall and it is likely that the process will yet gather pace. Contrary to what your instinct tells you, this is actually good news. What the world needs right now is slowing economic growth. It will reduce the upward pressure on prices, allowing central bankers to remain on hold, which will take away the constant cloud that hangs over global equity markets. China will have to slow down too. We all know what this means: even more volatility in the markets, especially on the commodities side. Under a best case scenario, call it Goldilocks if you want, all this would lead to central bankers keeping their powder dry. While most companies would find the going gets tougher, share markets would still happily add a few more percentages to this year's tally so far. All in all, that would make calendar 2006 not so bad, a few scares aside. But that's not necessarily how it will be. The public debate amongst economists and strategists at the moment is whether the increased momentum in the economies of Europe and Japan will be resilient enough to withstand a slow down in the US. It would seem that we all want the answer to be no. Because that will take the pressure off the oil market and reduce demand for Chinese products, both will help to keep the inflation monster contained from now on. No matter in what way, shape or form the above scenarios develop over the coming months, it will have become clear to anyone that for investors in the share market the going is definitely to become tougher. Has anyone else noticed that property trusts have been among the outperformers in the local share market for each of the past three months? It has been a while since yield investing was the norm. I think it was more than three years ago, before we all woke up and realised that BHP Billiton (BHP) shares at $9 each were an absolute bargain. Unfortunately, what seemed like a rather simple and straightforward scenario ahead of us has become less so over the past few weeks. Economists at Credit Suisse, for instance, believe that global economic growth will prove to be more resilient than we all would like it to be. That would be not so good news. JP Morgan has been amongst the more bearish experts since early this year. The difference with the likes of Mellon Financial is that JP Morgan thinks the Fed Funds will rise by another 75 basis points still. Few would think such a scenario would not put the US economy into recession. A combination of falling corporate profits and rising interest rates would be devastating for the share markets as well. That's why JP Morgan thinks Aussie shares will underperform their US peers in the year ahead, even though US shares are expected to generate a negative return. Maybe we should all start sending emails around asking our friends and contacts across the globe to stop spending all our money, every month. Or is it already too late for that? Your don't look at me when it comes to not spending all my money editor, Rudi Filapek-Vandyck StockInterview.com was granted permission to post this story written by Rudi Filapek-Vandyck.

August 1, 2006

Everything Points To A Yet Higher Oil Price Guest Commentary By Greg Peel Senior Writer, FN Arena www.fnarena.com FN Arena supplies financial and economic news stories, analysis and commentary in the Australian and global financial markets. FN Arena - Passionate about Financial News FN Arena is building the future of financial news reporting at www.fnarena.com. Our daily news reports can be trialed at no cost and no obligation. Simply sign up and get a feel for what we are trying to achieve. Greg Peel Senior Writer, FN Arena   Oil markets have been range-trading lately, bouncing around each day as the Israel-Lebanon situation looks either contained or about to escalate. Whether or not an end is in sight, the picture in the Islamic oil world is more of a macro one. This is what Barclays Capital's analysts have to say: "Prices may have become locked into a certain stability, but in our view the balance of risks is pointing towards a move to the upside. The first set of reasons for this are political, and arise most particularly from the current situations in Lebanon, Iraq, the Middle East in general, and also Nigeria. From the viewpoint of providing a stable background for the oil market, in our view the conflict in Lebanon could not currently be following much worse of a dynamic. "A whole series of regional issues are being stirred simultaneously and are becoming fused together, the standing of US policy across the region is being further eroded, and the situation appears to have gone well past the point when an end of hostilities might have returned affairs to something approximating the pre-war status quo. To the extent that a peaceful and sustainable solution to the Iranian nuclear issue depended upon the development of an extra degree of international trust, the chances of that peaceful solution appear to us to be diminished. "In all, the development of the situation in Lebanon can not in our view be considered neutral for the oil market, and it seems to have increased the chances of some more extreme price outcomes further down the road." The supply side is thus looking as dodgy as it has ever been. The OPEC president has called the latest oil spike "very uncomfortable" but points out that there's little OPEC can do when geopolitics and downstream constraints are the roots of the problem. Iraq and the US have been jointly painting an optimistic picture for Iraqi production. Before the invasion Iraq was pumping out 2.5 mb/d. June production supposedly reached 2.1 mb/d, but Iraq is claiming 2.7 mb/d is achievable by year end. Then everybody fell about laughing. The situation in Iraq is only getting worse, not better, and Barclays expects downside to production, not upside. Iraq is also targeting 4 mb/d by 2010 and 6 mb/d by 2012 which smacks of a simple pipedream in an increasingly uncertain country engrossed (even though no one will admit it) in civil war. Over to the demand side. Barclays reports China's oil demand growth was surprisingly sluggish last year but suddenly that has changed. Growth is now running at about 8-10% year-on-year compared to forecasts of 6%. Demand for refined products grew by 6% year-on-year in the first quarter but the second quarter has registered 11.1%. The big increase is in gasoline demand – 8.9% in the first quarter, 19% in the second quarter – which is no great surprise considering accelerating auto sales. And this demand growth has come even despite a 15% increase in gasoline prices. China is now madly producing gasoline out of local refineries hence reducing imports. Export restrictions have also helped. Barclays suggests "the likelihood of any significant slowdown in China's demand for transport fuels looks slim". Meanwhile, over in the US, the "crack spread" continues to widen (the price difference between crude oil and refined products such as gasoline). This is due to falling production as US refineries slip to 92.5% utilisation, below the 2005 average of 93.5% and the 2004 average of 97%. Believe it or not, outages are still occurring that are related to last year's hurricanes. As we approach August the US, and the world, will be praying we don't have a repeat performance in 2006. From a technical perspective, Barclays notes there is strong support for WTI crude above US$62.45/bbl, which seems a distant memory, and that the continuing technical uptrend implies a short term target of US$84-85/bbl. StockInterview.com was granted permission to post this story written by Greg Peel.

July 26, 2006

Rudi on Wednesday - Uranium in Australia Guest Commentary By Rudi Filapek-Vandyck Editor, FN Arena www.fnarena.com FN Arena supplies financial and economic news stories, analysis and commentary in the Australian and global financial markets. FN Arena - Passionate about Financial News FN Arena is building the future of financial news reporting at www.fnarena.com. Our daily news reports can be trialed at no cost and no obligation. Simply sign up and get a feel for what we are trying to achieve. Rudi Filapek-Vandyck Editor, FN Arena   Nothing is easy and straightforward when it comes to Australia and uranium. Take the official three mines policy, for instance, which has so far been kept in place by all subsequent federal governments since it came into place in 1984. Yet if the Canadian owner of the Honeymoon project in South Australia decides to open the mine and start production, as it is expected to do in the months ahead, the country with officially a three mines policy will have four uranium mines producing contentious yellow cake. This number could grow one unit larger if Rio Tinto (RIO) controlled Energy Resources of Australia (ERA) will bring its Jabiluka project in the Northern Territories into production, as it is widely expected to do over the next few years. This anomaly is a result of the Australian government issuing three more permits in 1996 as one of the original three allowed uranium mines, Nabarlek, closed. Another member of the original three, Ranger, is not expected to last that much longer either. The remaining one is, of course, Olympic Dam, nowadays owned and operated by the world's largest resources company BHP Billiton (BHP). It seems like a logical combination with Olympic Dam being the world's largest deposit of uranium. If BHP's plan to triple output at Olympic Dam, at a cost of circa $6bn, receives the go ahead from the South Australian authorities, Australia is likely to become the world's largest exporter of uranium. We're probably talking 2012 by then. More than anything else, it was the bilateral uranium treaty with China, signed in April this year, that sparked the enthusiasm of investors. Have a look at the share price graphs for most of Australia's listed uranium explorers. See how they all jumped up post the China treaty frenzy and fell down like a rock shortly afterwards? If your personal appetite includes uranium miners and explorers, you better get used to this. Truth is the treaty with China is not going to change anything in the short term. It might in the longer run. Selling uranium to China will always remain a hot potato (anyone who genuinely believes the Chinese will refrain from using it for military means because they promised us is way too goodhearted for this world). A fact that is often lost in the public debate is we haven't sold them anything yet. Why is that? Because uranium is mostly sold via long running supply contracts. Everything that comes out of the ground in Australia today is already under contract. The first of these contracts are expected to come up for renewal in 2010. That's still four years away. In the meantime it is far more exciting to be an Australian uranium explorer than an actual producer. As witnessed by the events at Australia's sole listed pure uranium play Energy Resources of Australia recently, when you are actually producing you are susceptible to all the factors that make life a bitch for every miner in the industry, whether it is copper, mineral sands or uranium. Costs are running up, experienced staff is demanding and difficult to find - don't even talk about finding replacement tyres - and production delays and shortfalls are constantly looming around the corner. If you're an explorer all the market seems to be looking at is the trend for the uranium spot price - to value your assets accordingly. To put it bluntly: the uranium frenzy in the smaller corners of the Australian mining sector has all the ingredients to end in tears for many an investor – and it most certainly will do so. As my good friend, and experienced market watcher, Markus always says: "It always ends in tears, simply because it always does". The vast majority of today's explorers will never become a producer. I know this may be difficult to grasp for a sector which appears to be readying itself for a good old fashioned boom. Takeover activity inside the uranium sector in Australia has probably never been higher as over the past few weeks. There's talk about Canadian suitors travelling around the country. There's talk about Chinese interest. Company directors are giving presentations at international conferences… Not a day goes by without some gold and copper explorer announcing it has also found what could be a sizeable uranium reserve, or it wants to spin-off the uranium assets, or it is seeking a partner for its uranium assets. And now the Labor opposition party leader Kim Beazley is in favour of changing the official three mines policy. Still, the majority of what must be over 100 listed exploration companies with uranium reserves in Australia will never progress into the producing stage. Even if a changing policy landscape towards the mining of uranium in Australia would result in a free for all situation, which is far from certain and possibly even unlikely, uranium is in essence ruled by the same cycle and dynamics that rule all other commodity markets. This means that, how ever inconceivable it yet may be today, supply and demand will swap places at one stage and prices will come down. According to the more bullish assumptions, the current cycle for commodities still has another 10-15 years to go. This will not be long enough for most of today's exploration hopefuls. In the meantime, it is hope alone that is driving both investors and miners in the sector. There's not much else to depend upon. It doesn't take too much imagination to forecast what will happen when sentiment turns within the sector. "It always ends in tears because it always does." Rudi Filapek-Vandyck (supported by the Brilliant Four: Greg, Chris, Terry and Rob) StockInterview.com was granted permission to post this story written by Rudi Filapek-Vandyck.

July 11, 2006

Oranges, Orange Juice and Enriching Yellowcake: Understanding the Nuclear Fuel Cycle Guest Commentary By R. Gene Clark Chief Executive Officer, TradeTech LLC www.uranium.info       R. Gene Clark Chief Executive, TradeTech LLC   Uranium extracted from the ground (natural uranium) consists primarily of two isotopes: the fissile isotope uranium-235 and the fertile isotope uranium-238. Because it is fissile (capable of sustaining a nuclear reaction), U-235 is the isotope of interest for generating energy. U-235 comprises only 0.7% of natural uranium and, for most nuclear energy technologies, this is too small to be useful. To be used in today’s prevalent nuclear power technology, the percentage of U-235 must be increased through a process called uranium enrichment. Because all isotopes of a given element have virtually identical chemical properties, enrichment relies on physics solutions. These solutions take advantage of the small differences in weight (or mass) of the two isotopes. The uranium enrichment process is analogous to the process of squeezing oranges to make orange juice. The raw oranges are like the feed to the enrichment process; the orange juice itself is like the product of enrichment; the resulting orange pulp and rind is like the waste stream of the enrichment process Just like squeezing oranges requires physical work, so does enriching uranium. In the process of making orange juice, there is a trade-off involved. If oranges are cheap and energy is expensive, you can use many oranges as feed and not squeeze too much to produce a given amount of orange juice. If oranges are expensive, but energy is relatively cheap, you can use fewer oranges, but squeeze harder to get the same amount of orange juice. One measure of how hard you have squeezed is the percentage of orange juice remaining in the waste pulp. If you squeezed hard, not much is left in the pulp and vice versa. The situation is analogous in uranium enrichment. The measure of how hard you have “squeezed” the uranium feed is called the “tails assay” – that is, the percentage of the depleted uranium tails that is U-235. Like in the orange juice analogy, it is impossible to squeeze all of the juice from the oranges; there is always some left in the pulp that is not worth removing. In the commercial world of nuclear fuel, the most common way of producing fuel is for the ultimate electric utility to buy the natural uranium from a uranium producer or trader, have it converted into natural UF6 by purchasing that conversion service, then purchasing the service of having the natural UF6 enriched, and finally having the enriched UF6 fabricated into fuel for subsequent use in the nuclear power plant. Under the terms of most enrichment contracts, the utility buyer is given some flexibility about what enrichment tails assay is to be used from year-to-year, a value that determines the amount of natural UF6 it must deliver to the enricher and how much enrichment service must be purchased to make the final enriched product. Using the orange juice analogy for reference, a lower the tails assay (percent of juice remaining in the pulp) means the enricher has “squeezed” harder (provided more enrichment services) and that less uranium feed (fewer oranges) is delivered to the enricher. The utility enrichment customer can thus determine (within the commercial confines of the contract) what tails assay results in its lowest cost for the final enriched uranium product. This decision is based on the price of natural uranium feed relative to the price of enrichment services. StockInterview.com was granted permission to use this excerpt from a presentation made by R. Gene Clark at: China Power & Alternative Energy Summit 2006 Beijing, June 9, 2006

July 6, 2006

Will Cameco Supply the Uranium for New Mexico’s Proposed Enrichment Facility?   New Mexico State Senator Carroll H. Leavell Guess what? Our recent investigation shows the uranium to be enriched in the LES/Urenco proposed enrichment facility in Lea County, New Mexico may come neither from uranium properties in New Mexico nor anywhere else in the United States. Just as New Mexico's nuclear/uranium mining renaissance was ready to get underway, a deal may have already been cut to enrich uranium mined in a foreign country. Louisiana Energy Services (LES), through the consortium's general partner Urenco Ltd., may have struck a deal with Canadian-based Cameco Corp (NYSE: CCJ). Will the uranium come from Canada or Kazakhstan? According to New Mexico State Senator Carroll H. Leavell, the uranium ore to be enriched at the facility near Eunice, New Mexico facility would be coming from outside the United States. Senator Leavell told StockInterview, “The uranium ore will be coming out of Saskatchewan.” When we asked if the uranium to be enriched in New Mexico would come from the Athabasca Basin, an area hosting the world’s richest grades of uranium and which is also located in northern Saskatchewan, Senator Leavell claimed he wasn’t sure where the Athabasca Basin was. But he told StockInterview that Urenco Ltd informed him the uranium was coming from that western Canadian province. We can only speculate the uranium producer might be Cameco (NYSE: CCJ). On July 22, 2002, Cameco signed a Memorandum of Agreement with LES, along with Urenco Ltd, Westinghouse Electric Company, Fluor Daniel and the affiliates of U.S. utilities: Exelon, Duke and Entergy. In an email response to our inquiry, earlier this week, Netherlands-based Urenco Ltd Communications Coordinator April Wildegose-Mistry informed StockInterview, “Cameco Corp was part of the original LES project. They pulled out around March 2003 as they needed to focus on other business issues.” We have also asked to interview Urenco’s CEO. Perhaps he may clarify this matter for us. One industry insider told us Cameco stated its continued support for the LES initiative after it withdrew as a partner. However, the recent joint venture company, Enrichment Technology Company, formed by Areva and Urenco may open the possibility the uranium could also come from Areva’s uranium interests in Athabasca. AREVA is a Paris-based company offering technological solutions for nuclear power generation, and electricity transmission and distribution. New Mexico State Representative John A. Heaton This development could further irritate at least one New Mexico legislator. State Representative John A. Heaton from Carlsbad, New Mexico, and who also sits on New Mexico’s Energy and Natural Resource Committee, was adamant about U.S. independence from foreign energy sources. He told StockInterview, “We need to use the assets we have and not be dependent upon foreign countries. I worry a lot about the dependence we have on other countries.” In this instance, Heaton might be getting a double-whammy of foreign dependence. Not only is Urenco Ltd a foreign-owned and controlled company (a Dutch/ British/German consortium), but the uranium its New Mexico facility would be enriching could come from at least one foreign source, Canada. Because the uranium ore might be sourced from Cameco, yet another country’s uranium could be supplying the New Mexico enrichment facility: Kazakhstan. Cameco plans to boost uranium mining in this former Soviet country to a level which might approach its uranium production in the Athabasca Basin. Kazakhstan recently joined the “Putin Alliance” of uranium-producing countries. On June 22nd, Kazakhstan signed a contract worth $1 billion to supply Russia’s Tekhsnabexport to supply Russians with uranium through the year 2020. The Economist magazine’s Economic Intelligence Unit recently issued a caution on this country. David Miller We asked our uranium industry analyst, David Miller, about this new twist in the LES/Urenco story. Miller is a third-term Wyoming legislator, who is an original member of the Wyoming Energy Commission and a past member of the National Council of State Legislator’s (NCSL) Energy Committee., now serving on a NCSL-related committee. Miller is also president of Strathmore Minerals, a company which is now advancing its properties through the permitting process in New Mexico. Miller told us, “The State of New Mexico may miss out on the hundreds of millions of dollars of tax revenues from potential severance, ad valorem, sales and other taxes the domestic industry would pay the state to mine uranium in New Mexico. Instead, the foreign uranium pays zero taxes to enter the state for enrichment.” In other words, Cameco or another may be getting a free ride on taxes. Ominously, Miller asks these questions, “The real question for New Mexico is this: What happens to the part of the uranium that does not go onto the fabrication plant? Does it stay in New Mexico? Is it shipped back to Russia, Kazakhstan or Saskatchewan?” This gave us pause for thought. After it leaves New Mexico, how do we know it would be used for civilian energy purposes? Could it be transported elsewhere and be more highly enriched? That’s just speculation. Miller recommended that New Mexico legislators demand the LES plant be fed uranium mined in New Mexico, not in Canada or Kazakhstan. “If this were to happen,” Miller wrote in an email to us, “thousands of new mining jobs would be created in areas of New Mexico which need the most economic development.” Once the world’s leading uranium producer, New Mexico’s Grants Uranium Belt is again being explored by more than a dozen companies. Some hope to permit and operate new uranium production centers in New Mexico. We trust this latest wrinkle will awaken New Mexico’s legislators and help them protect uranium mining developments in their states. Perhaps their voters, who might be looking for higher paying jobs, would appreciate that.

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