Approaching his 50th year in the uranium business, the quiet but assertive Chairman and Chief Executive of Uranium Resources (OTC BB: URIX). Paul K. Willmott talked to us about the current uranium bull market. Willmott discussed the third uranium bull market he’s experienced with both exuberance and caution.

Interviewer:

How do you feel about the rising uranium price? And how high do you think it will go?

Willmott:

Looking at the oft-quoted number of over $100/pound, that number came out of an analysis from a gentleman at MIT (Thomas Neff, MIT Center for International Studies). What he did was use the high point of 1980s with a time-value of money, and came up with $100. I am not saying that the prices could never get to that level. I’d never say that. There could be a price spike, and there are a lot of things that could or could not happen. The prices will rise to cover projected and estimated costs of production. It will also get to a level that will induce people to invest in companies, or for the company to invest in the business to get a rate of return.

Interviewer:

How are the production costs different now as opposed to then?

Willmott:

If you go back to the 1980s, the majority of the uranium was being mined by underground mining methods. Underground or open pit methods were used here in the United States: most of it in New Mexico, a lot of it in Colorado and Wyoming. The cost of production in those days was somewhat in the mid to high $20’s. When you put a rate of return on it, it got the market price up into the high $30’s. Since then, the major mining in Canada now is not at Elliot Lake or at Bancroft, Ontario, both underground and where it was before. The majority of uranium mining now is being mined in high grade ore bodies in the Athabasca Basin, which back in the 1980s was basically unknown, unexplored or unfound. In the United States, there is virtually little or no underground mining of uranium. It’s all done by low-cost ISL. Same as in Kazakhstan. You still have open pit mining of low-grade ore bodies, but those are very inexpensive to mine as in Africa. You also have byproduct in Australia.

Interviewer:

Are you saying uranium prices are determined by production costs, not supply concerns?

Willmott:

The big point is the major cost of uranium today is significantly less than what it was in the 1980s. If you go back to my basic premise, which is that price rises to cover cost of production, I don’t see that you can make the comparison of taking the high point in the 1980s and transposing it over today on the time-value of money basis, and coming out with something over $100/pound. That’s not to say the market could not get over $50/pound. I think it very well may. I think it will be the spike or an anomaly. And I think it will ultimately fall back as production comes on to the current demand of uranium.

Interviewer:

What about Asian demand?

Willmott:

There’s lot of talk about reactors in China, in India, Russia, and elsewhere. Talk of reactors in Europe staying on longer. That could prolong the cycle. I think that you will find over the next 5-7 years there will be enough uranium discovered, or discovered, put into production, licensed and permitted, to meet our current demand for uranium. That cycle may get prolonged a lot longer as these other (nuclear) plants may or may not come on.

Interviewer:

Won’t the U.S. alone put an additional squeeze on the current uranium inventories by building another 10, 15 or 20 reactors?

Willmott:

No, because if you look at the lead time on the announcement of these plants, the lead time to get these plants on, I think you’re looking at five to ten years at best. The I don’t think it’s going to be as long for the Chinese, because they don’t really have environmental concerns, regulatory concerns or intervener concerns. It certainly would put a crimp on existing and forecasted production. In terms of the long-term needs, they will ultimately be met. The current prices today are impacted by the current needs and some perception about the future.

Interviewer:

TradeTech LLC recently announced, in a news release, that a large percentage of the spot uranium price rise in 2005 came from speculators and investors?

Willmott:

If you look at what spot demand is, compared to the long-term demand, usually the spot is around 20 million pounds. Last year, I think it was around 30 million pounds. (Editor’s note: On January 27, Trade Tech reported slightly less than 30 million pounds for 2005.) That’s 20-30 million pounds of demand out of total demand of 180 to 190 million pounds. Of that demand, this past year, around 10 million – that’s the latest number I know – came from speculators, hedge funds, and the Uranium Participation Corporation (TSE: U). Certainly, it was a very major influence of a very small part of the market. Every week, everybody is excited about what the spot price is going to be on Monday night for UXC or Friday night from Trade Tech. It’s a little bit of the tail wagging the dog. Most certainly, the demand of 10 million pounds or so by the hedge funds had a very significant impact on the spot market for 2005.

Interviewer:

But will this speculative uranium buying continue?

Willmott:

Some of these people were able to get in while the spot price was in the low $20’s. Now that the price is at $37.50/pound, they’ve done quite well. If this price increase plateaus, and I project the spot price to be about $40/pound by the middle of this year, and then I’m not sure. I don’t know how long it will take to get up to $50. It might go up quite rapidly. What you’re going to see, as you can see with some of the (publicly traded) stocks out there, I think the major increase could very well be behind us. You will get an increase, but it certainly will not be in the couple of hundred percent increases that we’ve seen in 2005.

Interviewer:

Is the oft-quoted $100/pound number realistic then?

Willmott:

The uranium spot price is going to go to some level where there will be enough money brought in by investors to do the necessary exploration and development. There may be a price spike along the way. My feeling is it’s just not going to climb up and get over the $100 range that a lot of people are talking about. It could be a price spike, but I don’t think it’s sustainable.

Interviewer:

After the price spikes, or runs higher, where do think the uranium price will settle?

Willmott:

As the prices rise, on a longer term basis, there will be production that comes online, as is always the case. I am on record as having said that the price could very well get up to a level where it’s $50, $60 or $70/pound. But it will ultimately fall back to a level that more represents the cost of production. If you look at the places where they are exploring for uranium now, in Athabasca, and you look at the current costs of production, it’s my feeling that somewhere in the high $20’s or low $30’s is where the price will ultimately be for uranium. I think it’s going to take anywhere from five to seven years, may be ten, before production gets to that level. And that’s in today’s dollars.

Interviewer:

Have prices become unrealistic in the uranium sector?

Willmott:

I think there’s a lot of speculation out there, which may be a bit unrealistic. That’s more in the stock prices. Certainly, the need for uranium is there. I just think people are over-reacting as to what’s going to ultimately happen.

Interviewer:

After World War I, a British army major in the Belgian Congo discovered uranium oxide with concentrations as high as 80 percent. That very quickly ended the long-term radium boom in the Colorado Plateau, an element which had been extracted from uranium. Could a major discovery end the recent excitement in this bull market?

Willmott:

I don’t think any single discovery, whether it will be in Athabasca or elsewhere, no single discovery is going to overcome the total supply that is ultimately needed.

Interviewer:

You’ve talked about Kazakhstan. Do you believe this is the wild card for the world market?

Willmott:

Yes, it is. There are very large, very economic deposits there. They’ve made some very grand plans on what they’re going to produce. I personally don’t think they’re going to get there, not in the time frame they state. Then, of course, there are the uncertainties, such as the political. I can’t reflect on that, but there are uncertainties there. I don’t think they’re going to put on production as fast as what they have stated.

I don’t think there is any single source that will do it (alleviate the supply shortage). I think it will go a fair distance in filling the shortfall or projected shortfall. I don’t think it’s going to satisfy it. But, you’re looking at somewhere around 80 or 90 million pounds of supply shortfall. Even if they get up to 25-30 million pounds, that’s not going to be enough.

Interviewer:

Do you believe a bust will follow this excitement?

Willmott:

Yes, but when you say bust, a lot of it is going to depend upon a market that doesn’t relate to current supply and demand. There’s a lot of supply out there that people will tout. Like “here come the Kazakhs,” or “the expansion of Olympic Dam,” or those type of things. Most supply and demand projections that we’ve been using in the company, and are using, have already anticipated these things. They’re not unknown ore bodies. The ore bodies in Africa, they’ve been known for a long time. Rossing staying on has been known for a long time. Midwest Lake has been known for a long time – it was found 22 years ago. Cigar Lake was 22-23 years ago. A lot of the production you are seeing now, which is coming on and people are getting excited about, have been known and have been factored in for supply and demand projections for a long time.

Interviewer:

How does the record price rise in 2005 compare to sustained high prices in the 1970s and early 1980s?

Willmott:

I think that the 2005 price rise is a reflection of the shortage that is there. In the 1980s, the shortage, the price rise, then, was on a perception basis. The perception was that all of the utilities were going to get into nuclear power. I remember Eisenhower saying it was going to be too cheap to even meter. What happened was that all of these utilities were going to build all of these nuclear reactors. And then they realized the reactors were going to need uranium. That created a pseudo demand.

Interviewer:

Why do you call this a false demand?

Willmott:

The utilities all wanted to get into nuclear power. They made that decision. They then needed uranium to run their reactors. What happened then was the U.S. Enrichment Corporation told the utilities, “Look, if you want to get your uranium enriched, you are going to have to sign up for it now, basically on a take or pay contract.” With all of these grandiose plans, the utilities signed “take or pay” contracts with the USEC to supply uranium and to get it enriched. During the period, while they were committing, there was such a demand for uranium by all of these utilities that it caused the price to go up.

Interviewer:

And then there was Three Mile Island.

Willmott:

The demand for nuclear power went away after Three Mile Island. But, the utilities had already committed with mining companies to buy the uranium and they had already committed with USEC to enrich it. When the bloom went off the rose, there was no need for the uranium. The demand for the uranium went away, but the uranium kept coming out. That created a huge overhang that caused the prices to plummet and stay down for quite a number of years until the actual production was consumed. The “real” demand really turned out to be based more upon perception. When that perception died, the need for nuclear power died, but the supply kept coming out.

Interviewer:

What about the demand today?

Willmott:

Demand today is real. What is different in this cycle, besides the difference in the mining methods and the costs, which we’ve gone over, is that this is really a REAL demand right now. It’s coming from the utilities that realize there is an impending shortage of uranium.