Equity Strategy September 28, 2007:

The uranium price has been weak over the past few months as the market adjusts to an over bought situation which developed as investors became a little too bullish over the short term. The fundamentals of supply and demand are still very favorable for uranium over the longer term. The global expansion of nuclear power facilities continues unabated, construction of these plants require a long lead time due to extensive environmental and engineering requirements.

According to the World Nuclear Association (www.world-nuclear.org)  there are 439 nuclear power plants in operation globally, there are 34 new plants under construction (7.75% increase). In addition there are 81 nuclear plants currently in the planning stages where approvals, funding or major commitments are in place. There are an estimated 223 have been proposed with a clear intention or proposal announced but without  firm commitments in place, offering the potential for a move to the planning stage over the next few years. If all of the planned and proposed facilities are completed the number of nuclear facilities will increase by 76%, this will create sustained pressure on the supply of uranium world wide.

Total global production is not able to meet current demand and this imbalance is likely to become more pronounced before it gets better. Global production from mining operations over the past five years has been coming in between 41,000 and 49,000 tonnes annually, it is estimated that 66,500 tonnes will be required in 2007 to fuel the 439 currently operating nuclear power facilities. The shortfall has been met by the utilization of surplus military uranium. 30 tonnes of military high-enriched uranium has been displacing approximately 10,600 tonnes of uranium oxide (13% of global requirements) annually over the past 5 years. The amount of military surplus uranium is finite and will not be available to fill this supply gap over the long term.

There have been major advances in technology that have reduced the amount of fuel required for example since 1993 nuclear generated electrical production has increased 5.5 fold while total uranium (U3O8) use increased only 3 fold. Further technological advances are likely over the long term and will have an impact on the cost of electricity to the consumer and may alleviate some of the pressure on uranium supply over the long term.

The cost of fuel is a relatively small proportion of the overall cost of operating a nuclear power plant; the electrical price is not dramatically impacted by changes in the price of uranium. A Finnish study released in 2000 showed that if fuel costs doubled the cost of electricity would increase by 9% for nuclear, 31% for coal and 66% for gas other studies have arrived at similar conclusions. The cost of building a nuclear power facility is considerably higher than conventional gas or coal fired power plants usually in the range of $300 million but over the long term the cost of electrical power will be much more stable and predictable.

Another advantage that nuclear power offers is it will not add to the carbon foot print and will help countries meet any potential targets regarding emission reductions. The Kyoto accord has made nuclear power a much more attractive alternative to traditional coal or gas fired power facilities. Nuclear power plants will be able to avoid any potential carbon taxes that may be implemented in the future reducing the uncertainty of this increase in costs. This is especially attractive to newly industrializing countries such as China, India and Russia where an enormous increase in power consumption is being created to fuel the growth in industrial operations. The combination of low cost predictable and clean power generation over long time horizons will potentially be a competitive advantage over the long term.

The spot price of uranium surged earlier this year reaching an all time high of $136.00 a pound in June before falling back to the current level of $85.00 a pound. The long term contract price which is the price that new production is likely to be sold at has been steadily moving up over the past five years from $10.75 a pound in August of 2002 to the current $95.00 a pound.

This is the first time in decades that the long term contract price is higher than the spot price indicating an increasing concern by nuclear power producers of a potential squeeze in uranium supply. This concern is creating the need to have long term contracts in place for current operations and near term completions as well. Uranium users appear to be willing to bid up the contract price in an effort to ensure there will not be any disruption in supply going forward.

Canadian companies currently produce approximately 25% of the global uranium followed by Australia (19%) and Kazakhstan (13%). The largest producer in the world is Canadian based Cameco (CCO-T) producing 8,240 tonnes of uranium in 2006 or 20.9% of total global production. Cameco is expected to bring their Cigar Lake mine in to production in 2010 this mine is forecast to produce 7,000 tonnes of uranium annually. The Cigar Lake Operation has had a number of setbacks over the past year due to flooding which has pushed the start of production from 2008 to 2010.

Cameco is very well positioned as the global leader in uranium production and has excellent potential for growth over the long term. Buy with 18 – 24 month target of $60.00.

Uranium One (UUU-T) is currently producing approximately 2 million pounds of uranium annually. The company expects to have four new mines in operation over the next year and is forecasting production will increase to 7.5 million pounds annually. The company will have operating mines in Kazakhstan, South Africa and Australia. The company has a number of exploration projects in South Africa, Australia, Canada and the Kyrgyz Republic.

Uranium One is substantially expanding production and will benefit from the higher long term contract price as this new production comes on line. Buy with an 18-24 month target of $20.00.