A Melman Minute — March 16, 2011

For sheer drama, it is almost impossible to conceive of a more terrifying background than the consequences of the Japanese earthquake, subsequent tsunami and resultant damage to that nation's nuclear capacity. It seems we have been inundated with images of tragedy and horror without end.

One of the mining share consequences has been a virtual 'melt-down' in the prices of several exploratory and producing miners who are involved with uranium exploration and/or production. We showed a chart of uranium producer Cameco in our previous Melman Minute and are including a chart of Khan Resources, a Canadian mining company involved in uranium exploration in order to illustrate the rapid sell-offs and, this morning in particular, subsequent rallies which have taken place in the uranium share group.

(The use of these charts is neither a recommendation to buy or sell these particular shares. The charts are for illustrative purposes only.)

During the past several days, we have devoted considerable thinking time to the entire question of nuclear power generation's future and it is our conclusion that the events in Japan will not reverse the movement toward greater numbers of nuclear power plants in the future. The bureaucratic hurdles may become longer and there may be modifications in plant construction requirements, but there is a simple reality that we believe over-rides other considerations. Simply stated, that reality is the fact that for billions of people, the most powerful desire is to escape poverty and to improve their material standard of living.

In order to accomplish such improvements, it will become necessary to continually increase electric power generation and, when the array of alternative sources are contemplated, nuclear power generation remains the source most capable of satisfying the world's future energy requirements. Among those other alternatives we might find hydroelectric power, coal-fired power plants and petroleum based sources such as fuel oil or natural gas.

The environmental hurdles to hydroelectric power plants which would involve creation of massive dams along the world's major rivers would appear to be virtually insurmountable and it is also important to understand that the construction of such dams usually involves the flooding of vast areas of land including much fertile farming acreage, a dire prospect indeed when food price inflation is already advancing strongly.

Coal-fired plants also appear likely to flounder on environmental objections to their "dirty" fuel status and there is a practical consideration that is also of an important nature, particularly in the case of countries such as Japan, which has virtually no coal mining of its own. Therefore, if it were to attempt to satisfy its growing power requirements via coal-fired plants, the problems of transporting coal across the world's oceans would appear to be insurmountable, specifically including the amount of marine fuel oil which would be required to operate an almost endless array of major ocean-going freighter vessels from ports in countries such as Australia, Canada and the USA.

As far as petroleum-based fuels are concerned, problems abound in that direction as well. First, there is already a precarious balance between production and demand of crude oil. Any increase in demand could send prices soaring even higher than the present $100 per barrel area and many analysts were already projecting $200 per barrel in the relatively near future even before the Japanese events. In terms of natural gas, there appear to be abundant supplies, but the problems involved in transporting the supply of natural gas to the final end-users are significant, involving freezing natural gas into Liquid natural Gas (LNG), transporting it large distances and then reconstituting it on-site - plus the additional factor that if demand were to suddenly and steadily increase, sharp price increases could also be anticipated.

There is an important consideration which we believe will be understood by many once the heat level of present conversations dies down. Despite the magnitude of this quake - and it was almost certainly a once-in-a-lifetime event - there have been no deaths attributed to the existence of nuclear plants, as has been the case throughout the world for the entire time span of nuclear power generation, with the single exception of the poorly designed and poorly maintained Chernobyl facility. In other words, nuclear power generation has proven to be safe, reliable and efficient.

Over time, we believe these considerations will move to the forefront of serious power generation discussions and nations which today are pulling in their horns, so to speak, regarding future nuclear power generation will once again move ahead with their projects.

Accordingly, we suggest that investors with a long range outlook might take advantage of the recent sharp price declines by investigating opportunities to acquire shares in the exploratory and producing uranium sectors.

Of course, we also repeat our disclaimer that no investments should be made without prior consultation with a registered investment professional.

Anyone who believes that inflation is not a serious threat received a setback this morning when the U.S. government reported two important figures for February. Producer Prices rose at an overall rate of 1.6% for the month of February and the price of imported goods rose almost as fast, by 1.4%, during the same month. Much of the increase was attributed to higher food and fuel prices, but the net effect remains the same, namely that for most consumers, prices are not static, but are headed higher.

One last thought...While the world's attention has turned to the Orient, the struggles in Libya have continued and have lately taken an ominous turn. Strongman Gaddafi has now resorted to brute force in order to hold on to his position of power and, if reports are at all accurate, the number of casualties is rising enormously as cities across Libya where rebels are active are being attacked relentlessly.

International powers have decried Gaddafi's actions, but other than words of condemnation, they have appeared feebly unable to offer any counter-action to curtail his activities.

As of 9:00 AM PDT, financial markets in Canada and the USA are taking divergent paths with the Dow continuing its recent declines, off by about 135 points while Canada's TSX Index is ahead by about 80 points on higher metals and crude prices. Precious metals are recovering somewhat after recent selling waves with gold once again above $1,400 while silver has recovered by about 40 cents per ounce in early trading. Base metals are also recovering strongly with both copper and nickel ahead by more than 2% on the session. Surprisingly, mining share indexes are in slight decline, despite the stronger metals prices.

In other markets, crude oil is ahead by over $1.00 per barrel, the US Dollar is slightly higher and long term interest rates continue their recent declines.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, March 18, 2011.

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