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Is This Uranium Bull Market For Real?

In light of Toshiba’s recent proposed acquisition of Westinghouse Electric from the government-owned British Nuclear Fuels (BNFL), historians may be reminded of former Westinghouse Chairman Robert Kirby’s litigious international outcry and prolonged battle over secretive and illegal price manipulation by a global uranium cartel. In the 1970s, Westinghouse, determined to capture the world market of building nuclear reactors, offered dirt-cheap nuclear fuel as part of its incentive to get sales from utility companies. The company’s 27 utility customers had locked in agreements with Westinghouse to provide them with 65 million pounds of U3O8 over the next twenty years, well into the 1990s. Those contracts set off one of the most curious legal battles of the 1970’s, ultimately reducing Westinghouse to a shell of the powerhouse it once was. In recent weeks, Toshiba (London Stock Exchange: TOS; Tokyo Stock Exchange Ticker Code: 6502) has been strongly criticized for the Westinghouse acquisition, and may sell as much as 49 percent of the deal to two other Japanese firms and a smaller stake to an American firm. Toshiba’s CFO, Sadazumi Ryu said the company would pay for some of its acquisition costs within three years out of current cash flow plus float debt to about 115 percent of equity.

Will Toshiba repeat the mistakes made by Westinghouse in the mid 1970s during the last uranium bull market? Today, Toshiba aims its sights on the lucrative Chinese nuclear energy market, which on the surface appears more ambitious than the U. civilian nuclear program of the 1970’s. Toshiba wants to be a major beneficiary of China’s aggressive plans to expand the country’s nuclear energy program. And why not? Uranium prices have soared the past few years.

Spot uranium rocketed in 2005 at an even faster degree than in 1975. That was the year when Westinghouse’s Robert Kirby was told by his doctor to not even bother giving up his chain-smoking habit. Things at Westinghouse had gotten that bad. The head of the Pittsburgh-based conglomerate failed to grasp what was behind the escalating uranium price during the 1970s. His Westinghouse incentive plan sounded great when spot uranium sold for $6/pound. However, at $40/pound, Westinghouse got stuck with potential liabilities of more than $2 billion (1970s dollars) because of his offer to provide the utilities with cheap fuel. By July 1975, Kirby began blaming the world’s uranium cartel, which he believed manipulated the spot price higher to piggyback his company’s development plans. Across from Kirby’s offices in Pittsburgh’s Golden Triangle were the offices of Gulf Oil, a uranium supplier, whom he believed to be a member of the uranium cartel. By September 1975, Westinghouse announced a shortfall of 25,000 metric tons of uranium, and claimed “commercial impracticability” in honoring its nuclear fuel commitments to the 27 utilities. And the lawsuits began.

According to a special report in the Pittsburgh Post-Gazette, Kirby’s “suspicions heightened when, in late 1976, he received copies of documents suggesting Gulf and 28 other suppliers had conspired to form a cartel to keep Westinghouse out of the uranium business.” The documents were the minutes of a private meeting of uranium suppliers held in Australia. In a bizarre twist of fate, the whistleblower came in the form of Friends of the Earth, which offered Westinghouse additional documents if the nuclear power plant manufacturer would help the environmental group release jailed members in the Philippines. Kirby ran with what he had, ignoring their request, and began a course of intense litigation. The lawsuits were eventually consolidated and heard in a federal district court in Virginia. During the course of the litigation, Westinghouse took its grievances to London’s House of Lords, setting international case law about the discovery process in litigations. What really happened in the 1970’s? Kirby and Westinghouse were caught up in an international trade dispute, during a world revival of the uranium market. Uranium prices had collapsed in December 1959 when the U. government placed an embargo on the purchase of foreign uranium for domestic purposes.

The embargo came after the nuclear weapons build-up of the 1950s had peaked. In 1959 alone, the U. bought 20,000 metric tonnes of uranium for the country’s weapon procurement program, about 61 percent from Canada. Within a week after the embargo, global uranium prices fell by 75 percent. Twenty-four out of the 28 Canadian uranium producers and processors left the business. Two Canadian crown corporations remained with viable uranium assets to mine and sell. Eldorado Mining and Refining Ltd had stakes in mines at Port Radium, Key Lake and Rabbit Lake. The provincially owned Saskatchewan Mining Development Corporation owned had stakes in Key Lake, Cluff Lake and Down Lake. Before 1942, Eldorado Mining (later re-named El Dorado Nuclear Ltd) had been a privately owned radium company, which in that year was taken over by the Canadian government and made into a crown corporation.

During World War II and for the next decade, the company’s raison d’etre was to produce uranium for the U. and U. nuclear weapons programs. By 1956, both countries looked elsewhere for their uranium. By 1965, Canada’s production plummeted to 3,000 tonnes from a peak of 12, 000 tonnes annum in 1959. Canada’s uranium exploration came to a standstill, and only three mines remained operational. Boom town Elliot Lake became a ghost town.


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