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.S. 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.S. 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.S. 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.S. and
U.K. 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. Lacking buyers, a
self-serving Canadian Prime Minister Lester Pearson announced in
1965 that Canada's exported uranium would only "be used for
peaceful purposes only." Nearly a year earlier, the U.S.
government had banned the enrichment of foreign uranium for
domestic use, pre-empting any newsworthy value to Pearson's
announcement.
Between 1964 and 1967, more than sixty nuclear reactors were
ordered for the U.S. civilian nuclear energy program.
Westinghouse's newly designed light-water reactor created
excitement within the industry. During that time, Canadian
uranium exploration was taken out of mothballs and production
resumed. Hardball shenanigans in Washington kept the uranium ban
intact, and global uranium prices reached an all-time nadir of
$4/pound. Canada was shut out of the U.S. nuclear fuel cycle
market, and Ottawa was forced to stockpile a reported $100
million of uranium during the Nixon presidential administration.
By late 1971, Prime Minister Trudeau's cabinet had reached the
end of their rope failing at every step to remove the ban by
diplomatic means.
News reports suggest a number of uranium-heavy countries held an
initial meeting in Paris in February 1972 to establish a
uranium-producer's alliance, in essence a de facto uranium
cartel. Others suggest it was formed in April 1972, after the
Canadian government reportedly gave its blessing. Canadian
author Gordon Edwards (Canada's Nuclear History) bluntly wrote,
"The purpose of the cartel was to secretly manipulate world
uranium prices using a phony bidding system. Hidden quotas were
established by representatives from Canada, France, Australia,
South Africa and Rio Tinto Zinc (London Stock Exchange: RIO)."
Namibia and Niger were also included in the alliance, as was
Gulf Oil, at least according to Robert Kirby of Westinghouse.
When the U.S. government re-affirmed its trade embargo in March
of that year, a subsequent uranium cartel meeting took place in
Johannesburg, South Africa in May 1972. At an Ottawa conference
on May 28, 1972, it was reported that Jack Austin, then deputy
minister of energy, voiced his concern the cartel could be
considered illegal under Canadian law. Nonetheless, the
politicians gave the uranium cartel a green light.
The alleged price manipulation was paying off. In 1973, the spot
uranium price doubled. By 1976, it doubled again and stayed
above $40/pound for nearly four years. It was around that time
the alleged cartel disbanded to avoid international anti-trust
laws, which Westinghouse was arguing after unleashing a tsunami
of litigation. Westinghouse was desperate to escape its
liability over the promise of cheap uranium to utilities. In
March 1976, the U.S. Department of Justice began investigating
possible infringements of U.S. anti-trust laws by the alliance
of uranium producers. By mid 1977, a federal grand jury had been
formed to pursue the investigations and possibly initiate
criminal proceedings.
In a letter dated July 12, 1977, the U.S. Attorney-General wrote
to the U.S. District Attorney for the Eastern District of
Virginia, explaining the quandary this international episode had
caused and discussed invoking immunity to obtain witnesses who
would talk about the alleged conspiracy:
"These persons are not likely to come within the personal
jurisdiction of the United States courts so long as the
Department of Justice continues a sitting grand jury
investigation of the international uranium industry; (3) These
persons are British subjects and we have determined that it is
highly unlikely that their testimony could be obtained through
existing arrangements for law enforcement co-operation between
the United States and the United Kingdom; (4) The Department of
Justice has been largely unable to obtain information from these
foreign persons about the subject matter of this
investigation..."
By mid 1978, Westinghouse Electric's complaint against Rio Tinto
Zinc in the United Kingdom floundered in that country's court
system. Obtaining evidence in England was markedly different
from the U.S. style of depositions.
Conclusion
During this litigious period, Westinghouse settled with several
utilities, but continued to pursue the lawsuits. By 1979, Judge
Merhige in the U.S. District Court for the Eastern District of
Virginia, Richmond Division, ordered Westinghouse and the
utilities to equitably resolve their differences. Westinghouse
agreed to concessions that ultimately cost the company nearly $1
billion, but locked up the utilities as long-term customers by
providing parts and engineering services for up to 25 years. In
quiet out-of-court settlements, the uranium suppliers paid
Westinghouse nearly $100 million and supplied the company with
uranium.
Besides, there was another cartel in the 1970's, which posed a
far greater risk to the developed nations. From the oil embargo,
which began 1973 and throughout the decade, the OPEC oil cartel
overshadowed the tiny uranium cartel. Saudi King Faisal's "oil
sword" had a far greater impact on the energy climate, Gross
Domestic Product, inflation and quality of lifestyles, than an
anxious alliance of uranium producers trying to meet production
costs and peddle stockpiled inventory at higher prices. Not only
was the oil crisis a more serious affair, but another un-related
episode tanked the price of uranium.
Just as the decade was coming to a close, on March 28, 1979, a
water pump broke down at the Three Mile Island nuclear plant,
about ten miles southeast of the Pennsylvania state capital. It
was an unexpected event, heightened Hollywood-style, as the
accident coincided with the opening of a new movie called The
China Syndrome, starring Jane Fonda, Michael Douglas and Jack
Lemmon. In short order, many Americans were persuaded that
events within the movie were somehow related to the Three Mile
Island event. This was a Hollywood PR man's dream. Fanning the
media flames to capture a larger box office gross, a basically
nothing episode (in terms of loss of human life, since no one
died from the reactor accident) was transformed into an
earth-shattering campaign against the entire nuclear energy
industry. Ironically, more died in the movie (one, Jack Lemmon's
character) than as a direct result of the Three Mile Island
accident (0 reportedly died).
Hysterical commentary from that era bespoke of a nuclear
accident, which would melt down to the earth's core, as one
character in the movie suggested. Unable to distinguish what was
movie fiction from scientific reality, the movie's message left
a horrifying memory in the collective minds of the general
populace. A general panic followed, and nuclear energy was badly
tainted by the accident. As the momentum for building U.S.
nuclear power plants came to a grinding halt, overflowing
inventories for the raw material to fuel those power plants had
once again nullified the uranium exploration and mining sector.
It took more than two decades to draw down those built-up
uranium inventories, about as long as it has taken for the
public to once again accept nuclear energy as a safer, cleaner
alternative to fossil-fuel powered electricity.
Why is today's uranium bull market different? Is the current and
spectacular rise in spot uranium prices different today than it
was in the early to mid 1970's, when an alleged uranium cartel
reportedly bid up prices to an artificial level? Is that same
factor occurring during the current steep rise in the spot price
of uranium? Will Toshiba sink into the same quicksand, during
the balance of this decade, as Westinghouse Electric once did?
(To Be Continued)