Power Plays

01/13/2006 12:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue combines the expertise of a trader with a broader focus on long-term fundamentals. While experienced in all areas of investing, he has developed a noted expertise in energythe source of both of his top stock picks for 2006.

"Coal continues to account for more than 50% of US electricity generation; low sulphur coal from the Powder River Basin (PRB) of the western US is in particularly high demand. The real supply problem for coal right now remains transportation; a particularly big problem for coal coming from the PRB destined for power plants on the East Coast. Most coal is transported by train and the railroads have been able to push through some aggressive price increases for transporting coal. The industry hasn't been this healthy in decades.

"While the longer-haul rails have seen a nice run, the regionals are overlooked and my favorite play is Genesee & Wyoming (GWR NYSE). The North American coal business is booming for Genesee and the firm has instituted several price increases and fuel surcharges while keeping a firm lid on costs. Even better, it has been a major consolidator for the regional rail industry and has made 25 acquisitions since 1985. The long-haul railroads have been selling off their regional networks, preferring to focus attention on the long-haul routes. Genesee has been able to buy up these smaller networks, reduce operating costs, and improve efficiencies.

"My top speculative pick for 2006 is Uranium Resources (URIX Other OTC). Nuclear power is a clean, efficient, and reliable power source that's making a comeback globally. Of course, the key fuel for nuclear power plants is uranium and demand for uranium is on the rise. Uranium Resources owns a series of uranium mines in Texas and New Mexico, states with considerable reserves of yellowcake. Production should be over one million pounds this year. Supply contracts are outstanding for about 300,000 pounds of uranium to be delivered annually from 2005 through 2008.

"The problem with Uranium Resources is that its production costs are about $11 per pound. That's fine with uranium prices now more than $30 per pound but it was disastrous in the late 1990s when prices rested under $10. To keep itself alive in those lean years, the company issued a boatload of shares, diluting its shareholder base. Uranium Resources recently secured yet another offering of shares in May, raising an additional $1.5 million.

"This money will finance future expansions of Uranium Resources' mining operations. Provided uranium prices remain high, this stock has the potential to turn the corner on profitability for good. If that happens, the stock should see some very impressive gains. I can't overemphasize this point: Uranium Resources is highly speculative and if you decide to buy the stock you should take only a relatively small position."

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