Lehman Sitting on Bomb’s Worth of Uranium Cake as Prices Slump

By Linda Sandler, Yuriy Humber and Christopher Scinta

April 14 (Bloomberg) -- Lehman Brothers Holdings Inc. is sitting on enough uranium cake to make a nuclear bomb as it waits for prices of the commodity to rebound, according to traders and nuclear experts.

The bankrupt bank, in the throes of paying off creditors, acquired uranium cake “under a matured commodities contract” and plans to sell it when the market improves “to realize the best prices,” Chief Executive Officer Bryan Marsal said.

Lehman, once the fourth-largest investment bank, has an estimated $200 billion in unsecured liabilities left to pay. The uranium, which may be as much as 500,000 pounds, might fetch $20 million at today’s prices of about $40 per pound, said traders who asked not to be named because of the confidential nature of the data. Marsal said the traders’ estimate of Lehman’s uranium holding is “reasonable,” while declining to be more specific.

Uranium has dropped for five straight months from $55 a pound on Dec. 1 on concerns that countries including China and India would delay nuclear power projects because of the global economic crisis, and because Lehman might dump its radioactive material on the market, the traders said.

More than 43 million pounds of uranium-oxide concentrate, or yellowcake equivalent sold on the spot market last year, more than doubling the 2007 trading volume, according to Roswell, Georgia-based Ux Consulting Co.

The oversupply in an illiquid market pushed prices down about 30 percent between September and November, spurring sales by speculative investors, such as hedge funds, said John Wong, a fund manager in London at CQS UK LLP, which has $6 billion under management including shares of funds that own uranium.

Not Liquid Market

“What people found out is that this is not like playing copper where it’s a liquid and deep market,” Wong said. “A lot of the funds playing this market have blown up.”

Uranium typically trades through broker-dealers, including MF Global Ltd. and Tullett Prebon Plc, or in direct sales between mining companies and nuclear utilities. Utilities buy processed ore known as yellowcake, which is later converted, enriched and fabricated into fuel rods. The New York Stock Exchange also supports trading in futures contracts, which are not linked to physical delivery.

The market is regulated by governments, who control transport of radioactive material and limit the number of buyers and sellers by requiring them to obtain licenses. Utilities and producers are key buyers and sellers. Lehman got its license just a month before its bankruptcy, one of the traders said.

A supply of 500,000 pounds of yellowcake is just “slightly” less than the amount needed to make one bomb, or fuel one nuclear power reactor for a year, if the latest enrichment technologies are used, said Gennady Pshakin, an Obninsk, Russia-based nonproliferation expert.

Unloading Everything

Lehman, before filing for bankruptcy protection in September, actively traded commodities in the broker-dealer market and on exchanges such as the London Metal Exchange and the New York Mercantile Exchange. After filing, it began unloading holdings of everything, including greenhouse-gas credits, traders said. Uncertainty about the bank’s plans for its uranium is helping to depress prices, Wong said.

“Everyone knows there’s still an overhang,” he said. If Lehman sold its remaining stockpile, “there’d be a tightness in the market immediately.”

Lehman “tested” the uranium market after its bankruptcy filing in an effort to raise cash, pulling back after it did because “everyone was low balling,” Marsal said. With $10 billion in the till today from other asset sales, Lehman isn’t in a hurry any longer to sell uranium, he said.

“We plan on gradually selling this material over the next two years,” he said. “We are not dumping this on the market and have no fire-sale mentality.”

Forced to Liquidate

Lehman’s bankruptcy forced it to liquidate assets to pay creditors. Some $400 billion out of $639 billion in assets were offset by matching liabilities, Marsal said.

The bank raised a quick $1.75 billion in September by selling its North American brokerage and real estate to Barclays Plc. It later got the London-based bank to return thousands of Lehman-logoed knickknacks that also will be sold to pay creditors, the bank said. They include tote bags, umbrellas, stress balls, Tiffany paperweights and other items now stored in closets and warehouses from New York to Chicago.

Lehman’s radioactive material is partly stored in Canada, Marsal said. One trader, who declined to specify a date, said he was offered 450,000 pounds of Lehman uranium stored in facilities owned by Canada’s Cameco Corp. and France’s Areva SA.

“When Lehman first approached the market to sell the material, they had a flawed market strategy,” said Kevin Smith, head of uranium trading and marketing at commodities brokerage Traxys SA. “They were trying to sell it all as a block and part of it was at a less desirable location. It was a take-it-or- leave-it offer, so everyone left it.”

The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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