In summer 2010, Russia rocked the uranium market when it said it would load fuel into Iran’s first nuclear power plant on Aug. 21. It escalated U.S. concerns that the Kremlin would consider exporting more of its uranium to China and India rather than to the United States. The move was further alarming because the United States had asked the Russians to delay starting the plant until Iran stops enriching uranium. This, as well as other fundamentals, suggest the uranium market is poised to go nuclear.
Despite its importance to the world economy, uranium is unfamiliar to most commodity traders. What are the key fundamental drivers? First, getting exposure to uranium is not as simple as buying or selling, say, stock indexes or gold. The commodity has a thinly traded futures market on the New York Mercantile Exchange (Nymex). There are no listed options.
On the spot market, uranium fetches roughly $60 a pound, quite a bit off the $148 a pound seen on May 8, 2007. The decline in uranium from the 2007 highs has been because of widespread speculation that the Russians would flood the market.
True, Russia is a major player; however, it’s not the only player. On a macro-level, it’s also critical to keep an eye on Kazakhstan. According to the World Nuclear Association, the former Soviet Republic state became the world’s largest uranium producer in 2009 with nearly a 28% share of the market. That share is expected to rise to 30% by 2015.
There is reason to be cautious. In recent years, Kazakhstan’s government and foreign oil companies have feuded over production agreements. This suggests the Kazakh government could look to slow down and diversify its reliance on energy, including uranium, to encourage future economic growth. Supporting this theory is the expectation that uranium prices should be closer to $75 a pound to provide incentive for new projects around the world.
Also, according to the CIA World Factbook, China was the top destination for Kazakhstan goods in 2009, while Russia and China were the top two importing partners of Kazakhstan. Hence, economic prosperity could lie more to the East than the West for Kazakhstan. This means that despite any further growth in uranium supplies by Kazakhstan, output likely will go to Russia, China, Japan, South Korea and India as opposed to North America, where U.S. President Obama is a stated proponent of nuclear energy.
Time to buy?
To determine whether now is the time to get long uranium, keep in mind that the Energy Information Administration (EIA) said the demand for electricity in the United States is expected to increase by 20% by the end of the next decade (see "Power surge"). Uranium demand may be bolstered by one noted benefit of nuclear power plants: They produce no greenhouse gases. This has been a hot topic for years, made even more timely in the wake of the BP oil spill and global warming activists publicizing that the average coal plant can dump nearly 4 million tons of carbon dioxide into the air each year.
On the demand side, some estimates suggest China will buy nearly 5,000 metric tons of uranium this year, or double what it currently consumes. Consider that China’s uranium demand may climb to 20,000 tons per year in the next decade — that is more than one-third of the 50,000-plus tons mined the world over in 2009.
And Russia? Prime Minister Vladimir Putin has been targeting Russia’s use of nuclear power to jump to 25% by 2030 from roughly 16% now. Some suspect that Putin will seek greater ties to China for Russia’s uranium because of cooling relations with the United States and China’s newcomer status to the nuclear party; China derives only 2.3% of its electricity from nuclear power, compared with the United States’ nearly 20%.
Among the highest nuclear power users is France. The country gets more than 75% of its electricity from nuclear energy.
U.S. policymakers likely are considering proposals that would impose charges on entities that emit carbon dioxide, the most common greenhouse gas, with cap-and-trade legislation more realistic in 2011 with a newly elected Congress. Despite many Republicans being opposed to cap-and-trade, some members likely will be persuaded by the public outcry against crude oil’s environmental dangers from the BP oil spill. Such cap-and-trade policies could artificially increase the cost of generating electricity with fossil-fuel and further encourage the use of nuclear power. If cap-and-trade is not tied to alternative energy sources, the program only will drive up energy costs for the U.S. consumer. At roughly $10-$25 per metric ton, carbon dioxide charges probably would make nuclear generation more competitive with existing coal power plants. For more on the bullish case for uranium, see "Uranium prices poised to rise" (see ).
Getting in
With the futures market currently illiquid, options non-existent and the spot market out of reach, there is another way to get exposure to uranium: nuclear industry companies and their stocks.
One company that has close ties to the uranium market is Cameco (CCJ). CCJ (market cap $15.9 billion) is a top uranium producer with roughly 16% of the world’s production from its mine in North America (see "Uranium players"). The company has 480 million pounds of proven and probable reserves and extensive resources.
CCJ has a memorandum of understanding to pursue a long-term uranium deal with China’s Guang-Dong Nuclear Power Holding Company. There also is the potential of joint development opportunities. This is a utility that currently is managing one of the largest reactor construction programs in the world.
Although there are risks in investing in all stocks, CCJ is a relatively conservative bet. There are more speculative alternatives. The small micro-cap uranium stocks likely would experience stronger upside in the case of a surge in the market.Here is a roundup.
Strathmore Minerals: Strathmore Minerals (STM on TSX Venture Exchange; market cap $107 million) is a consulting client of Blue Phoenix Inc. Additionally, STM recently was listed on the OTCQX under STHJF. STM operates in Wyoming, the largest U.S. state for uranium production. At its Gas Hills property, STM has advanced efforts with a 100-hole development drill program supported by a uranium exploration data library acquired from CCJ (STM’s acreage is close to uranium giant AREVA’s Lucky Property).
Japan’s Sumitomo Corp. is a 40% partner in STM’s Roca Honda mine in the Grants Mineral District of New Mexico. That Sumitomo has retained its alliance with STM amid its well-publicized FOCUS ‘10 initiative during which it has re-committed itself to core fundamentals should give investors confidence that this is a long-term growth relationship. Perhaps the company agrees. In September, STM put in place a 12-month, 4.39 million share buyback program.
STM has an experienced management team in place with former ties to AREVA, as well as the International Atomic Energy Agency (IAEA). That STM is a name to watch is amplified by STM’s Roca Honda project having higher grade uranium, and possibly could be larger, than URI’s Church Rock, Uranerz’s Nichols Ranch and UR Energy’s Lost Creek projects combined. However, STM’s market cap is the lowest in the group.
USEC Inc: USEC Inc. (USU; market cap $675 million) received a cash infusion of $75 million from Babcock & Wilcox and Toshiba, which owns Westinghouse Nuclear. Babcock & Wilcox and Toshiba, relatively new board members of USU, agreed to purchase $50 million in convertible preferred shares in USU if the company can secure a loan guarantee promise from the Energy Department and another $75 million if USU can actually close the loan guarantee, a figure which would be for $2 billion.
Uranerz Energy Corp.: In late August 2010, Uranerz Energy Corp. (URZ; market cap $233 million) saw its board of directors implement a share rights plan set at $8.75 to protect its shareholders from what it believes would be any unfair takeover attempt.
Uranium Energy Corp.: Uranium Energy Corp. (UEC; market cap $417 million), a company with no debt, announced its first qualified resource at Palangana in South Texas Fall (2010) with deliveries expected in early November. UEC is close to major near-term uranium output. Shares of UEC are held 11.2% short.
Ur-Energy: Ur-Energy (URG; market cap $288 million) is completing permitting activities to bring its 2 million pound Lost Creek, Wyo. uranium deposit to production in early 2011. URG, which has more than 65,000 acres in mining-friendly Wyoming, has no debt and more than $30 million in cash. URG should be able to produce more than 1 million pounds of uranium per year once production begins for a minimum of 6.5 years. The company uses In-Situ Recovery (ISR) mining, which is cost effective and has a low environmental impact.
Paladin Energy: Paladin Energy (PALAF on OTCBB; PDN on TSX) has uranium projects currently in Australia and two operating mines in Africa. The company is ramping up production at its flagship Namibia project from 3.7 million pounds to 10 million pounds by 2014. The Kayelekera Mine in Malawi is producing 3.3 million pounds of uranium. There are some concerns about the safety of investing in areas that could see some nationalization of certain mining assets. Additionally, Paladin Energy is in the process of acquiring all the uranium assets from Frontier Gold (FRG; market cap $1.76 billion). Assets include Frontier Gold’s 100% owned interest in Aurora, located in Labrador, Canada. Aurora may be able to produce 5.7 million pounds of uranium per year.
Denison Mines: Denison Mines (DNN; market cap $1.248 billion) produced 1.4 million pounds of uranium and was slated to ramp up production to 1.6 million pounds at the end of 2010. Its goal is to boost that figure to 10 million pounds over the next five years. DNN is debt free and one of the more diversified names in the industry in terms of projects and geography (Canada, Mongolia, Zambia and three locations in the United States). In Canada, DNN operates the Wheeler River project (DNN owns 60%, CCJ owns 30% and JCU owns 10%).
Uranium Resources: Uranium Resources (URRE; market cap $316 million) recently was given the green light to move forward with development of its Churchrock/Crown Point project in New Mexico after years of delay.
In addition, those who would prefer exposure via a fund may consider PowerShares Global Nuclear Energy (PKN), the Market Vectors Nuclear Energy (NLR), Barclays iShares Global Nuclear Energy (NUCL) or Global X Uranium ETF (URA).
The longevity of uranium is more appealing vs. gas and coal finds. The need of major reactor turnarounds over the next 20 years is real and will no doubt outpace supplies. This suggests that going nuclear will be a popular future investing hot topic that smart investors should prepare for today.
Uranium prices are poised to rise
- The U.S./Russian honeymoon is strained as Russia’s use of nuclear power is to jump from 17% to 25% by 2030.
- Kazakhstan, the largest producer of uranium, is looking to diversify its economic dependence on energy.
- South Africa, which holds 7% of the world’s uranium reserves, appears on the verge of cutting uranium exports to ensure sufficient domestic energy supply.
- India will see its electricity needs jump a whopping 10X to about 8,000 tons by 2020, according to officials at the state-owned Nuclear Power Corp.
- The World Nuclear Association has said China will see its demand for electricity soar to 85 gigawatts by 2020 (that is nine times its present capacity).
- The November U.S. Congressional elections may kick-start legislation that favors nuclear energy to satisfy a growing American appetite for electricity.
- Any cap-and-trade legislation in 2011 will make the economics of nuclear power more favorable.
- Global population growth and industrial development will lead to a doubling of electricity consumption by 2030.
- The demand for electricity in the United States is expected to increase by 20% by the end of the next decade and secondary supplies of uranium are dwindling.
- In the past 30 years, the percentage of electricity generated by nuclear power plants in North America has grown from 4.5% to more than 20%.
- Given that it takes about 10 years to permit and construct new mines, the industry will be challenged to meet demand (similar to the crude oil market).
- In 2010, there were 59 reactors under construction (up from 49 in 2009).
E-mail Licata at jlicata@bluephoenixinc.com.
