by Alexander Green, Chairman, Investment U
Friday, October 19, 2007: Issue #721
The spot price of uranium has pulled back 42% over the last five months. And Wall Street’s been relatively cold on uranium mining stocks because of it.
Cameco (NYSE: CCJ), for example, is 20% below its 52-week high. But the industry is staging a comeback
Demand for uranium has never been higher. And current prices present an attractive buying opportunity. Here’s why…
Uranium: Record Demand, Dwindling Supplies
In all, 440 commercial power plants, 284 research reactors and 220 ship and submarine reactors require uranium to fuel their operations. And reactors worldwide have used up nearly twice the output of all the uranium mines in the world in the last year alone. How did the mining capacity fall so far behind?
After the Cold War, nuclear arms production ground to a halt. As a result, enough uranium was stockpiled to feed existing reactors for many years. During the 1980s and 1990s, no one even bothered to mine it.
Add to that the 1993 deal signed by the U.S. and Russia calling for the dismantling of Russian nuclear warheads and the feeding of the resulting diluted fuel to U.S. existing reactors, and the demand for mined uranium simply vaporized.
Oil was at $17 a barrel then, and no new nuclear power plants were on anyone’s drawing boards.
Fast-forward to 2007 and $88-oil: Annual worldwide uranium demand is roughly 150 million pounds, reserves are dwindling, and U.S./Russia weapons agreement has expired.
And it’s going to get worse a lot worse.
The Re-emergence of Nuclear Energy
More than 100 new reactors are under construction or in the planning stage, worldwide: 21 in the U.S., 30 in China, 11 in Japan, 20 in India and a whopping 42 in Russia.
The resurgence of interest in nuclear energy as a viable power-generating option has got suppliers of the precious metal scrambling. Right now, there’s simply not enough inventory to meet the current reactor capacity.
In fact, existing reserves could be gone in less than a decade. And miners must find a way to increase uranium production by 50% – just to keep pace.
What’s more, the Energy Watch Group estimates that of 300 uranium mines studied, roughly 90% have ore grades below 1%.
Why is this important? Mined uranium must be significantly enriched before it can be used in a reactor vessel. What this means is that with mostly low-grade ore, a greater amount must be mined just to keep up with the enrichment required for reactors.
Investing In Uranium
Right now, the price of uranium stands at roughly $78 a pound, down from $136 this summer. But the recent downward price move is no reason for alarm
The Department of Energy recently flooded the uranium market with some of its reserve supply to alleviate spot shortages. But the short-term boost to inventories won’t satisfy the immense reactor demand for long.
The good news for investors is that it takes five to eight years to bring a new mine on line. The barriers to entry are high. And that’s great for anyone holding shares in established producers.
Cameco’s up 28% since August 16th. Perhaps the Street’s finally catching on.
Today’s Investment U Crib Sheet
Saskatchewan, Canada, is home to one of the world’s richest uranium deposits. The Cigar Lake mine is projected to yield at least 232 million pounds of uranium and it was originally scheduled to come on line sometime in 2007 or 2008.
But in October 2006, the mine flooded substantially delaying production. At the time of the accident, uranium was trading for around $56 per pound, but spiked on the news. Three months later, prices topped $100 per pound.
Now operational setbacks are the norm, not the exception in the energy industry, and Cameco’s remediation is well underway. The latest completion date is sometime in 2010.
But here’s the crucial point on the calamity at Cigar Lake: the flood removed approximately 18-20 million pounds of expected production from the market place, sending prices through the roof.
Uranium production is highly sensitive to unfavorable events like this. Should another supply concern hit the market, expect another short-term spike in prices.