Editor's Note: This is the Sixth Installment of an Ongoing Series Highlighting the Global Investing Outlook for 2008
By Don Miller
Of all the commodities to ride the volatile global roller coaster in 2007, uranium had the wildest ride. Overall, it gained 28% for the year. But that seemingly simple statistic masks a much-more-complex story.
At one point in June, uranium had gained 84% on the year. But then a mass sell-off – including up to 200 tons auctioned off out of the inventory of the U.S. Department of Energy – drove prices from $138 a pound down to $75 a pound in just three months.
Even though, the price roared back to $93 a pound, a price move fueled by a continued demand. Investors can take that incident as a sign of things to come.
At a time when global energy demands are soaring – outstripping the long-term supply of such crucial commodities as crude oil – the long-term outlook for uranium is exceedingly bright. Nuclear power is slowly making a comeback as an electricity source of choice in the U.S. market, and will be a key to the ongoing emergence of such economies as China and India.
Market fundamentals point to demand-driven price increases for uranium. And history shows that when uranium prices move higher, uranium stocks almost always tag along for the ride.
The situation in uranium is reminiscent of the world's skyrocketing demand for oil. In a classic supply-and-demand imbalance, eventually someone is going to pay the price. With uranium – as with oil – there plain and simple just isn't enough to go around.
"We are at the beginning stages of a massive bidding war in uranium," said Sol Palha, a noted uranium investor and analyst.
Nuclear energy is rapidly gaining acceptance as a clean, reliable alternative to burning coal. In a bid to combat global warming and keep up with soaring demand for electricity, countries are rushing to build nuclear power plants. Currently, there are 440 nuclear reactors in operation that generate about 16% of the world's electricity.
Another 25 are under construction, 38 are on order and 115 are proposed. Also, there are 284 research reactors and 220 nuclear-powered ships and submarines patrolling the oceans – key facts that nevertheless often slip by most industry analysts.
Refined uranium [known in the industry as U308] is what makes nuclear fuel. And the proliferation of new commercial nuclear power plants has the price of the radioactive metal soaring.
Now here's the thing: All told, those reactors soak up about 77,000 tons of refined uranium every year. Yet, in 2006, only about 50,000 tons of uranium was mined. That has forced some countries to run reactors at only 50% to 60% capacity, while others – such as India – have actually been forced to periodically take reactors off line because they lack the fuel to keep running them
For a more-clear picture of the uranium shortfall, consider the chart that follows:
And the insatiable global appetite for electricity – an appetite that induced China to spend a decade building the controversial-but-crucial hydroelectric project known as the Three Gorges dam – will drive demand for uranium even higher.
In the next 15 years, China alone is building 30 new plants, with as many as 200 needed by 2050. Japan is planning 11 more by 2010, and the United States and United Kingdom are also jumping back onto the nuclear bandwagon. These new plants will only serve to widen the supply/demand gap.
Uranium: Easy to Find – Not Easy to Mine
Now, uranium itself isn't scarce. In fact, it's so widespread that you might even have some in your backyard. But in order to mine it, uranium must be found in large concentrations. And only a small number of these concentrated deposits have been discovered worldwide.
With prices escalating, uranium-mining companies are rushing to dig up as much of the stuff as quickly as possible. But that is simpler said than done. It takes seven to 10 years to find and bring a uranium discovery into production. That explains why uranium-mining production was only projected to increase 9% in 2007 over 2006.
According to the, more than 50% of uranium comes from mines in Canada and Australia. Kazakhstan, Russia, South Africa, Namibia and the United States are smaller producers. Yet the smart players are already moving to secure supplies.
"China is doing massive deals in Africa and is now working on ever bigger deals in Kazakhstan," Palha, the analyst, told Money Morning. "China is basically locking up uranium supplies. This effectively means that there will be even less uranium for the rest of the world players."
Russia also has started to stockpile uranium after declaring it a "strategic resource." Russian Federation President Vladimir Putin recently traveled to Australia and signed a deal to buy uranium. It's only a matter of time before the Russians stop exporting yellow cake altogether.
And all this is complicated by a flood at Saskatchewan's Cigar Lake mine – the world's largest undeveloped high-grade uranium deposit with 232 million pounds of U308 at a grade of 19% [90% of the world's mines have ore grades below 1%]. Damages from the flood will halt the start of production until 2011 – at the earliest.
Since uranium's supply/demand imbalance clearly won't be improving anytime soon, the price of uranium is likely to continue its upward march.
Uranium: An "Alternative" Energy Source No Longer
Uranium investing is not for the faint of heart. Another accident like the one at Pennsylvania's Three Mile Island, or Russia's Chernobyl, would likely spawn a worldwide anti-nuclear backlash that could send uranium spot prices into a downward spiral for several years.
Even though new technologies and more-efficient power-plant designs have made commercial nuclear power a much-safer proposition, there are still older plants operating throughout the world that are potentially vulnerable to a Chernobyl-like scenario.
Disposal of nuclear waste is another issue that could spell trouble for uranium prices, as the Yucca Mountain Repository isn't expected to reopen until 2020.
The development of alternative energies like solar and wind are also a threat, although most experts believe these are ancillary energy sources – at best.
What's becoming increasingly clear is that – despite the admitted dangers of nuclear power – commercial nuclear energy is clearly the safest, cleanest, cheapest source of the massive amounts of electricity needed to fuel global growth, to avoid a worldwide energy crisis that will make the two in the 1970s appear as a costume-rehearsal, and to battle the long-term environmental effects of global warming.
And many safety improvements have been made since Three Mile Island and Chernobyl.
China is working on an advanced reactor using so-called "pebble-bed" technology, which makes a power plant virtually impervious to a meltdown situation. Improvements have also been made in the new generation of reactors, especially in cooling systems and containment domes. U.S. industrial giant General Electric Co. (GE) has developed technology-based products and services that help the operators of so-called "boiling water reactors," or BWR, to run their plans more safely and efficiently. And it's developed a new "advanced boiling water reactor," or ABWR, design that it says can be built in only four years, and then run cheaply and safely for decades thereafter.
There's also a "dirty little secret" about the nuclear power business that most investors never consider – but industry insiders know and understand very well. You see, the supply/demand picture isn't the only catalyst of soaring uranium prices.
The fact is that refined uranium is only a minuscule part of a power plant's overall cost. It takes an upfront investment of about $2 billion to build a new nuclear power plant. That's just the cost of construction.
When you add in the maintenance and labor costs, laying out $100 a pound for uranium to keep your plant running is a really a drop in the financial bucket. Indeed, some analysts estimate that the price of uranium could skyrocket to $2,000 a pound and still be viewed as a viable energy source for plant operators.
That really changes the picture for investors.
Investing in Uranium – Mining the Right Stocks
So where should you look for profit opportunities? If you look at the charts, some uranium mining company stocks move up and down almost in lockstep with spot prices.
If you want a pure play on an increase in the price of uranium itself, Cameco Corp. (CCJ) might be worth a look. It's the largest producer of uranium in the United States. And it's straight downstream from a glut of cash contained in a new energy bill that offers $18.5 billion in loans to cover the construction costs of new nuclear plants. It's no surprise that applications for new U.S. nuclear plants are taking off for the first time in 30 years.
If you're looking for more safety and diversification, Rio Tinto PLC (RTP) and BHP Billiton Ltd. (BHP) could fill the bill. Both have huge mining operations with large uranium deposits. Both have skilled management teams and offer engineering savvy. And both stand to reap substantial profits from any price surge in yellow cake.
As mentioned, U.S. industrial giant General Electric's GE Energy unit is a player in the commercial nuclear power market, both here and overseas. As a highly diversified company, it gives you only marginal exposure to the pending surge in nuclear plant construction, but that also diffuses risk. The company has a terrific international exposure, meaning it will benefit from the soaring economic growth in Asia. And it's in a transition, or turnaround, phase, meaning there should be some extra profit upside for investors who buy in now.
But perhaps the most intriguing company in the nuclear energy industry is Areva, which trades on the EuroNext Paris exchange. The stock is up 35% in 2007 and a whopping 333% in four years. Areva is the largest integrated nuclear company in the world, with manufacturing facilities in 41 countries and a sales network in more than 100 countries.
It's a one-stop shop, handling all aspects of nuclear power, including mining and refining, as well as building and maintaining nuke plants. Late last month, U.S. power supplier PPL Corp., (PPL) requested U.S. Nuclear Regulatory Commission licensing approval for the construction and operation of a new Areva U.S. EPR (European Pressurized Reactor) commercial nuclear reactor. Plans call for the plant to be built near Berwick, Pennsylvania. And Areva just signed a contract worth $11.6 billion to build two nuclear plants with China Guangdong Nuclear Power – the largest nuclear power contract in history.
However you decide to play this particular commodity, a bet on uranium is likely to help put a "glow" into your portfolio in 2008.
[Editor's Note: Uranium is just one of the commodities investors should look at in 2008. With the huge global demand for commodities of all types that China's frenetic growth is generating, and the inflationary pressures being spawned by the falling U.S. dollar, investment gurus such as "adventure-capitalist" Jim Rogers say that commodities are a good place to be in 2008. Rogers chronicles specific investment opportunities in both commodities and the shares of specific China-based companies in his just-released bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market." To see how Money Morning can help you can obtain a free copy of Rogers' new book, please click here.]
Writer Don Miller, a regular contributor to Money Morning, last wrote about the 2008 outlook for China. Money Morning's "Outlook 2008" series last covered the U.S. Economy. Next up: Alternative Energy Investments.
News and Related Story Links:
- Australian Uranium Association: .
- California Energy Commission:
Nuclear Power in California: 2007 Status Report.
- Money Morning:
How to Profit From "La Nouvelle Alliance" – France and China.
- The Indian Express:
Low on Uranium, 5 N-Power Units Are Shut Down Early.
Uranium Wars, by Sol Palha.
The Three Gorges Hydroelectric Project.
China the Asian Superpower: Three Gorges Dam.
PPL Corp. Plans to Set Up Areva EPR Reactor.