Investing In Uranium: The Bull Is Back?

While many commodities markets have been in bull runs over the past few years, uranium has been on a tear. Between 2000 and its June 2007 peak, the price of uranium shot up from around $7 per pound to $135. Then this summer, the spot price almost halved. Some blame unsavory speculators for uranium’s roller coaster ride. But it is better to blame the laws of supply and demand. After taking a look at both sides of the equation, it’s hard to argue that the uranium bull will slow down for long.

Investing in Uranium: The Demand Side

Uranium had its heyday during the Cold War. But after the Cold War, nuclear arms production ground to a halt. Uranium harvested from dismantled nuclear weapons meant that there was enough of the stuff around to feed existing reactors for many years. As a result, uranium prices slumped and it became economically unfeasible for companies to invest in new mines. Thirty years of underinvestment, strict regulations, and an overall lack of exploration for uranium deposits meant that commercial stockpiles dropped 50% between 1985 and 2003. Today, uranium producers are meeting just 60% of total annual demand — the balance supplied by decommissioned nuclear weapons. And even that’s 80% gone. In 2006, the world’s nuclear reactors used 173 million pounds of uranium. Yet uranium mines only supplied 103 million pounds. In the United States alone, consumption of uranium outpaces U.S. production by more than 20-to-1.

And all of this is happening just as demand for uranium is picking up. About 16% of the world’s electricity comes from 440 nuclear reactors. In the past 12 months, the number of proposed nuclear reactors has risen by 67% to 256 as governments across the globe turn to nuclear energy as a way to cut carbon emissions quickly and painlessly. Currently, there are 28 reactors under construction around the world by familiar names including Japan, China, India and Russia. China alone plans to build two new 1,000-megawatt nuclear reactors every year. Other Asian countries are getting into the act as well. Indonesia, Vietnam and Thailand each plan to build their first nuclear-power plants in the next few years. The Philippines and Malaysia are also considering entering the nuclear fray. By 2050, scientists estimate the world will need about 900 more nuclear power plants to keep up with growing energy requirements.

Investing in Uranium: The Big Turnaround in Nuclear Power

This is a surprising turnaround for the single most feared and hated energy source in the world. Here are some reasons.

Oil production is not only peaking, but it also has the unfortunate quality of being located in some the globe’s most unsavory political hot spots. Compare that to uranium where 38% of the world’s uranium reserves are found in Australia. And it’s not just about U.S. energy security concerns. Even the former Soviet Republic Belarus, which was hardest hit by the Chernobyl nuclear accident, is accelerating its nuclear energy program. It does not want to be held hostage to the Russian bear, its primary supplier of natural gas.

Awareness of global warming also is contributing to the revival of nuclear power, and hence, uranium. When you read that Greenpeace founder Patrick Moore notes that "Nuclear energy is the only non-greenhouse gas-emitting power source that can effectively replace fossil fuels and satisfy global demand," you know that attitudes may have reached a tipping point.

Finally, the addition of three billion capitalists to the world economy in the last 15 years has accelerated worldwide growth to an unprecedented extent. Everyone wants to live like Americans and Western Europeans. And that means a huge spike in global energy consumption.

Meanwhile, the uranium industry has been caught off guard. There are few people still around who really know the business. At the industry’s height, about 20,000 engineers and geologists worked in the uranium sector in American companies. That number has plummeted to about 400 engineers and geologists now, many of whom are about to retire.

The industry itself is plagued by supply problems like flooding at the Cigar Lake mine in the Canadian province of Saskatchewan. The mine had been expected to provide about 18 million tons of uranium a year, or 17% of world production, when it began producing in 2008. But the flood means that the mine is now unlikely to come on stream before 2011. As one analyst pointed out, it’s like the global oil market losing Saudi Arabia’s production.

Investing in Uranium: A Roller Coaster Ride

The uranium market experienced its first market wobbles in recent years this summer. There are several explanations. Demand for fueling reactors fell 72% since peaking in April, as utilities were reluctant to rebuild their inventories at high prices.

The U.S. Department of Energy’s recent auction of half a million pounds of uranium further depressed uranium’s price. The real culprit may have been the credit crunch which forced hedge funds to sell uranium holdings to cover losses elsewhere. With speculators holding the equivalent of 22% of global uranium production in 2005, it’s easy to point the finger in their direction.

But after six weeks of sideways motion, the price of uranium has once again begun to rise. October also tends to be 50% more active than other months of the year as it coincides with the refueling cycles at nuclear plants in the United States. And it’s worth pointing out that despite the big bull rally in uranium over the past couple of years, uranium hasn’t come anywhere near its old peak in inflation-adjusted terms. In 1978, uranium hit $43.40 per pound. But adjusted for inflation, that price is around $145 per pound in today’s dollars. On that basis alone, uranium has plenty of upside.

The bottom line? Despite some very recent rumblings at industry conferences about new supplies of uranium coming on line, it’s likely that demand for uranium will exceed supply for many years to come. The supply and demand fundamentals are still the same as a few months ago. And that means that the uranium boom — once it finds its feet — has plenty of legs left.


Nicholas A. Vardy
Editor, The Global Guru