Friday, December 10, 2010

Why Uranium Prices are Set to Roar Through 2011 and Beyond

Check out the chart of uranium stalwart Cameco - can you spot the trend?
Cameco price chart 2011
And backing it up a bit, we can see that Cameco has decisively pushed to two year highs - and it's making a run at its pre "end of the world) levels:

Cameco long term price chart 2011
Most trend traders watching CCJ would have likely "gone long" upon its breakout to two-year highs last month - and they'd have been rewarded nicely for it over a short period of time.

But does Cameco - and uranium - have farther to run?  Chris Mayer, one of our favorite analysts, thinks so.  Chris writes in DailyWealth:
I couldn't see how the price of uranium would fail to rise. It seemed inevitable.

First, there is demand. Just look at the number of nuclear reactors under construction. According to Geordie Mark at Haywood Securities, there has been a 61% increase in the last two years. There has also been a 54% increase in the number of reactors planned and a 45% increase in the number of reactors proposed.

Take a look at the countries with the largest number of planned and proposed reactors: China, 159; India, 60; Russia, 44; USA, 31; Ukraine, 22; and South Africa, 15. According to a Morgan Stanley report, the new plants will eat up 32,900 tons of nuclear fuel. This is almost half of the demand from this year's 443 commercial reactors.

Plus, existing reactors are getting extensions. As Mark says, "We're also getting something of a sea change in views on existing reactor fleets, certainly from Europe, where we're seeing policy changes to extend reactor fleet lives." So Germany, Sweden, Belgium, and others are looking to extend their existing reactors.

All of these reactors – new and old – will need uranium. Most of this demand will have to come from the mines. For years, uranium demand has outstripped what the mines produce. The shortfall, so far, comes from existing stockpiles. But these stockpiles are dwindling.

This takes us to supply. The price of uranium is simply too low to support new investment. Most new projects won't make any money, even at $52 per pound. Mark at Haywood Securities estimates we'll need a price north of $65. Even then, "it would probably have to be higher than that to warrant risking venture capital for exploration," Haywood says. "Also, you need to see higher prices for investment in large-scale, leveraged, development-stage projects."

As it is, the uranium industry is having a hard time raising production. We've had some significant shortfalls from large mines, such as the Energy Resources of Australia's Ranger mine and BHP's Olympic Dam mine.

So I think you could see a number a lot higher – easily over $100 per pound at some point. Importantly, the market can easily support such a price.

The uranium price really has little impact on the economics of a nuclear reactor. The uranium is maybe 10% of the cost of nuclear energy. Most of the costs of nuclear energy are upfront. It's not like oil: When oil went over $140 per barrel, lots of businesses practically had to stop... They couldn't afford to operate at that price. It had a big impact on costs. That's not true with uranium.

Remember, the peak uranium price was $136 per pound in 2007. Most other commodities are pushing all-time highs. Uranium has a long way to go. Uranium also has probably the best, most clearly defined demand curve of any commodity.

As I say, I can't falsify it. I don't see any threat to the bull case for uranium in the works. At some point, as with all investment ideas, we'll find a way to falsify our case for uranium. (It is the fate of all investment ideas to spoil, like milk left out too long on the counter.) But that day seems a way off yet. There is lots of room to run – so hang onto those uranium stocks!
You can read Chris' full (excellent) piece here.

I concur with Chris - I love the supply/demand case for uranium.  And it's been awesome for years.  Demand should continue to chug ahead for years to come, and there's just not enough supply coming online to keep up.

If you're looking to play this trend, the aforementioned Cameco (CCJ) is the big dog in this industry.  Though a more diversified basket of uranium miners may be advisable, to protect you from specific company risk.

More commodity reading: Why silver may be setup for a moonshot in 2011

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