By Ivan Y.
The spot uranium price for U3O8 reached a 7-year low last week at $36.50 per lb. Those who have followed the uranium sector know that uranium prices collapsed after the Fukushima incident in 2011. However, I believe the odds favor a rise in uranium prices in the long-term for the following reasons.
1) Japan will be restarting some of its nuclear reactors perhaps as early as this year. Following the Fukushima incident, all of Japan's roughly 50 nuclear reactors were shut down for safety reasons. Earlier this month, however, Japanese utilities have applied to reactivate 10 of those reactors. The Japanese central government supports the reactivation. It may or may not happen in 2013, but expect this first wave of reactors to be activated by 2014 with perhaps a second wave to come sometime after.
2) New nuclear reactors are being built across the world and will come online in the next several years. Currently, there are over 430 nuclear reactors operating around the world. 64 new ones are currently under construction. More than 150 are in the planning stages and 300 more have been proposed according to the World Nuclear Association. It takes several years for a reactor to be built, but demand will increase in the next several years as these reactors come online.
3) Uranium mine supply has fallen short of global demand for many years now. In 2013, global demand is expected to be 170 million lbs, growing to 220 million lbs by 2022. The shortfall has been made up by Russia's Megatons to Megawatts program, which converts highly-enriched uranium from Russian bombs into low-enriched uranium used by nuclear reactors. Russia is expected to supply about 24 million lbs of uranium this year through this program. The agreement with Russia ends at the end of this year leading to some uncertainty about future supply in 2014 and beyond. More than likely, a new agreement with Russia will be reached, but as of today that has not happened.
4) New mines need a uranium price of at least $60 per lb in order to justify the costs of developing and operating them. Uranium prices thus need to increase by more than 50% to make building new mines economic.
In the US, if you're looking at any new production, you're going to probably need $65 to $70 uranium. (Marin Katusa)
Investors can choose between uranium mining stocks or invest directly in the commodity. Here are three stocks to consider:
- Cameco (CCJ) is the largest primary uranium producer in the world. Its two main projects (McArthur River and Cigar Lake) are the two largest high-grade mines in the world. Saying that they are high-grade would be an understatement. These are superior high-grade mines that are about 20 times richer than the average uranium mine in the world. CCJ is expected to grow its production from 21.9 million ounces in 2012 to 36 million ounces in 2018. McArthur River produced 13.6 million lbs in 2012 and Cigar Lake is in the final stages of development and is expected to start producing in mid-2013 and contribute 9 million lbs of production annually.
- Denison (DNN) is an exploration company with no current production, but it has a portfolio of several interesting projects. The most promising project is probably the Wheeler River project. Drill results have indicated very high-grade resources. DNN's stake in this project is 60% with CCJ owning 30% and another company owning the remaining 10%. Other notable projects are in Africa and Mongolia. DNN has a 100% stake in the Mutanga project in Zambia and a 85% stake in a project in Mongolia. I'd be cautious with DNN because Africa and Mongolia are not considered to be safe mining areas like Canada, Mexico and the U.S.
- Uranium Energy (UEC) is an exploration company with a little bit of production. Almost all of its projects are located in the U.S. Its production comes from the Palangana mine in Texas, which produced 69,000 lbs of uranium in the last quarter. The mine is being expanded which should increase production. Production should also increase when the Goliad mine, currently being developed, comes online. Initial production should begin within the next 12 months. UEC also owns its own processing plant in Texas which serves both the Palangana and Goliad mines.
While the mining stocks are one way to go, I prefer Uranium Participation (OTCPK:URPTF), which is a company that does nothing more than purchase uranium and hold it in storage. It is thus directly linked to the price of uranium. It holds uranium in two forms: U3O8 and UF6. After uranium is mined, it is converted to U3O8 and then to UF6. The stock often trades at either a premium or discount to its underlying uranium assets similar to a closed-end fund. But URPTF is neither an ETF or a closed-end fund. It is a stock.
Uranium demand is fairly predictable considering that we know how many reactors are online. As long as reactors are up and running, they need to be refueled. However, another wild-card event like Fukushima could provide another crippling blow to the nuclear industry. Unfortunately, these events can't be predicted. Barring another incident that creates fear and uncertainty, the need for uranium should continue to grow as more and more reactors come online.