Over a two ounce McGill scotch on the rocks a few weeks ago, a gorgeous young lady remarked that she felt the world was a more dangerous place. Her blue, illustrious eyes then turned to me, and she asked in a very sweet, gentle voice if I agreed with her prognosis, to which I expressed my disagreement and that human kinds best days lie ahead. After the events of the past week, it appears my lovely friend was quiet prophetic.
As the world has entered a more dangerous state in recent weeks, opportunities emerge as those who can't take the heat leave the kitchen. One such opportunity is in Uranium, a metal that has seen a massive sell off due to fears about Nuclear Power being shunned in the wake of the Japanese earthquake demonstrated by the Nuclear ETF NLR:
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- Japan currently has 54 nuclear reactors in total, with 11 offline due to the earthquake and tsunami. The loss of the 11 reactors represents a loss of only 3.5% of electric generation capacity for Japan.
- Japan accounts for 12% of global uranium demand; however, they only have two reactors under construction. Meanwhile, there are 42 reactors being built in China, Russia, and India.
- Credit Suisse estimates that 90% of the growth in new nuclear reactors comes from China, Russia, and India. This is where they see the most significant risk to uranium outlook and are watching those countries with interest.
Although Japan accounts for 12% of the global demand, it'd be erroneous to think that they would start decommissioning plants. Besides the extravagant costs of such an endeavor, it is irrational to take a rare 8.9 magnitude earthquake and discontinue one of the best methods of creating power that has been invented. After Chernobly and Three Mile Island, both the Ukraine and the USA continue to use nuclear, with Ukraine increasing its use of nuclear power and now receiving 47.5% from this source. Ex post, these nuclear disasters have not stopped its proliferation.
Worldwide electricity demand continues to rise in an exponential fashion, which nuclear's share of providing is forecasted to continue to increase:
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Supply of uranium may be constrained in the future due to new discoveries rapidly tailing off in the 2000's, as noted by MIT's Thomas Neff in 2007:
"Just as large numbers of new reactors are being planned, we are only starting to emerge from 20 years of underinvestment in the production capacity for the nuclear fuel to operate them. There has been a nuclear industry myopia; they didn't take a long-term view."
The world currently uses 67,000 tons of Uranium a year, which at current uses amounts to 70 years of supply. There are potential threats such as fast reactor technology, which would greatly enhance the amount of power generated per unit of uranium undermining price, but this doesn't appear to be a near term threat.
Thus I conclude that nuclear power is not going to disappear, its use will increase, making exposure to the sector an advisable addition to your portfolio.
I looked at a few uranium mining companies as a option to take advantage of this situation, specifically Uranium One [TSX:UUU], but didn't like its financials. To avoid company specific risk, I'll focus on an ETF, the one I like in this space is Global X Uranium ETF (URA):
I've chosen URA rather than the aforementioned NLR due to the larger drop in the former. URA has seen a small bounce since its lows, but I believe the move has just begun. As a testimonial to the irrationality of the sell off, observe the volume the past few days, it's over 10 times the average.
I'd hold this play until it hits at least the $19 range, and like it long term given the macroeconomic data. In the event my lovely friend continues to be proven correct, I recommend a stop loss in the $12.50 range.