Uranium stocks have been on fire this month, jumping some 38% in aggregate. The move was largely driven by Rio Tinto Group’s (RIO) takeover bid for Hathor Exploration Ltd. that was topped by Cameco Corp (CCJ). The bidding war highlights the growing importance of uranium in the worldwide nuclear power market, which some analysts believe will face a big shortage.
Here’s a sector snapshot showing this strong performance:
- Uranium Energy Corp (UEC) +21.1%
- USEC Inc. (USU) + 30.7%
- Ur-Energy Inc. (URG) +44.8%
- Uranerz Energy Corp (URZ) +50%
- Denison Mines Corp (DNN) +50.9%
- Paladin Energy Ltd. (PALAF) +53.5%
- Uranium Resources Inc. (URRE) +66.3%
Of course, uranium investors have seen this scenario play out before and many remain skeptical of a huge rally. Between 2005 and 2007, the price of uranium soared to nearly $300 per kilogram or $135 per pound after the flooding at the Cigar Lake Mine in Saskatchewan led to supply concerns. After mid-2007, these prices began to fall and were trading closer to $100 per kilogram in 2010.
The long-term demand picture for uranium has remained largely constant, despite some setback concerns from Japan’s nuclear disaster. The Australian Bureau of Agriculture and Resource Economies (ABARE) projected worldwide uranium consumption to rise 6% to 86,800 tonnes this year, while some 107,300 tonnes may be needed by 2016 to support 72 new nuclear reactors scheduled to open, according to a story on Money Morning.
There are two primary sources of supply for uranium. First, Russia’s “Megatons to Megawatts” agreement supports the disassembly of nuclear arms, which in a larger context provides some 30% of worldwide uranium demand. And second, uranium mining companies are always coming online to fill the remaining demand.
While some bulls see a potential supply shortage – particularly as Russia’s agreement is expected to expire in 2013, bears insist the supposed supply shortage is overstated – especially after the troubles in Japan forced many countries to rethink their plans.
So, who’s correct? The answer is likely both. There is no doubt that there will be a supply shortage with 72 new nuclear plants coming online by 2016. But that supply shortage doesn’t necessarily equate to a sharply higher uranium price that many bulls are expecting. Rather, the M&A in the sector is the driving force behind the recent rally and may be a good reason for investors to be involved.