As I noted in my previous article entitled, "6 Ideas for Where the Next Bubble Will Be," I believe uranium prices are ripe to go much higher. There is an imminent supply demand imbalance due to the coming end of the Megatons to Megawatts program, as well as an abundance of new nuclear reactors set to come on board over the next 15 years, that I think will drive this market.
So the question: How high can uranium prices go? In that regard, I think it helps to first observe historical prices. See the chart below.
I think a re-test of previous all-time highs - more than double current uranium prices - is likely. The fundamental factors (i.e. supply/demand imbalance) are even stronger now, and central bank monetary policy is even more inflationary which will likely make markets as a whole more volatile and more prone to bubbles. Because I expect uranium prices to more double, I expect the same - even more so - for most uranium mining companies. Purchasing Cameco (CCJ), the largest North American uranium miner, or the uranium ETF (URA) are easy ways to play this.
I would expect profit-taking at $137 and selling from those who bought at the top of the last bubble and are eager to get out at breakeven. But I think the odds are still high that uranium will remain above $100. There is still immense demand, and even at $100 and beyond, nuclear is economically viable due to two enabling technologies: Breeder reactors and seaweed extraction.
1. Breeder Reactors. Increasing usage of and improvement of breeder reactors (pdf) have the ability to recycle uranium - and thus increase the economic value of each pound of uranium - in the creation of nuclear power. Breeder reactors are still a technology that needs further development and a more robust supporting industry of manufacturers and service providers. However, as the price of uranium rises, the economic imperative to utilize breeder reactors grows. Because of their ability to recycle fuel, breeder reactors make uranium at $200 economically viable.
2. Seaweed Extraction. Even without breeder reactors, there is a nearly infinite supply of uranium in the ocean. Indeed, it has been argued that uranium is actually a renewable resource. From this perspective there is no possible uranium shortage and no need even to employ uranium recycling/nuclear reprocessing (although there will still be economic advantages to doing so). Extracting uranium from the sea is going to require uranium prices be greater than $100 to be economically viable. So, when uranium extraction from the sea is coupled with breeder reactors, the possibility exists for uranium prices to go beyond $100 - and stay there.
Don't Forget About Time
Thus far we've outlined the case for how uranium can re-test its old highs, more than twice where we are now, and stay in that area. However, this fails to consider one big factor: Time. Namely, the ecosystem for breeder reactors and seaweed extraction is not in place, and given how regulated the uranium market is and how slowly nuclear progress occurs, this is not something I suspect will emerge overnight. As such, we are left with only ISR mining and conventional open pit mining to find uranium that will be used only once in many current reactors.
Until seaweed and breeder reactors get more developed, uranium prices could go much, much higher. As such, it seems to me there is a possibility of there being a multi-year period where seaweed extraction and breeder technologies are still in their infancy while demand for uranium as nuclear fuel is growing. I think this may be slightly comparable with the current situation in oil, in which peak oil is contributing to much higher gas prices and the emergent replacement technology - electric vehicles - are still too young to be viable on a widespread basis. From this perspective, I think there is an opportunity for uranium to go beyond $200, perhaps much higher, before settling down as nuclear re-processing via breeder reactors and acquiring uranium via seaweed extraction become sufficiently mature.
While I'm obviously very bullish on uranium, there are three potential spoilers to the scenario I've outlined above that I have on my radar:
1. End of Carbon Hype. While I favor uranium for its unrivaled energy density - which translates into superior cost and scalability performance - it is currently favored by governments for its lack of emissions and its ability to provide baseload energy. For me, the science on carbon emissions leaves much to be desired, and I'm not sure the problem is as big as it is made out to be or if the financial industry simply wishes to have a carbon tax and a market for trading carbon that they can gamble on and profit accordingly. If carbon emissions go out of vogue, uranium and nuclear power could lose demand - regardless of its merits.
2. Pseudo-Environmentalists Victory. It's no secret that nuclear power is despised in many circles because of its alleged environmental flaws. I don't share this view, and in fact I think nuclear is the one of the most environmentally friendly solutions for a world with 7 billion-plus people. An essay by energy journalist Robert Bryce entitled, "Get Dense" is worth reading for a deeper look at how density is the key principle for sustainability in a world with a massive population. However, regardless of what I think or the supposed environmental merits of energy density, the anti-nuclear activists are a prolific group that have scored victories in the past. If another nuclear accident happens, regardless of what its true causes are or even if it does not cause much damage but gets media hype, the potential exists for the nuclear industry to take a big hit and for uranium demand to evaporate rather quickly. I don't consider this likely, but in the interests of being alert, I think it is worth considering.
3. Other Energy Solutions. What if new drilling technologies lead to massive oil discoveries? How far can geothermal take us? Is free energy real, or just a fantasy? At this point, as far as I can see, nuclear is in the best position to displace fossil fuels and solve the energy/environmental crisis. It has both the scientific merits and an industry already in place that is growing. But if the price of uranium gets out of hand and breeder reactors are not sufficiently developed, the incentive for alternatives will grow. At the very least, potential substitutes are worth keeping an eye out for.
Conclusion: based on the current situation, I'll look to do a good bit of selling when price reaches $137, buy back after the sell-off, and then hold on for the market to truly overshoot itself - which I think could be by quite a bit, depending on what else is going on in the world and how the energy picture evolves as time progresses. For the patient investor, the opportunity in uranium is one I think could be life-changing.
Disclosure: I am long CCJ.