Energy Diversification

Nuclear Power Is in Demand

Its important that we are finally highlighting that nuclear power is clearly not an emission-free, or CO2-free energy source. The plant construction and uranium mining produce various pollutants and leave mine tailings.

This does not invalidate the nuclear energy proposition, but its clearly an issue worth evaluating in light of the climate change arguments.

From an investment standpoint, the single largest exposure to all aspects of the value chain from uranium exploration and production to nuclear plant construction and management is Areva (CEI.PA / ARVCF.PK). For a more diversified energy and infrastructure play, but with clear exposure to nuclear plant development, Shaw Group (SGR) is a good opportunity. Energy Solutions (ES) is a back-end play on the management of nuclear sites & waste.

Its important not to buy a basket of any old equities with nuclear attached to them. The utilities mentioned above are going to be the ones paying to develop nuclear plants, so its a capital drain for them for a long time. And with the latest estimates of plants costs at $5 billion to $12 (twelve!) billion, even with loan guarantees, this is a distant way to play nuclear.

Denison Mines (DML.TO / DNN) should clearly have been mentioned alongside Cameco and Uranium One. The point I would focus on here is a very strategic one: CHINA is likely to be both the nearest-term AND largest nuclear developer. Why? It can make it happen faster (for better or worse) because NIMBY concerns can be ignored. More importantly, remember that the Chinese lose 5,000 coal miners every year! These direct deaths coupled with the indirect health issues are a clear concern in China -- the government is aware and cares about these issues.

Many uranium-watchers claim China will try to tie up strategic uranium reserves by buying public explorers and producers. China has no reason to publicly announce this, but it has recently confirmed that its nuclear development is much further along that was expected. China also reportedly met with Cameco recently.

If China were to buy uranium companies, it would go for geographically accessible nations -- and ones without the finger-wagging they get from Australia (for example) about weapons proliferation. India is also going to have the same issues, given that even America will not sign a nuclear agreement with the largest democracy in the world!

Uranium One has operations in Kazhakstan -- very accessible to China and India. Despite its recent logistics challenges operating there, UUU.TO is a logical target, if you like this strategic reserve argument. The American and Canadian producers are not logical targets. Africa is a logical choice, although it a true energy crisis, the Chinese may feel safer having a source closer to home.

I'd steer clear of USEC -- the growth opportunity here has never been clear, and US uranium demand is years away from a significant increase. In fact, the biggest risk to US uranium supply is the Russia agreement being cut back -- but down-blending Russian HEU is a major revenue source for USEC, so it could even negatively affect them.

Finally, hedge funds enjoyed a huge run-up in both physical uranium and uranium explorers. They have reportedly been running from this sector, so the bubble in these shares could still be deflating for a while. Remember there are over 500 public uranium explorers -- clear indication of a bubble within this small sector of the market.