The Bullish Case For Uranium

Includes: CCJ, DNN, URA, URPTF
by: Ben Kramer-Miller

In this article I discuss the reasons investors should consider adding uranium and related equities to their portfolios. Investors have been given a unique opportunity to invest in uranium as a consequence of the Fukushima Daiichi nuclear disaster, during which lethal amounts of radiation were released from a nuclear power plant in Japan. As a result people throughout the world have begun to question the safety of nuclear power, and the price of uranium - the primary commodity used in producing nuclear power - dropped precipitously from $70/pound in March 2011 to around $40/pound today.

Such a precipitous price drop is indicative of investor fears that political pressure will force nuclear power into obsolescence. Nevertheless nuclear power will be an essential energy source in the future as fossil fuels become more costly to extract. It is during such time periods, where investor psychology trumps economic reality, that value investors should step in. But before doing so it is essential to outline the supply/demand fundamentals for uranium.

1: Supply and Demand

The following chart gives an overview of uranium production versus demand from nuclear reactors.

From this chart it is evident that demand outpaces supply, and that in order to bring supply in line with demand, the uranium price must increase so that lower grade uranium is profitable to mine. Of course this chart is just an estimate: as I state above investors are especially concerned that future demand will not be as high as once anticipated.

Investors are correct to be concerned that the Fukushima disaster will lead people to fear nuclear power. Furthermore the fear of another such disaster will likely dampen demand for uranium, at least in the short term. However this is only a temporary situation: in the long term nuclear energy will play an integral role in energy production throughout the world.

While countries from Japan to Germany have announced plans to eliminate or significantly reduce the use of nuclear power as a result of the Fukushima disaster, other countries (primarily those categorized as "developing") anticipate building several reactors in the future. According to the World Nuclear Association, over 160 reactors are planned to be constructed, and twice that number have been proposed. Because of the amount of planning and regulation that is involved in developing a nuclear power plant we can be fairly certain that these projects will be built unless there is another Fukushima-like disaster that makes these projects politically untenable.

Given that there are currently 435 nuclear power plants in the world, and given the 480 nuclear power plants that will likely be built (160 of which will almost certainly be built), the demand picture is fairly straightforward: demand will be roughly 35% to 100% higher than it currently is in the future than it is now.

While future supply of uranium is less certain than future demand there is one essential fact that potential uranium investors should be familiar with regarding uranium supply: at current prices mine supply cannot meet demand. This is clear from the above chart, which shows the existing supply deficit. Ultimately this supply deficit must be resolved, and the only way for this to occur is a higher uranium price motivating additional production.

Consider the following two examples of how the current low uranium price is impacting production. For starters there is only one major uranium mining company in the world: Cameco Corporation (NYSE:CCJ). The fact that Cameco Corporation made just $8.5 million last quarter on revenues of $444 million indicates that at current prices uranium can barely be mined profitably. Energy Fuels (EFRFF.PK) CEO Graham Moylan, in a recent interview (May 14), said that many of the company's projects are waiting to go into production, although he cannot commence production at the current uranium price.

Ultimately the current uranium price reflects an anticipation on behalf of investors that uranium demand will decline to match current production. Yet except for specific isolated cases, there aren't any signs that existing nuclear plants are shutting down in response to environmental fears at a rate that will significantly dampen long term demand, nor are there signs that planned nuclear reactor projects will be cancelled. Thus in all likelihood demand for nuclear energy and for uranium will rise rather significantly over the coming years and decades. Given this current production levels are insufficient to meet demand, and supply must increase, only a higher uranium price will spawn investment in these necessary mining projects.

2: Investing In Uranium

There are two ways to invest in uranium:

  1. Buy uranium
  2. Buy uranium mining companies

Buy Uranium

Investors are fortunate enough to have an easy option for purchasing uranium: they can simply purchase shares in Uranium Participation Corp. (OTCPK:URPTF). Uranium Participation Corp. is a holding company managed by Denison Mines (DNN) - a publicly traded uranium producer--that holds uranium oxide and uranium hexafluoride, which are forms of uranium "bullion." The management fees are minimal at 1.5% of the value of any uranium bought or sold, and $400,000 per year plus 0.3% of the company's net asset value in excess of $100 million (current NAV is just over $500 million). Uranium Participation Corp. is a great way for investors to gain exposure to the price of uranium without the risks of mining uranium.

Buy Uranium Stocks

Investors who are willing to take on mining risks along with the rewards should consider purchasing shares in uranium mining companies. Given that much of the world's in-ground uranium cannot be mined profitably given the current uranium price these companies are extremely risky. However if the price of uranium rises it sshares can rise substantially in value.

Investors interested in uranium mining companies should consider purchasing shares in the Global X Uranium ETF (NYSEARCA:URA). However investors should be aware that this fund holds many companies that are not yet producing uranium and many companies that have especially low market capitalizations. Unfortunately for uranium investors there is really only one company that meets many of the criteria that investors look for in an investment (multiple operations, profitability, pays a dividend...etc.), and that is Cameco. However, investors who are willing to take additional time to research the smaller companies may set themselves up to make fortunes: while they may not be profitable or producing now, many of the smaller companies will be worth many times their current valuations if they can make just $10 or $20 per pound of uranium mined.

3: Conclusion

Investors should take away the following points from this article:

  1. The Fukushima disaster caused a sell-off in uranium as investors feared that less uranium would be used in nuclear reactors. While this may be true short term, longer term nuclear power is essential in a world with rising energy demand.
  2. The demand for nuclear power is on the rise, and this rise is very predictable, as anticipated nuclear power plants take years of planning and construction: in all likelihood such projects will not be abandoned after substantial resources have been devoted to planning and constructing them.
  3. The supply of uranium that comes from mines cannot meet current demand. Furthermore, the current price of uranium will not support the additional production needed to meet this demand. As a result the price of uranium must rise in order to spawn the production necessary to meet the rising demand.
  4. Investors can invest in uranium directly by purchasing shares in Uranium Participation Corp. or they can take on additional risk and purchase shares in uranium mining companies. Most of these companies are extremely small or not yet in production. This makes them extremely risky, but they may prove to make fortunes for investors willing to take on these risks.

Disclosure: I am long OTCPK:URPTF, URA, EFRFF.PK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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