Staying Bullish on Uranium

Includes: URA
by: Wyatt Investment Research

The fear around nuclear energy is palpable. The catastrophic events in Japan on March 11 have put a damper on the momentum of what was fast becoming a nuclear renaissance. For the past several years, nuclear proponents promoted nuclear energy as a clean, efficient, reliable and safe alternative to dirty fossil fuels, and the world agreed.

A wave of new orders from BRIC countries as well as developed nations created a nuclear renaissance. Then over the past nine months, the price of uranium began to climb. Dormant since the 2008 recession, uranium rose from $42 per pound to a 52-week high of $72.65 in February.

The spot price of uranium fell over 25 percent in the days following the earthquake and subsequent tsunami in Japan. Value investors helped the troubled commodity regain ground by buying the plunge. But the question is still on everyone’s minds: What’s going to happen from this point forward?

On Monday, Germany announced it will shut down all of its nuclear reactors by 2022. The new policy is a complete reversal to the proposal to enhance Germany’s nuclear energy established by the government only seven months prior.

German Chancellor Angela Merkel stated to reporters on Monday: "Our energy system has to be fundamentally changed, and can be fundamentally changed .... We want the electricity of the future to be safer and, at the same time, reliable and economical.”

The decision by the German government to end its dependence on nuclear energy has once again riled the uranium market, but I believe the German decision is just creating short-term noise. Once this noise is gone, uranium stocks will once again reflect earnings -- and while sales to reactors in Japan and Germany may slump, the world's other 436 reactors will be as hungry as ever for uranium fuel.

Because as people are recovering from the Japan disaster – and possibly hating nuclear power more than ever – the supply and demand fundamentals of uranium have not changed in a significant way. The bottom line is that even in the wake of the Japanese catastrophe, uranium’s supply crunch lives on.

If we look out over the next eight to 10 years, which is the amount of time it takes a nuclear power plant to become fully operational, the market is still about 400 million pounds short of projected demand. The top 10 producers, which make up almost 90 percent of the uranium market, only produced 110 million pounds of uranium in 2010. In other words, uranium producers need to produce nearly four times the amount just to meet estimated new demand. The new supply will have to come from somewhere, or the price of the existing supply will need to increase to clear the market.

For uranium miners, the market is red hot. For investors, shares of the best uranium mining stocks could represent the best energy investment opportunity in decades.

The World Nuclear Association’s chart below sums up why now is the time to get into uranium-related investments. The world will be using more uranium for years to come, and many great investment opportunities appear in the midst of a supply crunch.

[Click to enlarge]

Uranium Production Chart

The supply crunch easily has the potential to become even more strained with 63 percent (note this is not the same as the top 10 producers mentioned above) of the current uranium production coming from only 10 mines worldwide. Additionally, the global supply of mined uranium is susceptible to supply shocks if one mine floods, or stops production for other reasons.

The most direct way to profit from the coming growth in nuclear energy and the shortage in uranium is to buy shares in the most productive uranium miners in the world. As I stated over a month ago, the tragedy in Japan and subsequent fear in the market have presented us with the opportunity to invest in several well-managed and fundamentally sound uranium companies. For well-informed investors with the patience to tolerate volatility for a couple of months, I think this could potentially be the single best opportunity to buy and hold uranium stocks.