Uranium Supply Crunch Coming By 2016 - How Far Off Till Thorium Is A Substitute?

| About: Lightbridge Corp (LTBR)
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A presentation at the Vancouver Resource Investment Conference this past week by nuclear expert and energy consultant Thomas Drolet highlighted that a supply crunch in the uranium market could be here by 2016 -- and that if not dealt with, it could stop growth in the nuclear fuel industry. This echoes the comments of Tim Gitzel, the CEO of Cameco (NYSE:CCJ) -- the largest uranium mining company in the world -- who last month said that investors were underestimating the possibility of a uranium shortfall.

This is an important point that I think uranium investors should consider in formulating their strategy. Particularly, here is my take:

Because new uranium supplies are needed and needed soon, the price of uranium will need to be in a steady uptrend over the next few years. It's a suppliers' market, and the miners know this; already companies like Uranium Energy Corporation (NYSEMKT:UEC) are holding on to their supply rather than selling it, waiting for price to rally before doing so. Higher prices are needed to draw more mining companies into the business.

Of course there are already many reasons to be long uranium -- specifically it remains the densest source of energy -- so the looming supply crunch and the existing supply/demand imbalance is just one more reason. The significance of a severe supply crunch in uranium does introduce, however, a new question: how far off can thorium be? Thorium remains the only viable substitute for uranium in the production of nuclear fuel. Moreover, it is much more abundant in the earth's crust than uranium is.

For investors, though, there are two concerns surrounding thorium:

  1. Can it be used in a cost-effective manner?
  2. Who is going to serve as the "smart money" -- the muscle that pushes the market higher?

We may be closer to answering those questions when we consider that India has begun to plan thorium-based power plants -- and that Anil Kakodar, India's newly appointed head of National Solar Mission, said that thorium and solar are the answer to India's energy needs.

Accordingly, at this point I think it's worth looking into thorium as an investment option.

The first point that should be noted, though, is that it may still be too early. I view thorium-related investing as high risk/high reward, and something that may take quite some time to yield a big payoff -- but the payoff could be huge, perhaps even bigger than buying gold at $200 or silver at $4, provided the right companies can be found.

And the search for the right company is what has led me to Lightbridge Corporation (NASDAQ:LTBR). Here's the scoop on Lightbridge:

  1. First, there aren't many companies in this sector, so the pickings are quite slim. The upside is that LTBR has a first mover advantage, which is particularly valuable if one views thorium as a disruptive technology ushering in a value network that could displace uranium. In disruptive theory, first mover advantage is particularly valuable. On the flip side, though, the scarcity of companies in this space is another sign that it's simply too early.
  2. Lightbridge has had experience and some success in India, which is something I'm particularly interested in; if India is the smart money driving the market, the winners will be those who can serve this market.
  3. Financially, LTBR has a fairly stable balance sheet; no debt, and a current ratio greater than 8 suggest the company is not distressed. The price-to-book ratio is 2.56, which I also find to be reasonable. Ultimately, though this is a very small company; the market capitalization is just $26 million. For these types of companies, I want to see a return of at least 10X, preferably much more, because of the risk involved.

To its credit, LTBR does do a lot of work with uranium; it is not exclusively linked to the thorium value network. Moreover, its share price does have a 52-week high of $7.22. As the stock market increases overall and the uranium market goes higher, I see it as quite possible for LTBR to re-visit these highs. Getting it now gives investors the option of exiting half the position on a re-test of those highs, netting a small profit, while allowing the remainder of the position to sit and in the event thorium displaces uranium and LTBR yields enormous returns as a result.

Ultimately, I'm not sure if I'll invest in LTBR at this point in time; I'm still weighing my options. Part of me wants to out of a desire to show my support for thorium and nuclear, though from the perspective of a detached and rational investor, opportunities in gold mining shares remain the bulk of my focus and where I believe the best combination of risk/reward is. So, unless there is a big drop in price that would send LTBR to its book value, I'll be inclined to wait to see how this market develops.

Disclosure: I am long CCJ, UEC.