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Uranium is cheap, but maybe not for long

|Includes: DNN, Uranium Participation Corp. (URPTF)

Uranium is not on very many hot topic lists right now.  But it is cheap, and there are good reasons to think it will not stay cheap too much longer.

The simple case for uranium has often been presented.  Do a little googling, and you will quickly see that  (1) demand is going to increase considerably, especially in China and India, (2) mine production is insufficient even to meet current demand, and will not meet projected demand any time soon.

That is all true, but to really make the case for uranium, you have to look a little more closely at the complex matter of secondary supply -- most importantly, military material.  The total military stockpiles of the US and Russia would supply the world's nuclear reactors for about 12 years at current usage rates, and no one knows how much of that supply might make it to the market.  The current Megatons to Megawatts program, under which it was agreed to convert uranium equivalent to about 20,000 warheads to nuclear fuel, ends in 2013.  But Obama has pledged to work towards a nuclear-free future.  How much more military uranium might make it to market?

No one knows, and there is some investment risk in that.  But consider the following:


So there is some uncertainty from military supplies, but it is unlikely they will greatly distort the market (quite possibly disastrous for the planet but, if we survive, good for uranium investors).

It comes down, then, to the economics of mining.  And evidence has been steadily accumulating that the price needs to be higher if mining is going to meet demand.  According to a Bloomberg article last week,
“The uranium bull market of 2006 and 2007 stimulated the development of new supply, but we do not think it is enough,” Schatzker [Adam Schatzker, a metals analyst at RBC in Toronto] wrote in a report. “The prevailing uranium price is too low to stimulate sufficient supply to cover future reactor requirements.”
Now might be a very good time to seriously consider investing, for three reasons:
  1. Although the uranium price drifted lower for a long time after the peak of 2007, it seems to have bottomed, and the price has been in an uptrend for about two months
  2. The main point of that Bloomberg article was that China is stocking up
  3. The latest edition of the Red Book, the ultimate authority on supply and demand in this market, has just been published, and it is bullish on price
The web site publishing the Red Book has been experiencing difficulties, but the third point above is clear from the press release and from an article foreshadowing the publication.

From the press release:
... the high-cost category (<USD 260/kgU or <USD 100/lbU3O8), reintroduced for the first time since the 1980s. This high-cost category was used in the 2009 edition in response to the generally increased market prices for uranium in recent years, despite the decline since mid-2007, expectations of increasing demand as new nuclear power plants are being planned and built, and increased mining costs. Although total identified resources have increased overall, there has been a significant reduction in lower-cost resources owing to increased mining costs. (emphasis added)
And from a recent article in the Nuclear Energy Agency newsletter:
This article is based on the latest edition of the “RedBook”, Uranium 2009: Resources, Production and Demand, which presents the results of the most recent biennial review of world uranium market fundamentals and a statistical profile of the world uranium industry as of 1 January 2009. …

Should demand increase as projected growth in nuclear power is realised, uranium prices would strengthen allowing mine production capacity to be increased even further. However, sufficiently high market prices will be required to fund such mine development activities, especially in light of rising costs of production. (emphasis added)
I don't think everyone is going to be looking the other way much longer.

There are many ways to invest in uranium.  I take the most direct route, holding shares in the Uranium Participation Corp. (U.TO or URPTF.PK).  This is basically a warehouse full of uranium oxide, managed by Denison Mines (NYSEMKT:DNN), one of the big miners.  Holding the commodity itself avoids any issue of cost from rolling futures contracts.  Of course holding miners is also interesting, and if you search for uranium on Seeking Alpha, you will find a good deal of interesting information on miners.


Disclosure: u.to