Time For A Fresh Look At Uranium

Apr. 04, 2012 2:36 PM ET
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Proponents of nuclear power argue that more nuclear power plants are needed to meet the rising demand for electricity in the emerging world, reduce greenhouse gas emissions, and diversify the world's fuel sources.

But after the Fukushima nuclear disaster, many investors wrote off both the nuclear and uranium industries as dead. But as of today, there are 435 nuclear reactors online in 30 different countries. And most countries, with the exception of Japan, are buying uranium at the same rate they were before Fukushima.

Even here in the United States, federal regulators approved last month the first nuclear plants in the country for more than 30 years. The Nuclear Regulatory Commission gave to Southern Company (NYSE: SO) construction and operating licenses for two new nuclear reactors at its existing Vogtle Electric plant.

For its part, Southern pointed out the differences between the Vogtle site and the Fukushina site. The Vogtle site is 130 miles from the coast and 220 feet above sea level, not to mention that it is not in a seismically active area. In addition, Southern will be using the newest and safest nuclear reactor technology available.

The uranium industry is also holding up better than would be expected by a casual observer. When the Fukushima disaster struck last March, the price for uranium was hovering near the $70 per pound level. Since then prices have fallen, but not off a cliff. Uranium prices are currently in the $50 to $55 range, which is a very profitable level for many uranium miners.

One such uranium miner that comes to mind is Uranium Energy Corporation (NYSE AMEX: UEC). The company controls 24 uranium projects in the United States, most of which are in Texas, with total resources of 41.5 million pounds of U308. It also has projects elsewhere in the United States including New Mexico, Arizona, Wyoming, and Colorado, in to the nation of Paraguay.

Uranium Energy produces U308 which it processes at an average cash cost of $16 per pound. It then turns around and sells the uranium at an average over the past year of $52 per pound. A profitable operation to say the least.

Of course, investors in the sector are most concerned by the future for the uranium industry and what the supply/demand situation will look like in the years ahead.

The question of whether future supplies of uranium will be able to keep up with demand is still pertinent. The problem is that the cost of production continues to rise for mining companies while the price remains constricted in a lower range by the Japanese disaster. Fears persist that Tokyo Electric Power will sell all of their inventory of uranium, the equivalent of large new uranium mine entering the market.

These lower prices are restricting the number of producers who will actually survive to produce uranium in future years, which may be beneficial in the future for survivors like Uranium Energy or the world's largest uranium producer, Canada's Cameco (NYSE: CCJ).

JPMorgan estimates that an incentive price for uranium needs to be $80 per pound before it makes economic sense for new Greenfield projects to be undertaken. A price that will not be seen in the near future thanks to Fukushima. That is what caused the specialist uranium consultant, UxC, to lower its forecast of uranium production by 19 million pounds per year through 2020, which is the equivalent of a 10% downgrade of supply growth over the decade.

On the demand side, the question about where the demand for more nuclear power and uranium will come from is also a legitimate one. The answer to the question has to be the emerging markets like China where demand for electricity is soaring. Sixty-one nuclear reactors remain under construction around the globe, with 26 of them in China.

The chief commercial officer of Rio Tinto Energy (NYSE: RIO), one of the world's biggest uranium producers, Simon Wensley, said, "The impact of Germany and other countries [shutting down their nuclear reactors] is grabbing the headlines but it's really irrelevant to long term demand. That is all about China, frankly."

And he's probably right. The real impact in the uranium market will probably be seen in five years when demand for electricity keeps heating up in places like China and supplies from prospective uranium projects in Africa and elsewhere do not come to fruition. That's when it will pay to be an established uranium producing company like Cameco or Uranium Energy.

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