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Uranium, a Sleeper Investment?

 Many investors now think it could be entering a multi-year bull run

While most commodities continued surging earlier this year, uranium didn’t budge. Once a hedge fund darling, it languished at four-year lows instead… until now.

Uranium’s spot price has risen 45% to $60.50 per pound in the past four months. Thanks to China, many investors now think it could be entering a multi-year bull run.

Last year, China moved copper costs by building up stockpiles when prices were low.

Today, it’s doing something similar with the uranium market. With prices grounded, the Chinese government is planning ahead for the rapid expansion of its nuclear industry.

The deputy director-general of the Energy Research Institute of the National Development and Reform Commission, Li Junfeng, knows how important those efforts are. In China’s push for clean energy, nuclear, he says, comes first…

China’s nuclear capacity

So far, China has 11 operational nuclear power reactors with a total capacity of around 9,100 megawatts.

That only makes up about 1% of the country’s total energy capacity. But Chinaexpects its nuclear power capacity to touch 70,000-$80,000 megawatts by 2020…

That would account for about 5% of China’s total installed power capacity.

Consultancy firm UxC says that would quadruple its annual uranium consumption to 50-60 million pounds. Meanwhile, the world goes through a mere 190 million pounds a year.

China currently has a mere annual uranium domestic capacity of around two million pounds. So it’s moving aggressively to secure uranium supplies around the world.

State-owned China National Nuclear Corporation and China Guandong Nuclear Power Corporation have already signed long-term supply agreements with outside miners such as Cameco (NYSE: CCJ). And they’re strongly pursuing joint ventures too.

China needs it too, considering that it imported 20-25% of global uranium usage this year.

Future uranium prices

Of course, all of those purchases have sent spot uranium prices skyward. So have production shortfalls, which have forced some mining companies to buy uranium on the sport market to meet their long-term contract commitments.

Those factors will likely push up uranium prices further on long-term supply contracts. That matters a lot, since such contracts account for the large majority of uranium trade.

Uranium miner Paladin Energy (TSX: T.PDN) recently noted that “initial base prices” for new, long-term contracts has “risen markedly” to “at or above $80 per pound.”

With all that said, inventories of uranium still remain plentiful. And Kazakhstanhas more than doubled its output since 2008 to become the world’s largest producer.

Yet even so, Russia’s probably won’t sell highly enriched uranium from its nuclear warheads past 2013. This has been an important source of uranium supply for many years.

Once those are used up, mine supply will likely fall short of demand. And new ones could take up 10-15 years to develop.

Outlook for uranium investments

Barring a large nuclear accident, uranium’s outlook looks very good. So do the portfolios of anybody who knows how to play it…

The aforementioned Cameco and Paladin Energy both make goodinvestments. But for really broad exposure to the commodity, ETFs usually work best.

In this case, the purest ETF play would be Global X Uranium (NYSE: URA). It holds 23 different uranium companies, with its largest position being in Cameco.