Is There A New Bull Market for Uranium Ahead?

Uranium soared from $10 a pound in 2000 to a stunning $136 a pound in 2007 – and then the bottom fell out. After three lean years, could …

Uranium soared from $10 a pound in 2000 to a stunning $136 a pound in 2007 – and then the bottom fell out. After three lean years, could another bull market be ahead?

According to the Ux Consulting Company, which tracks the price of uranium, the July 26 weekly spot price for U308 was $46 per pound. That is a 15% spike from the February lows around $40 per pound.

So does uranium at $46 per pound count as cheap, or expensive? That depends on how you look at it…

In the year 2000, uranium was well and truly dirt cheap. Thanks to a seemingly endless supply from decommissioned nuclear stockpiles, no one wanted the stuff… and the price of U308 (a standard mix of uranium oxides) fell to just $10 per pound.

Seven years on, however, uranium was at the pinnacle of a stunning bull run, riding a wave of increased demand for nuclear power plants around the globe. By the year 2007, U308 had hit an incredible $136 per pound – more than a 1,200% price increase from the bear market lows.

But then the bottom fell out for uranium prices – again – as hard assets got abandoned in the great financial meltdown. So now, in the mid-$40s, the uranium spot price is well off its year-2000 lows, but merely a third of bull market highs. Does that make it cheap?

China seems to think so…

The Dragon Inhales

"China is buying unprecedented amounts of uranium," Bloomberg reports, "signaling that prices are poised to rebound after three years of declines. The nation may purchase about 5,000 metric tons this year, more than twice as much as it consumes, building stockpiles for new reactors…"

Keep in mind, too, that China is buying at the "long-term price," which is higher than the spot price. A few weeks back, the dragon agreed to lock in uranium purchases of "more than 10,000 tons over 10 years" from blue chip miner Cameco (CCJ:NYSE).

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"China’s demand is insatiable," says analyst Dave Dai in Hong Kong. "They will have to take almost whatever is available."

India is hungry too. Jagdeep Ghai, the finance director for Nuclear Power Corp., reports that India’s uranium needs could grow tenfold in the coming years.

The name of the game now is locking in supply. In a world where the flow of oil is uncertain – and emerging market energy demand is certain to surge – nuclear power is a critical fallback. And that means more nuclear reactors in the works.

According to the World Nuclear Association (WNA) , China alone has 24 reactors under construction – and may have 200 reactors in play by the year 2030. Russia is building another 10… South Korea six… and India four. There are also new reactors under construction in places like Finland, France, Japan, Argentina, and even the United States.

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A Unique Market

Uranium is not like most other commodities. As one might expect, the "nuclear" tie-in makes it a highly regulated market. Not anyone can just buy it or sell it. (Although there is a uranium "ETF" of sorts – Uranium Participation Corp (U:TSE) – trading on the Toronto Stock Exchange.)

The supply profile for uranium is also unique. In the short run, there appears to be plenty of uranium to go around. The long run, though, is another question entirely. With all the new reactors slated for construction – and the price of oil a wildcard – forward-thinking players like China are thus happy to start stockpiling uranium more aggressively here and now, "just in case" demand gets out of hand later. Nor is China the only country to be thinking this way.

Another factor unique to the uranium market is what one might call the "Cold War effect." The reason uranium became absurdly cheap a decade or so ago was because of massive Cold War era stockpiles. For a time the world had uranium coming out of its ears as Soviet-era warheads were scrapped. Even today there is still Cold War supply to work through – but that supply will not always be there.

In fact, were all the Cold War uranium to be used up tomorrow, prices would head into the stratosphere. Current uranium demand outstrips new production by a huge margin – something on the order of 100 million pounds per year – and it’s only the dwindling stockpiles (those old warheads again) that make up the shortfall.

In addition to finite Cold War supply, uranium has its own version of the "peak oil" profile. Virtually all the cheap and easy uranium deposits have been tapped. As with crude, what’s left are the hard and dangerous deposits located in politically unstable parts of the world, like Kazakhstan and Niger. This is another factor that could push uranium prices higher.

The Large-Scale Alternative

When disaster unfolded in the Gulf, we wrote that the BP oil spill would be a game changer for alternative energy. That assessment still holds true. But it may prove out that the biggest "alternative" winner of all, in respect to deepwater drilling fallout, is nuclear energy.

The main trouble with wind power, solar power and the like, is the challenge of large-scale deployment. With each passing day the underlying technology improves – which moves us closer to getting the economics right – but there is still a long way to go.

Nuclear power, in contrast, is already tested and proven. It has already been deployed on a massive scale. Take modern-day France, for example, a country known for (among other things) bucolic landscapes and old-world farming techniques. Roughly 79% of France’s electricity is produced by nuclear power, the highest percentage in the world.

Nuclear energy has more or less been embraced as a vital, large-scale alternative to fossil fuels. Even aggressive green advocates, who have grumbled over safety and waste disposal issues with nuclear in the past, now grudgingly admit that nuclear power has clear advantages in reducing air pollution and C02 emissions (both serious problems in China).

Combine this reality with good prospects for oil back above $100 per barrel before too long, and you have political "safe passage" for the upcoming nuclear renaissance. Put it all together, and it’s not hard to accept the assessment of RBC Capital Markets that uranium could rise another 32% in price next year. That makes a number of companies in the mining and reactor space worth exploring.

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