Since last summer, uranium prices have gone from $40/lb. to $70/lb. for the U3O8 compound of uranium, otherwise known as “yellowcake.” Many uranium stocks, including Cameco (NYSE: CCJ), Dennison Mines (AMEX: DNN) and Uranium Resources (NASDAQ: URRE), have rallied in this environment. Investors should be wondering if this move in uranium stocks has further to go.
Investing in Uranium
Uranium is different than most energy commodities as most of the trading is conducted in the over-the-counter market. There is a spot market and an illiquid futures market, but they play a lesser role in setting prices than they do for oil or natural gas.
One good thing about uranium is that the cost of the fuel is relatively small in comparison to the cost of the nuclear power plant. So once the decision to build a nuclear reactor is made, it is likely that this nuclear reactor will reliably use a lot of uranium for 30 to 40 years. So investors should pay attention to the number of new reactors coming on the market. Currently, there are close to 100 new reactors coming on line in the next 10 years (some old reactors might not close with new technologies that extend their life depending on the level of fossil fuel prices).
Beneficial Market Disequilibrium
About 85% of total annual production is sold under long-term contracts, and the other15% trades on the spot market. The rule of thumb is the bigger the uranium producer, the more geared it is toward long-term contracts.
You have to remember that since 1985, uranium use has exceeded the available supply from Western sources. Production from mining currently satisfies just 62% of market demand.
The remaining supply of uranium comes from reprocessing of used reactor fuel, stockpiles, and the dismantling of nuclear weapons. This is a 25-year shortfall in production that could cause the previous $140 high-water mark established in 2007 to be exceeded as new reactors come online.
A major source of uranium — the dismantling of Russian nuclear weapons — is due to end in 2013, which will result in the equivalent of a large mine being completely shut down. More reactors and a tighter uranium market mean higher prices.
3 Uranium Stocks, 1 ETF for Your Portfolio
The go-to stock in the uranium space is Cameco (NYSE: CCJ). This is a large-cap miner with huge reserves, but less leverage than smaller miners. This is because as a key global supplier of the nuclear fuel, utilities choose to enter in long-term contracts with the company. There was an issue with mine flooding that delayed a new project for several years, but that now has been resolved and the new supply should hit the market just as the Russian supply from nuclear weapons ends in 2013.