While most of the investing community is focusing on the direction of gold prices, potential hyper-inflation and quantitative easing programs, smart investors should be focusing their attention to another yellow metal: uranium.
The key nuclear power ingredient has quietly staged a nice rally during the past year, and more gains could be in store as the ignored sector is being propelled by many bullish tailwinds. The combination of positive factors could lead to an almost doubling in prices for the fuel.
So forget about gold and grab some uranium for your portfolio.
Rising Demand, Diminishing Supplies
The meltdown at TEPCO’s Fukushima reactor rocked Japan and set forth unparalleled changes across the entire world’s nuclear sector. That still-unfolding tragedy has made producing power via nuclear means off-limits as both citizens and policy makers debate the safety of the power source.
Japan has begun phasing out the fuel source, and Germany has announced a complete phase-out of its nuclear plants by 2022. Other developed nations have been following suit. These nuclear bans have had a negative impact on both uranium prices and nuclear sector equities since the time of the disaster. Those developments left the sector “dead money” since 2011.
Yet, despite being so hated, nuclear is still the source of a lot of the world’s power, and that isn’t changing anytime soon. In fact, the numbers are growing by leaps and bounds.
According to the World Nuclear Energy Association, there are more than 60 new reactors under construction. That’s in addition to the 150 reactors in construction planning stages and the 330 facilities proposed by governments and utilities, the bulk of which are located in Asia.
With some analysts calling for Asia’s power demands to nearly triple by 2030, governments on the continent continue to expand towards the power source. Both China and India have adopted aggressive nuclear plans in addition to their alternative energy ambitions. China’s latest national plan calls for around 80 GW worth of nuclear generation capacity by 2020, while India hopes to add 200,000 MW worth of generating capacity within 20 years.
The story is the same across the rest of Southeast Asia. Nations like Thailand, Indonesia, Vietnam and Malaysia are all adding the cheap source of base-load power at record clips.
All of this construction will put pressures on the 435 nuclear power plants currently in operation around the globe and the nearly 165 million pounds of uranium they consume each year — especially when you consider the supply issues.
The problem is that current uranium supplies from mines amounts to just 143 million pounds.
The rest comes from an agreement between the U.S. and Russia. The U.S.-Russian Highly Enriched Uranium Purchase Agreement — also known as “Megatons to Megawatts” — was created to dismantle Cold War-era nuclear missiles and use the warheads for reactor fuel. The twenty-year-old program has worked beautifully as the secondary supplier to the nuclear sector and has been able to cover most of the shortfalls.
Well, all good things must come to an end, and the HEU will no longer exist after 2013.
The odds of the program being extended are slim to none, and the cancellation of the agreement will remove about 22 million pounds worth of supplies off the market. Perhaps more important for investors, the end of the agreement will allow Russia to sell their supplies to the highest bidder on the markets. And as we noted above – there are a lot of potential bidders.
Once again, we have a commodity with exponentially rising demand and falling supplies. That’s a recipe for higher uranium prices and profits for smart investors.
Betting On Uranium Oxide
Spot uranium prices are currently around $40 per pound. However, the potential HEU shutdown and new plant construction could double that price in a few short years. According to investment bank JPMorgan, uranium will hit $58 per pound in 2014, $70 per pound in 2015 and a whopping $90 per pound in 2016. While that’s still well below the mineral’s all-time highs of around $140 per pound, it’s still more than double today’s prices.
That leaves plenty of potential profit for uranium producers.
One producer set to gain big is Cameco (CCJ). The firm controls roughly 14% of all uranium production and features some of the largest proven and probable reserves — currently 465 million pounds. The bulk of those reserves lie in stable and friendly Canada with extremely high ore grades. That steady Canadian production allows Cameco to prospect across the globe — in places like Australia and Kazakhstan — to grow its production and reserves.
Perhaps more importantly, those high ore grades and sound production strategies allow CCJ to be profitable even with uranium prices currently in the basement. In fact, Cameco has been able to realize average prices for its production above the current uranium spot prices based on the quality of its mines. Any bump up in spot prices will only serve to better the company’s profits and margins.
CCJ shares currently trade for a forward P/E of less than 16 and a yield of 1.9%. While that’s not super cheap, given Cameco’s status as the world’s top uranium miner the slight premium is worth it. After all, the company’s top reserves command top dollar. Strengthening uranium prices will only make things better.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.