At some point during 2013 the price of uranium is forecast to rise from today’s price of $48 per pound to $70 per pound, a rise of 45%. If these forecasts turn out to be accurate then we can expect to see uranium companies, such as those mentioned below, retest their pre-Fukushima highs. That would mean that in the next 18 months these uranium stocks are likely to produce gains of anywhere from 50 to 70% and in some cases more.
Why uranium prices are heading a lot higher
Despite last year’s Fukushima Daiichi nuclear disaster the fundamentals for uranium, both in the short and the longer-term, look very good.
According to the World Nuclear Association (WNA), there are currently 433 operating nuclear power plants worldwide, which use a total of 176.7 million pounds of uranium every year. Next year however, the Russian Megatons to Megawatts program – which takes Russian bomb-grade uranium material from nuclear weapons and converts it into a diluted form suitable for use as commercial reactor fuel – comes to an end. This will remove 24 million pounds of secondary uranium supply from the market.
The longer-term outlook for the price of uranium is also bullish. In addition to the current fleet of operating reactors, there are also 65 reactors under construction – China alone plans to build 23 nuclear facilities by 2020 – and a further 158 that are on order or planned.
Thanks to all this new construction it is estimated that by 2020 uranium demand will reach 255 million pounds.
A 10 year chart of the uranium spot price
Monthly price chart in US Dollars per pound. Chart courtesy of indexmundi.com.
Chart Notes: There are actually two uranium prices. The spot price, and the term price. The spot price is for those that want to take immediate delivery, while the term price is where 70-80% of the trading is done by the large utilities. From 1990 to 2003 the price of uranium was around $10 per pound – the price then began rising in response to increased demand. In the latter half of 2006 the price spiked to nearly $140 per pound and then fell sharply. The spike was caused by an increase in demand for reactor fuel coming from China and other developing economies, coupled with a sudden reduction in supply from two of the world’s largest mines.
Meanwhile on the supply side, several major uranium producers have begun to delay or shelve projects due to today’s low price of $48 per pound and production costs that have risen dramatically in recent years.
BHP Billiton (NYSE:BHP) recently announced that it would delay the planned expansion of its Olympic Dam mine (the largest known single deposit of uranium in the world), by at least a couple of years. Earlier this year Paladin Energy (TSE:PDN) postponed the expansion of its Langer Heinrich mine until the price of uranium picks up.
In December 2011 AREVA (EPA:AREVA) suspended its Trekkopje uranium project with the objective of resuming the project in 2016, if the uranium price recovers sufficiently. Cameco (NYSE:CCJ), which supplies around 16% of world production, also warned investors recently that its Kintyre Project in Australia would need a uranium price of around $67 per pound to break even by the time it’s due to begin production in 2015.
The fact is, a lot of uranium projects simply aren’t economic at today’s uranium price, and the cost of exploring for uranium is also rising.
In an interview last month David Sadowski of Raymond James told The Energy Report that, “All of this demand begs the question, where is this uranium going to come from? Well, we don’t think supply is going to be able to keep up.” He went on to say, “When we look at the majority of additional projects needed to fill the looming supply gap, we think they need prices north of $70 per pound to go forward. This is one of the key reasons why we feel that sub-$50 per pound prices are unsustainable.”
David Talbot of Dundee Securities also addressed the supply deficit recently, saying, “We’ll be lucky if annual uranium production reaches 180 million pounds by 2020. And that would require sustained spot prices of $70-80 per pound.”
Both the short-term supply crunch and the long-term growth in demand look very bullish for the price of uranium. This raises two important questions:
- How high will uranium prices go?
- What is the best way to profit from higher uranium prices?
Let’s address the first question…
How high will uranium prices go?
Right before the Fukushima nuclear disaster, which occurred on 11 March 2011, the spot price of uranium was $68.20 per pound. By 17 March the price had fallen to $52.25 per pound, and today it trades for $48 per pound. However, many analysts (myself included) believe that uranium is at or near a bottom, and that prices are due for a substantial rise in the coming years.
David Talbot, of the aforementioned Dundee Securities, stated last month that, “Our current forecasts for next year and 2014 are $70 per pound and $67 per pound, with a long-term forecast of $65 per pound.”
Mark Busuttil, a resources analyst from JP Morgan, expects the price of uranium to average $70 in 2013 and $85 in 2014 before easing to $75 in 2015.
What is the best way to profit from higher uranium prices?
Well, before Fukushima, when the price of uranium was $68.20 per pound, Cameco Corporation (NYSE:CCJ), which is the world’s third largest uranium producer, was trading at a little over $37 a share. Today the company’s stock trades for $22.45. That’s a 66% discount to the pre-Fukushima price, and it’s a similar story with other uranium companies.
Denison Mines (TSE:DML), a mid cap uranium producer/ explorer with uranium mining projects in both the United States and Canada, is trading at a 55% discount. Uranium Energy (NYSEAMEX:UEC), a mid cap producer/ explorer with projects in the United States, is trading at a 44% discount. And Uranium Resources (NASDAQ:URRE), a small cap producer/ explorer with properties in the US state of Texas, is down 78%.
It’s clear then that despite the positive outlook for the price of uranium, the companies that bring it to market remain severely depressed. However, if the price of uranium reaches $70 per pound sometime in 2013 then we can expect to see quality companies such as those I just mentioned, retest their pre-Fukushima highs.
The bottom line is that in the next 18 months the quality names in the uranium sector are likely to produce gains of anywhere from 50 to 70%, and in some cases more.