With the price of uranium languishing and both the short and long-term fundamentals for the sector so favorable, we believe that this is the right time to begin buying uranium stocks, and so we are. This article looks at the supply and demand picture as well as some of the ways to play higher uranium prices.
The case for higher uranium prices: Demand
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 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 U.S. Dollars per pound. Chart courtesy of indexmundi.com.
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 a 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.
The case for higher uranium prices: Supply
Meanwhile on the supply side, several major uranium producers have begun to delay or shelve projects due to today’s low price of $48.50/lb 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/lb 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 prices, 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/lb to go forward. This is one of the key reasons why we feel the sub-$50/lb 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 [uranium] prices of $70-80/lb. Our current forecasts for next year and 2014 are $70/lb and $67/lb, with a long-term forecast of $65/lb.”
How to play higher uranium prices
Both the short-term supply crunch and the long-term growth in demand are very bullish for uranium. The question is: What is the best way to capitalise on higher uranium prices?
Right now there isn’t an Exchange Traded Fund (ETF) the tracks the price of uranium, however Uranium Participation Corp. (TSE:U) provides an excellent proxy for the price of the commodity since it invests in and holds physical uranium.
Perhaps the best way to gain exposure to the rising price of uranium is via the Global X Uranium ETF (URA) which is listed on the New York Stock Exchange. Among its top 10 holdings the fund includes large cap companies such as Cameco (NYSE:CCJ), Paladin Energy (ASX:PDN) and Uranium One (TSE:UUU). It also includes small companies such as Uranium Resources (NASDAQ:URRE) and Energy Fuels (TSE:EFR).
The Global X Uranium ETF provides investors with a convenient way to gain exposure to the uranium sector without having to pick individual stocks. In total the fund holds 24 companies and charges an annual management fee of 0.69%.
We have added the Global X Uranium ETF to the 247bull investment portfolio. However we have also added two junior exploration and development companies: Strathmore Minerals (CVE:STM), a Canadian based company with some of the largest in-ground uranium resources in the United States. And Fission Energy (CVE:FIS), a junior company with properties in the Athabasca Basin, Quebec, and the Macusani District in Peru.