Uranium – Our "Trade of the Decade" Heats Up!

At the start of the year, your California editor dubbed uranium the “Trade of the Decade.”

Uranium may or may not be the Trade of the Decade, but it has been a pretty decent trade of the year. So far in 2010, the uranium price has soared 35% – triple the return of the S&P 500 Index.

The phrase, “Better lucky than good,” comes to mind…and your California editor never hesitates to give Lady Luck her due. But sometimes, good fortune germinates and blossoms from the seeds of timely analysis and insight.

Your financial market observers here at The Daily Reckoning did not simply toss their Trade of the Decade into the hat and walk away; they have continued to detail the bullish case for uranium – and for selected uranium mining companies – month after month.

Early in 2010, for example, Chris Mayer, the mind behind both Capital & Crisis and Mayer’s Special Situations, penned no less than five Daily Reckoning columns advocating investments in uranium. The last of these columns, “Cameco Corp. is a ‘Buy’”, extolled the virtues of North America’s largest uranium miner. The stock has soared to 53% since then.

Taking the baton from Chris in mid-summer, Byron King, editor of Outstanding Investments, sang uranium’s praises in two additional Daily Reckoning columns, while also suggesting specific ways to play the trend. All three of the stocks he recommended in his October 25 column, “More Nukes!”, have jumped spritely during the last two weeks.

Rising Uranium Price

After such impressive gains for stocks like Cameco, it is reasonable to ask if the uranium story is spent…or if it is just beginning to heat up. Your California editor posed that exact question yesterday to both Chris Mayer and Byron King. And both of these accomplished investors replied that the uranium bull market is far from over. Therefore, given the still-bullish outlooks of Messrs. Mayer and King – and the fact that uranium remains your California editor’s Trade of the Decade – we will reprise a few key aspects of the bullish case for this unique energy source, as presented in the previous editions of The Daily Reckoning

From “Uranium – A Place to Hide” by Chris Mayer:

Robert Mitchell, a general partner at Portal Capital, gives us the 21st-century version of some timeless investing advice.

“In the world of commodities, demand is rarely the compelling reason to get long,” Mitchell begins. “Instead, you want to own a commodity where supply is incapable of responding to even a small bump in bids.” In other words, buy the commodities where it is most difficult to produce more. Though hardly a new insight, it’s one that investors sometimes forget. One commodity that aces this simple test is uranium.

As Mitchell sums up: “Uranium is well below cost of production, with a superb demand curve.” We’ve made the demand case before, too, and we won’t rehash it here. Suffice it to say that a slate of new nuclear plants means a robust demand for uranium for years to come. There are few commodities positioned as well for the next several years.

From “Trade of the Decade: Sell Everything, Part II: by Eric Fry:

Buy uranium. This unique energy source is a “backdoor play” on the growth of Emerging Markets.

There are 436 nuclear reactors in 30 countries around the world. But here’s the important thing; there are over 200 new plants in some stage of planning, engineering or construction. And most of these new plants will open in a Developing World nation.

But there’s not even enough uranium coming from the world’s mines right now to supply the current power plants across the world, let alone a couple hundred more. Thus, the uranium story is really quite simple. It is a supply and demand story. There is a lot of demand and not much supply. Any questions so far?

Mined supply of uranium satisfies only about 55% of total demand. The rest of the supply comes from somewhere else. These secondary sources of uranium come primarily from old nuclear warheads. But no one really knows how this enormous supply gap will resolve itself in the future. This is what we do know: when you get a supply deficit, prices rise. And I think that will be the case with uranium…

One way to participate in a long-term rise in the uranium price would be to take a position in the Market Vectors Nuclear Energy ETF (NYSE:NLR). Most of the holdings of NLR are on foreign exchanges. So it’s a great way to play nuclear energy on the New York Stock Exchange, yet obtain exposure to the international nuclear market without the hassle of foreign trading.

This ETF is one of Byron King’s recommendations. So if this trade works, I’ll be back in 10 years to accept my high-fives; if it doesn’t work, talk to Byron King about it.

From Uranium and Specialty Metals: A Few of My Favorite Things, Part II by Chris Mayer:

One of the best investments you can make right now is to pick up relatively secure, low-cost uranium – the feedstock for nuclear reactors…

There is a surge in demand coming in the next decade from the hundred or so new reactors expected to come online. Yet the industry is about 400 million pounds short of meeting that demand, as shown in the chart below.

Supply and Demand in the Uranium Market

The market has been in deficit for years, as it burns off Cold War stockpiles, which are finite and dwindling. Another way to look at it: Uranium demand is on its way to hitting 226 million pounds per year. Yet last year, the top dogs – which make up 90% of the market – produced only about 110 million pounds of uranium.

So essentially, the industry needs to produce almost four times that to meet the estimated new demand through 2018. On an annual basis, the industry will need to about double in size.

It gets even more interesting…

Most of the best mines are already in production. As with everything else in the resource world these days, the low-hanging fruit is all gone. Future grades will be lower, meaning we’ll have to mine a lot more ore to get a given amount of uranium. Furthermore, the new mines are in more geologically and politically challenging locales.

From “Uranium is Heating Up” by Byron King:

Uranium prices appear to be bottoming, as China buys major supplies from Cameco (NYSE:CCJ). On June 24, China agreed to buy more than 10,000 tons of uranium oxide – yellowcake – over 10 years from Cameco.

According to Thomas Neff, a physicist and uranium industry analyst at the Massachusetts Institute of Technology, China is buying unprecedented amounts of uranium. Based on public information, China may purchase about 5,000 metric tonnes of yellowcake this year. That’s more than twice as much as China consumes.

Clearly, China is building up stockpiles for its long list of new reactors. According to the China Nuclear Energy Association, China plans to build at least 60 new reactors by 2020. The average 1,000-megawatt reactor costs about $3 billion. Loading a new reactor requires about 400 tonnes of uranium to start. Take 60 reactors, times 400 tonnes each. That’s 24,000 tonnes of uranium (over 52 million pounds) – about all of the world’s current output for one year.

New nuclear plants represent a game-changing aspect for future uranium demand and pricing….

Now we’re going to see an explosion (no pun intended) of uranium demand from China, on top of the existing user base (plus other new demand from India and numerous other locales in the world)…

Thus, don’t be surprised to see uranium in shortage by the second half of this decade. Looking ahead, there’s just not enough new production in the planning stages. The world needs new mines, but startup costs are much more expensive than 10 or 20 years ago.

Meanwhile, much of the world’s uranium comes from mines that have been in operation for a long time. That, and decommissioned nuclear warheads from the Cold War days. But this latter source is nearing exhaustion.

Bottom line in all of this is that we’re right at the bottom of the curve for uranium pricing. Going forward, we’re watching as the new demand unfolds, to make uranium investments all that much more valuable.

The uranium story isn’t over yet. Stay tuned!

Eric J. Fry
for The Daily Reckoning

The Daily Reckoning