Investing in Uranium: Profiteers of the nuclear age's second coming
By Andrew Mickey
In this article
China and India alone have plans to construct as many as 70 new nuclear power plants over the next few years.
Uranium is headed to $100 per pound by the end of the year and will likely hit $200 within the next two years.
Of the 142 publicly traded uranium companies, only a small percentage of them are actually producing uranium.
Investing in Uranium: Profiteers of the nuclear age's second coming
The second coming of the nuclear age is upon us. There are literally dozens of nuclear power plants around the world either under construction or slated to begin construction within the next few years. China and India alone have plans to construct as many as 70 new nuclear power plants over the next few years.
Uranium demand is soaring and uranium prices are climbing just as fast. Just two weeks ago a pound of uranium traded at a 26-year high at $11 per pound marking a four-year increase of more than 940%. But with uranium prices downright soaring, you'd expect a crash to be looming just around the corner.
After all, we're in the midst of a surging uranium demand that rivals the California Gold Rush of the 19th century. But as more and more uranium miners begin to develop new mines, supply will eventually catch up with demand. But that's years away.
Using the most prevalent form of uranium mining -- known as in-situ-leach mining, it takes more than four years from initial groundbreaking to get the first pound of uranium out of the ground.
Uranium is headed to $100 per pound by the end of the year and will likely hit $200 within the next two years. But here's the best part, the end users of uranium nuclear power plants are highly indifferent to soaring uranium prices.
Uranium is different than most other commodities like copper, oil, and aluminum. When prices for these commodities rise, alternatives are used. Take oil for instance. When oil was trading for $20 a barrel, no one was talking about ethanol as an alternative and windmills and solar panels were far from being considered a viable source of electricity generation.
Investing in Uranium: No Alternative
Uranium, however, has no alternative. The 442 operational nuclear reactors around the world are designed to use enriched uranium as their only fuel source.
Uranium demand is highly “inelastic.” That's economics parlance for something whose demand is poorly correlated to price. The classic example of a highly inelastic demand is cigarettes. As a pack of cigarettes rises, the number of packs of cigarettes declines very little. And just like smokers are unwilling to change their habits despite rising costs, nuclear power plants are unable to change their addiction to uranium.
Demand for uranium is so inelastic because of the amount of electricity a single pound of uranium can produce. One pound of uranium contains the same amount of potential energy as three million pounds of coal.
The radioactive element's egregious amount of potential energy makes it a marginal cost to operating a nuclear power plant. For instance, at $85 per pound, uranium only accounts for $4.25 per megawatt hour (MWh) of electricity. And with a MWh of electricity selling for as much as $60, uranium only accounts for 7.08% of nuclear power generation costs.
That's why uranium could easily hit more than $200 per pound and nuclear power companies would still be quite indifferent. They could easily pass on the extra $5.75 per MWh of electricity onto customers.
The situation is very similar to filling up your car with gas. If you drove up to the gas station only to realize gas prices are up to 20 cents per gallon, would you really care? That's pretty much how nuclear power plant operators look at it.
As you can imagine, there has got to be some sort of investment opportunity in the uranium industry. But many uranium producers have already skyrocketed in anticipation of the booming demand for uranium. Even $12 billion Cameco, the world's largest uranium producer, is up more than 900% over the past four years.
And many other uranium producers have already entered into long-term supply arrangements with customers that have price ceilings. Three to five years ago uranium producers entering into these contracts placing a $60-per-pound ceiling on a pound of uranium seemed unrealistic.
Investing in Uranium: Stocks May Be Rising…
In exchange for the price ceiling, they received a price floor. Most often that's $20 per pound. That way they were protected if the bottom fell out of uranium prices like they did between 1980 and 1982 when the price of a pound of uranium fell from $100 to $17 in only two years.
On top of that, most uranium stocks don't even produce any uranium. Of the 142 publicly traded uranium companies, only a small percentage of them are actually producing uranium. Most are development stage companies that won't bring their first pound of uranium out of the ground. The stocks may be rising, but uranium's run could be done by the time many of these new players get their first pound of uranium out of the ground in 2009 or 2010.
Now, after seeing a remarkable surge in uranium prices, we see the companies that have sold out their futures in exchange for downside protection. That's why the most exciting investment opportunity in uranium is in the uranium enrichment market. Once processed into yellowcake uranium is sent off to one of the few and highly regulated uranium enrichment facilities in the world where it is turned into uranium hexafluoride, the useable form necessary to generate nuclear power.
There are two methods used to enrich uranium, gas diffusion and centrifuge-based enrichment. Both are capital-intensive processes that require massive facilities and highly specialized equipment to complete the enrichment process.
And both processes are highly inefficient. In fact, both processes were created in the 1940's. The second coming of uranium is on its way, but an investor must be very diligent in selecting which investments will benefit most from the soaring price of uranium and highly inefficient enrichment processes.
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Andrew Mickey is the Editor-in-Chief of BreakAway Investor, a monthly investment advisory that regularly provides readers with smart ideas that build wealth safely and consistently. He is also a contributing editor for Taipan Financial News and the founder of the elite trading service Level 6 Trader
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Related Resources
NEI: World nuclear power plants
UX Consulting: Uranium spot prices
EIA: U.S. nuclear statistics