Three ways to play the uranium boom

The UK's plans to re-embrace nuclear power have been put on hold for the moment amid legal wrangles over the Government's consultation' on the issue. But in many other parts of the world, nuclear power is seen as the only workable solution to global warming, not to mention the threat of high oil prices.

That's been good news for the uranium price, which, buoyed by the surge in demand, has risen fourfold in three years. And last week's takeover of UrAsia Energy by fellow Canadian miner SXR UraniumOne has put the sector firmly in the spotlight. The merger will create the world's second-largest uranium producer under the name UraniumOne. As the FT puts it, the deal comes "at a time when the uranium market is white hot". The question now is whether uranium is in a bubble, or whether it has further to go.

Having already doubled to $45 a pound in the 18 months to June last year, the price of uranium now stands at $75 a pound. That's due in large part to the flooding in October of the Cigar Lake mine in Canada, owned by Cameco, the world's largest producer of uranium. Cigar Lake had been expected to supply more than a tenth of the world's supply by 2008, but that now looks unlikely. Uranium demand was already expected to outstrip supply by 25 million pounds next year. The Cigar Lake incident has widened that gap to 32 million. "That's like the global oil market losing Saudi Arabia's production," says Sean Broderick in the Whiskey and Gunpowder newsletter.

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Critics point out that too much of the recent surge in price has been due to the appearance of a new buyer of the metal: hedge funds. They have certainly injected a greater degree of speculation into the price, and now account for almost a third of the spot uranium market. But supplies look like they may be be playing catch-up for some time yet.

Investing in alternative energy sources: Nuclear power is just one of the options open to the UK when the North Sea oil runs out. Our special MoneyWeek report reveals the 4 oil and energy sectors set to soar and the hottest share tips in each. Click here to find out more.

Commercial stockpiles dropped 50% between 1985 and 2003, which was when demand first began picking up. During that time, low prices meant no one was interested in mining for uranium. Demand may have gathered momentum now, but it takes eight years for a new mine to come online and start processing, according to the World Nuclear Association.

And while uranium supplies have been running low, demand for nuclear power has been growing. There are already plans for around 130 new nuclear power plants to be built in the next 15 years, 27 of them in China. To this end, China recently signed an export deal with Australia to receive 8,000 tonnes of uranium a year. That's a fair chunk of the 77,000 tonnes needed to power the world's plants in 2005. Japan, India and Russia are all planning to build new reactors, and the US will have to begin thinking soon about how to deal with its 103 ageing reactors, the last of which was built in the 1970s. And with the EU expected to import 65% of its energy by 2030, it's likely many European countries will reassess their relationship with nuclear power.

Yet at $75 a pound, uranium is still far from its inflation-adjusted high of $145 ($43.40 a pound in 1978). British stockbroker Hargreave Hale thinks it will hit $100 a pound. When? "$100 by the end of this year would not be surprising," says Broderick, and given that Cameco has already said that 2007 production from Cigar Lake will be deferred, that doesn't seem improbable. We look at the best ways to profit from all this below.

Investing in uranium: three stocks that are white hot

Consolidation fever has gripped the uranium mining sector among the many stocks driven higher as a result is Uramin (LSE:UMN), which has soared around 300% since we tipped it on listing in April. While this is great news for anyone already in the sector, many stocks now look rather expensive.

In fact, the best miner to buy in the circumstances could be Cameco (US:CCJ). The group's troubles with Cigar Lake (see above), which hit profits in the most recent quarter, have seen its share price barely affected by the merger speculation. But recent news that it would plug the leak at the mine in the second quarter was better than some had expected, says analyst Kevin Bambrough of Sprott Asset Management. And despite the Cigar Lake problems, the company still has plenty of uranium to sell.

If nuclear reactor operators "don't have the luxury of waiting until material prices come down a bit, Cameco could stand to make a mint in future quarters", says Anders Bylund on Motley Fool. The group is on a forward p/e of 23, and, unusually for the sector, pays a dividend, yielding 0.5%.

Alternatively, with analysts still expecting to see $100 a pound before too long, you could just track the uranium price. Uranium Participation Corp (CN:U), is a Canadian fund that does this by buying uranium oxide and uranium hexafluoride.