Uranium set to benefit from a nuclear renaissance

The tide has most definitely turned in favour of nuclear energy - but where will the uranium required come from? Justice Litle looks at which uranium producers are best placed to profit from rising demand.

Cigar Lake, in Canada's Saskatchewan province, is home to one of the richest uranium ore bodies on the planet. At 232 million pounds of proven and probable reserves, the economic value of the find is nearly $14 billion by recent spot price.

Cigar Lake production was expected to save the day for hungry nuclear power utilities - 103 of which operate in the United States. The plan was to have 7-8 million pounds of production online by 2008, with as much as 18 million pounds a year not long after. Cigar Lake was expected to supply 50% of all new uranium production within five years.

Then the walls caved in. Literally.

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Concrete-reinforced steel doors were in place to hold back the lake, but an underground rock fall caused the doors to give way. Water rushed in at 1,500 cubic meters an hour; in due time, the mine was flooded.

The flood is a costly setback for Cameco, 50% joint owner of the Cigar Lake mine, and a major headache for uranium buyers in general. Kevin Bambrough of Sprott Asset Management believes American utilities will be particularly squeezed.

'The delays...will create a sense of urgency for the next few years,'

Bambrough said. 'It's almost the equivalent of the oil industry losing Saudi Arabia.'

What production setbacks mean for the uranium price

Uranium prices are surveyed and quoted on a weekly basis by various industry watchers. The recent move from $56 to $60 a pound was 'the largest weekly increase on record,' according to Eric Webb of Ux Consulting. Long- term forecasts of $75 and even $100 a pound now appear justified; uranium would have to trade above $111 a pound to break its inflation-adjusted highs from 1978.

This is more than just subterranean cave-in blues: The uranium spot price hasn't seen a down month since 2001. For years now, uranium producers have met just 60% of total annual demand - the other 40% coming from government stockpiles and decommissioned nuclear warheads. This can go on for only so long.

The tightness of supply comes at a time of atomic resurgence. Three large-scale factors have turned the tide in favour of nuclear energy:

geopolitics, global warming and developing world growth.

Why nuclear power is back on the agenda

First, geopolitics: The unpleasant consequences of fossil fuel addiction splash across the headlines every week. Mahmoud Ahmadinejad predicts the collapse of Israel, the UK and the United States...Hugo Chavez vows to defeat 'the most powerful empire on Earth'...Vladimir Putin waves off brutal assassinations while cranking up the Cold War rhetoric...and so on.

All this and more is fuelled by an unquenchable thirst for oil and gas.

Nuclear power may not offer a direct path to energy independence - we can't put uranium rods in our gas tanks, as Peter Tertzakian observes - but it is a big step in the right direction. (And if hybrid car sales continue to skyrocket, drivers could conceivably 'plug in' at night, when traditional electricity demand is low.)

Second, global warming: The debate rages on; many still agree with Sen.

James Inhofe (Oklahoma), who called global warming the 'greatest hoax ever perpetrated on the American people.'

Yet political ideologies aside, mounting evidence is getting harder to ignore. While China, North America and Australia are endowed with huge deposits of thermal coal, the consequences of accelerated coal use could be dire. (Air pollution factors in too; filters in Lake Tahoe, your editor's beloved backyard, are already clogging up with Chinese gunk.)

Whether the public accepts global warming or not, Western governments surely do. The United States was arguably the last holdout, and with Sen. Barbara Boxer(California) succeeding Inhofe as chair of the Environment and Public Works Committee, that domino has clearly fallen. Politics aside, this is another feather in uranium's cap: Regime change in Washington, combined with the urgent need to 'do something' about global warming, works in favour of nuclear energy.

The Democrats would no doubt like to rely more on greener solutions, like solar and wind, but those industries are still too small to pack a meaningful wallop. The green technologies of tomorrow hold great promise, but they have not yet demonstrated an ability to perform at scale. Nuclear power has already demonstrated its safety, scalability and 90%-plus reliability, with next-gen technology like pebble bed reactors offering improved maintenance and safety to boot.

The final factor driving a nuclear renaissance is developing world growth. The historical correlation between energy use and economic growth is high; when rapid industrialization kicks in for a developing world country, the energy consumption path goes parabolic.

Asia knows that relying on fossil fuels to drive the next stage is a mug's game, for geopolitical, environmental and financial reasons. Besides, there will already be enough headaches as we try to fill up all those cars (hybrid diesels anyone?) and enough pollution to deal with aside from new power plants. Fossil fuel use is going to rise dramatically no matter what; nuclear power will help take an edge off that pain. Let a hundred reactors bloom.

So where will the uranium to fuel a nuclear resurgence come from? With government stockpiles covering 40% of present demand, the question looms large.

For one, Cameco is confident that Cigar Lake will eventually be up and running. The costs will be high, but that uranium is too valuable not to be accessed - and Cameco should recoup its recovery costs and more in the long run.

An important future source could be Australia, home to 38% of the world's low-cost uranium reserves. Surprisingly, for a country so rich in the stuff, Australia does not operate a single nuclear power plant - yet. The 'lucky country' still relies on coal for 80% of electricity needs. Yet a government report recommends adding nuclear to Australia's energy mix to lower greenhouse gas emissions, and Prime Minister John Howard recently called the rise of nuclear power in Australia 'inevitable.'

A commissioned study argues Australia could quadruple its export profits by enriching and fabricating uranium at home, rather than shipping it abroad unprocessed. Local environmentalists may protest against expanded uranium trade, but friendly pressure from the United States could win out...especially when combined with lucrative economic incentive.

Another country keen on nuclear power is Russia. Home to an estimated 15% of world uranium reserves, Russia could yet go from exporter to importer in the coming years. The official plan is to dramatically expand nuclear power's share of the Russian energy mix, to 25% by 2020.

Russian uranium production will have to grow approximately 433%, from 3,000 tons a year to 16,000 tons, if domestic supply is to do the job.

On the positive side, existing government stockpiles of uranium can act as a buffer against volatile demand. Construction costs make up the lion's share of investment for a new plant, with ongoing fuel and maintenance costs relatively small in comparison; the hitch is that a steady supply of fuel - the uranium itself - should be locked up in advance, preferably via ironclad contracts. This puts a lot of power in the hands of financiers, who like to see a reasonably steady production stream before committing funds. The financiers are thus relieved to know that governments are on their side, with a willingness to act as swing supplier in the event of temporary shortages. The US government in particular is doing all it can to get the nuclear resurgence jump-started, including making generous offers of 'regulatory insurance' to utilities who get the ball rolling.

All in all, the pieces are in place. The rise of safe, clean nuclear power is in most everyone's best interest...except the petrocrats who want to keep the world as addicted to fossil fuels as possible. Uranium producers could have some very good years ahead.

By Justice Litle for The Daily Reckoning. You can read more from Justice and many others at www.dailyreckoning.co.uk

Editor's Note: Justice Litle is an editor of Outstanding Investments, ranked number one by Hulbert's Financial Digest for total return performance over the past five years. He has worked with soybean farmers, cattle ranchers, energy consultants, currency hedgers, scrap metal dealers and everything in between, including multiple hedge funds. Mr Litle also acted as head trader for a private equity partnership, and made contributions to Trend Following: How Great Traders Make Millions in Up or Down Markets, a popular trading book by Mike Covel (FT/Prentice Hall).