Despite environmentalists' opposition, all the evidence suggests that the world must once again go back exploiting uranium-based power. MoneyWeek investigates
Right now, says Robert Mitchell of Adit Capital in The Gloom, Doom and Boom Report, carbon is accumulating in the atmosphere at a rate of three billion tons per year. You may think this doesn't matter, that "we will all part this earth from problems utterly unrelated" to global warming. Or you may simply think it doesn't exist. But you can't get away from the other consequence of our dependence on fossil fuels: their prices just keep on rising. The oil price has more than doubled in the last few years as demand from all over the world, particularly from China, has soared beyond everyone's expectations. And the price of coal is also rising at a rapid clip, thanks to the fact that the average US consumer gets through about four tons of coal every year and that Chinese usage is heading that way too.
That's a number that isn't going to go down, says Peter Huber in The City Journal. Why? Because coal is crucial to our electricity supply. More than 38% of the world's electricity comes from coal and the demand for electricity is rising fast all over the world. It is expected to rise 20%-30% in the US over the next ten years and at much faster rates in the developing world (Chinese electricity consumption has doubled over the last decade). The fastest-growing parts of the global economy - IT and telecoms - depend entirely on electricity for fuel, and it's taking over the thermal sector too: where you used to see a gas cooker in almost every Western kitchen, today you see a microwave. The same is true in manufacturing - huge numbers of furnaces, dryers, welders and kilns are being replaced by electric alternatives. Even the transport arena is becoming increasingly electric. Modern, high-speed trains are being designed to run on electricity and hybrid cars are increasing in popularity. Everything about living in a modern economy depends on being able to plug in and power up. This means we need to generate more electricity, fast. China is already suffering from serious electricity shortages that could cripple its economy (last year there were 175,000 blackouts) and one in every three people in the world have no access to electricity.
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So how do we produce more electricity? Not with oil, says Dan Denning in his new book The Bull Hunter. You can, of course, use oil to make electricity, so it is "still part of the story". But as the chart on page 22 shows, using oil for electricity generation peaked in 1980: as the price of oil rises, "you can burn just about anything else for cheaper electricity". Next up is coal: over 95% of the demand for coal over the next three decades will come from the electricity market. But "coal by itself is not the answer". Why? Because it is dirty. When England was the centre of the Industrial Revolution and coal fuelled the steam engines, "the sky was black with soot". This is happening all over again in China, where acid rain is a huge problem and layers of smog blanket the streets in every major city. There are exciting new possibilities opening up in the form of clean liquid coal, but while the technology for this is sorted out, westill need something else. But what? Environmentalists love to point to solar cells, windmills and hydrogen, but "no realistic combination of those three will even vaguely approximate to the incremental trillions of kilowatt hours of electrical power the citizens of Earth will soon request", says Mitchell. If you wanted to power every house, office and streetlight in London, you would need to cover an area twice the size with solar panels (and it would have to be somewhere sunny - so not in London).
The good news is that instead of doing this, you could build a couple of nuclear reactors and you'd have an endless supply of clean, cheap energy. A bundle of enriched uranium-fuel rods about the same size as a two-bedroom flat in Brixton would power the whole of London for more than a year. Many think that the age of nuclear power ended long ago, says Denning. They're wrong. Thirty-seven countries around the world, the US included, currently use nuclear power. France is famously the most dependent (77% of its juice comes from nuclear power), but the US has 104 nuclear plants operating at almost full capacity and the UK has 35, which between them reliably provide 20% of the country's electricity. What's more, "over the last four decades nuclear power has been the fastest-growing major source of electricity in the world". And that is going to continue. Germany and Switzerland just extended leases on current plants; the UK has just put its nuclear plan back on the table ("My Government will give the go-ahead to building new nuclear power stations," said the Queen at the opening of parliament this week - see the box on page 20); Japan gets 39% of its energy from nuclear power and is planning to expand that; India has nine plants under production and another 24 planned; and China will need to "build at least two reactors a year every single year for the next 15 years" in order even to begin to meet its needs. Finally, in the US, the Energy Secretary, Samuel Bodman announced this week that the first new nuclear-power plant in more than two decades could be completed by 2014.
So what does this mean for investors? asks Doug Casey of Casey Research. The salient point is "one of supply and demand". Currently, mines around the world are producing about 92 million pounds of uranium a year, which amounts to just over half of the 175-million-pound annual demand from nuclear-power plants. We are using more than we are producing, which has created a "classic supply/demand squeeze": the price of uranium has risen more than three-fold over the last four years.
The question now is whether this will continue or not. Let's look at the supply side. The first thing to bear in mind here is that while there is no arguing that there is currently a shortfall, the idea that the world itself is short of uranium "is absurd in geological terms", says Casey. Uranium is not only relatively easy to mine, but is also more common than even tin or zinc. Because of this abundance, the rising uranium price has, and will continue to, bring more deposits out of the woodwork. A great many areas that it wasn't worth mining in when uranium was selling at $7/lb look more attractive at the current $23.50/lb and overall uranium producers and explorers currently hold over 2.5 billion pounds of known U3O8 reserves, theoretically enough to satisfy the current market for more than a decade. So how much of this reserve will come to market in the near future and how will this affect the uranium price?
The most immediate new production to come online is likely to be from existing mines tapping into high-grade ore, says Casey. Cameco has already applied for a license to increase output from its existing McArthur River and Key Lake facilities by up to 3.3 million pounds annually, for example, and is looking to increase production from various other mines as well. But one wildcard in uranium markets is the production coming from central Asian nations, most notably Kazakhstan, which hosts an estimated 15% of world reserves, or some 1.4 billion pounds of yellowcake'. The nation is currently the world's third-largest producer, with an output of 7.3 million pounds in 2003, but the national uranium producer, KazAtomProm, has announced that it intends to increase production fivefold over the next decade. Africa may also yield a small amount of new supply over the next few years. Finally, there is the US, where slight increases in uranium production could arise in the near term, both from expansions of producing operations and new mine startups.
A further issue is secondary U3O8. This includes uranium obtained from the recycling of nuclear weapons, utility and supplier stockpiles and other sources, such as breeder nuclear reactors. Such sources have been feeding the nuclear industry for the past 20 years, making up for the shortfall in primary mine production. So how much stockpiled uranium is left? Very little. In 2003, the Energy Information Administration reported that stocks had dropped to 85.2 million pounds. Of this, 45.7 million pounds were held by nuclear plants, with the remaining 39.5 million pounds in the hands of supply agencies - only a few years supply at current burn rates.
The upshot on the supply front, says Casey, if you add up new projects coming on stream, is that annual supply is likely to expand by around 64 million pounds a year over the next few years. Assuming that no current uranium mines become depleted (which they will) and that the world sees no new nuclear plants built (which it will), the increased supply would still fall short of current demand by more than 18 million pounds. If the world's nations build all the reactors they say they will, the supply gap may even increase. All this suggests the uranium market isn't in immediate danger of being swamped by increased production. If market forces are allowed to act freely, prices will rise for the next several years until they reach high enough levels to unlock the Earth's reserves of low-grade uranium. In the meantime, well-positioned investors in the uranium sector can sit back and enjoy the ride. See the box on page 21 for the best shares to buy.
Doug Casey is chairman of Casey Research, LLC, and author of Crisis Investing. He is also editor and publisher of Caseyresearch.com and the International Speculator. For a limited time, MoneyWeek subscribers can take a 30-day trial subscription to International Speculator absolutely free. For details, visit www.caseyresearch.com. Dan Denning is editor of Strategic Investment and author of The Bull Hunter, which is released this month by John Wiley & Sons. To find out more about commodities and the energy sector, visit www.energyinvestor.co.uk
Four hot uranium producers
Cameco is the world's leading uranium producer (or the "Saudi Arabia of uranium", says Robert Mitchell of Adit Capital, who is a holder of the shares) and thus a long-term hold for uranium investors. But as much of its sales for 2005 and 2006 are under fixed-price contract, in the short term it won't benefit much from rising prices.
Africa may yield some new supply over the next few years, says Doug Casey, the most immediate is likely to be from Paladin Resources' Langer Heinrich deposit in Namibia. The property, acquired by Paladin in 2002, is thought to contain some 72.8 million pounds of U3O8. Paladin is completing a bankable feasibility study, with production expected to begin in late 2006 at a rate of 2.5 million pounds per year. Several other projects will follow soon after. Investors who got into the stock when Casey first tipped it will have made over 1,412% since, but with the firm lined up to be one of the first out of the door with new U308 production means, "the show is not yet over".
One source of increased uranium supply in the near- to mid-term could be Australia's Olympic Dam deposit, which alone hosts more than a quarter of the world's known uranium resources, says Casey. Owners WMC Resources currently produce about 10 million pounds annually from Olympic Dam, but are conducting drilling aimed at delineating further resources and ramping up output to near 30 million annual pounds. The company is targeting the full expansion to be completed by 2010-2014. Assuming a gradual step-up, WMC could be adding 2.5 million pounds of output per year.
USEC (USU) is a gamble, says Mitchell. It was one of the biggest gainers on the NYSE in the first quarter (+68%) and is the only domestic enricher of uranium in America. However, it is a "very controversial company" and requires $1.5bn in financing. If it works, "it could be a huge winner even from here."
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