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One of MoneyWeek's favourite yellow metals has had an extremely exciting week so far.
We're not, for once, talking about gold, but that other precious yellow metal - uranium.
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Uranium has been in a long-term bull market for quite some time - but a flood at industry giant Camecos Cigar Lake mine has sent share prices at its rivals soaring, and looks set to have a similar effect on uranium prices when the index is next compiled (it only updates twice a week, as uranium is not traded on the open market).
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How can just one mine have such an impact? "Losing Cigar Lake in the uranium world is like the oil market having to deal with the loss of Saudi Arabia," reports Toronto-based Sprott Asset Management's Kevin Bambrough.
So could we be facing Peak Uranium?
The latest troubles at Cameco's Cigar Lake mine first became apparent on Monday, when the company announced that flooding at the mine was worse than it had initially suspected. The flood started on Sunday, but the group had hoped that flood doors would contain the water - though completion of the mine was still likely to be delayed by a year, to 2009.
But the doors did not seal properly, and Cameco now expects the entire underground area of the mine to be flooded - which means considerable uncertainty over the mine's future.
"This is the largest, highest-grade uranium mine in the world and we have uncertainty about when and if that will be developed. So it's a very, very significant event," said Nicole Adshead-Bell of Dundee Securities.
The mine was expected to produce up to 18m pounds of uranium a year between 2008 and 2010. As Adshead-Bell says: "Most uranium mines produce at a rate of 2.5m pounds per year and less, so you need a lot of new uranium mines to come along just to replace Cigar Lake."
And the trouble is, supplies are already tight. Peak uranium' might be pushing it, but there's no question that there's not enough to go round. Ray Goldie, analyst with Salman Partners, told Reuters: 'In 2008, we had previously estimated that demand would exceed supply by about 25 million pounds, now it will be about 32 million pounds, so increasing the gap by about 30 percent.'
The UK's position on nuclear power may be uncertain at the moment, but other countries around the world, particularly in developing markets, are building new reactors rapidly. China in particular needs to deal with the pollution problems being caused by its reliance on dirty fossil fuels, and nuclear power is seen as a good solution.
The effect on the uranium price (which at $56 a pound, is already up more than 50% in the past year) "will be almost immediate," Eric Webb of Ux Consulting tells Fullermoney. "There's enough inventory in the market right now that power plants would continue to operate. The big question is, at what price?"
It's a good question. And Sprott Asset Management's Kevin Bambrough reckons he has the answer: "I still say the uranium price is going to test and exceed the inflation adjusted highs of the prior peak," he told StockInterview.com. "I think the (peak of) $110 to $120 will get taken out in this market."
Obviously this is good news for Cameco's rivals. Major gainers in recent days have included Australian group Paladin Resources, which has two open-pit uranium mines scheduled to start producing in 2007 and 2008, and thus is set to benefit from the higher prices caused by any supply squeeze.
Others gaining include Denison Mines, UrAsia Energy, and SXR Uranium One, which we mentioned in MoneyWeek a couple of weeks ago. SXR is due to start production in early 2007.
You could buy into one of the above stocks - and given the rosy outlook for uranium, they should all continue to do well, even after the gains they've made this week.
But what of Cameco itself? The industry leader has seen its shares fall sharply since the start of the week. But as Eoin Treacy on Fullermoney.com points out: "Camecohas 18m pounds in reserve [so] they will be able to meet their contractual obligations. Assuming the price of the raw commodity continues to climb, what reserves it has in its other properties will continue to appreciate, so the situation is not life-threatening.
He continues: "This is a secular bull market and any weakness could be viewed as a buying opportunity for the long term." That sounds like a good idea to us.
Turning to the wider markets
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The FTSE 100 edged 16 points higher to close at 6,182 yesterday, following a mixed day's trading. Shares in household cleaning products maker Reckitt Benckiser jumped by over 5%, making it the day's biggest riser, as it announced expectation-beating third-quarter results. For a full market report, see: London market close
Across the Atlantic, the Paris CAC-40 retreated slightly from yesterday's record high, closing 7 points lower at 5,404. In Germany, the DAX-30 was 4 points higher at 6,247.
On Wall Street, stocks were mixed ahead of the Federal Reserve's interest rate decision. The Dow Jones was 10 points firmer, closing at 12,127. The Nasdaq was down 10 points, at 2,344. And the S&P 500 ended the day a fraction of a point higher, at 1,377.
In Asia, the Nikkei closed 81 points lower, at 16,699.
The price of crude oil was creeping higher this morning, last trading at $59.43. In London, Brent spot was little changed at $57.55.
Spot gold had slipped to $581.50 this morning, down from $583.40 in New York late last night.
And in London this morning, First Choice Holidays announced that second-half growth had slowed after heightened airport security and the World Cup discouraged some Britons from travelling abroad this summer. The company also expects full-year margins to narrow 'slightly' as a result of later bookings, prompted by July's heatwave, and its failure to fully pass on higher fuel costs to customers. Shares in First Choice had risen by as much as 5.5p this morning.
And our two recommended articles for today...
How bad will a US economic slowdown be?
- The US economy is slowing down. That much we all know, says Jeremy Batstone of Charles Stanley. The question is, how much is it going to slow down? To find out whether the Fed can steer a course between the Scylla of recession and Charybdis of high interest rates to ensure a soft landing, read: How bad will a US economic slowdown be?
Should you invest in Argentina?
- Investors who remember the 2001 crisis may be inclined never to return to Argentina. But for some, the Latin American market is looking very attractive these days, especially when it comes to property. For Doug Casey's views on whether Argentine real estate is worth the risk, see: Should you invest in Argentina?
