How to profit from uranium shortages

While gold has been struggling of late, the other yellow metal, uranium, continues to glow. Spot prices have risen eightfold over the past few years to more than $60 a pound. The latest uptick, a 7% jump from last week's level, was spurred by the news that Cameco, the world's biggest uranium producer, had suffered a flood at its Cigar Lake mine and that it may now never produce.

According to one analyst, the flood is the equivalent of the oil market losing Saudi Arabia; the 18 million pounds it was supposed to produce from 2008 amount to more than 10% of last year's global demand. A tight market is tightening further: demand was already set to exceed supply by 25 million pounds in 2008, notes Sean Brodrick on TheStreet.com. Now the gap will be 32 million pounds.

Uranium: supply and demand

At present, production from mines meets just 62% of demand and, given that it can take years to bring uranium mines onstream, a significant production boost is unlikely any time soon. Stockpiles and uranium from decommissioned Russian nuclear weapons have been meeting some of the demand, but these supplies are dwindling. Merrill Lynch is forecasting supply deficits out to 2015. On the demand side, the key factor is a revival of the nuclear industry as a clean source of fuel; worldwide, 200 new reactors have been proposed or planned, says Wirtschaftswoche. China alone will be adding two plants a year until 2020. In short, even before the Cigar Lake fiasco, uranium's long-term appeal was clear. Kevin Bambrough of Sprott Asset Management sees the metal eventually hitting $110-$120.

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Top plays on uranium shortages

One way to play the story is through Uranium Participation Corp (TSX:U, CAD12), a Toronto-listed fund that buys physical uranium in order to profit from price increases; it is similar to an exchange traded fund. On the stock front, MoneyWeek recently highlighted Energy Resources of Australia (AX: ERA, AUD16), whose shares look set to "go much higher", says Brodrick. Wirtschaftswoche points to Denison Mines (TSX: DEN, CAD22), a debt-free Canadian miner that has just taken over a US producer and is involved in promising exploration in Canada.