It's time to grab a slice of 'yellowcake'

Governments have rediscovered nuclear power, with 44 reactors being built and another 110 planned. Uranium production can't meet demand, and the big players have been buying up smaller miners. So is this the start of a uranium bull market? Eoin Gleeson examines the sector, and picks the best company to invest in now.

The British nuclear renaissance continues apace with news this week that Centrica has stumped up £2.3bn to buy a 20% stake in British Energy. But with governments around the world pinning their hopes on nuclear power, why haven't we seen a rebound in the industry's raw material uranium?

Blame Lehman Brothers. It turns out the failed financial group may be sitting on up to 500,000 pounds of 'yellowcake' acquired from a maturing commodities contract that's enough uranium to make a nuclear bomb. So uranium dealers have been in a state of paralysis, anxiously waiting for the moment when the massive overhang gets dropped on the market by the liquidators to settle some of Lehman's debts.

But the dealers can rest easy, says Lehman CEO Bryan Marsal on Bloomberg. Having secured $10bn from selling other assets, Lehman is in no rush to dump radioactive material with the first bidder. And that message seems to be filtering through to the market. Uranium has crept up 11% to $45 a pound since 15 April, according to Metal Bulletin.

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Indeed, there are good reasons to think we are witnessing the start of a bull market for uranium. For starters, some major buyers have recently been building their long-term supplies of yellowcake in a big way. Few come bigger than China's National Energy Administration, which recently announced it is stockpiling uranium to meet the latest nearly-doubled target of 75 million kilowatts of nuclear capacity by 2020. Industry giant Cameco has already confirmed that China accounted for "a very significant" proportion of recent spot-market demand.

Secondly, we won't see a lot of new uranium coming to market this year, even if there is a steady trickle of the metal from Lehman's vaults. That's because it's tricky and expensive to get hold of. Miners need special ventilation and short hours below ground to extract radioactive ore. Meanwhile, securing the necessary mining permits from governments is fraught with difficulty. And with the price of uranium languishing around $40 a pound, it is simply not economical to mine it from scratch. The marginal cash cost is believed to be in the $45-$50/lb range, according to a recent report by Salida Capital. "Adding in a reasonable return on investment suggests a minimum $60-$65/lb contract price to justify investment in a typical uranium project."

The upshot is that global mine production will only meet about 73% of demand this year, according to UX Consulting. In recent years that shortfall has been made up by sourcing recycled uranium from old Soviet warheads, but that programme is set to end in 2013. Meanwhile, 44 reactors are still under construction with another 110 at the planning stage. "It's conceivable that the uranium industry many need to expand annual mine production by more than 50% over the next decade in order to meet the demand from new reactors," says Salida Capital.

So the big uranium players have been buying up uranium miners. Indeed, RBC Capital Markets is predicting a wave of consolidation in the sector over the next 12 months. Cameco, which produces about 18% of the world's supply, has just earmarked $2bn for a shopping spree. Japanese and Korean utilities firms have been snapping up uranium miners since 2007. We look at a likely bid target below.

The best bet in the uraniumsector

Having had their fingers seriously burned when the uranium price blew out two years ago, many investors have been doing their best to forget uranium. Analysts at Goldman Sachs and JP Morgan recently predicted that the price could remain under $50/lb through to 2011. But many big industry players see things differently.Cameco, for example, recently bought a huge chunk of uranium on the spot markets at prices well above its cost of production.


One prime takeover candidate is the Uranium Participation Corp (TSE:U). The firm currently holds about nine million pounds of yellowcake in inventory for financial investors. Given the firm essentially buys uranium and stockpiles it for resale, it remains about the closest thing to a pure play on an escalating uranium price. The company has just announced plans to raise around $76m by selling 11.6 million shares to a syndicate of underwriters. It intends to spend this war chest building up its uranium reserves. Predators know that buying this $572m firm is therefore a good shortcut to scarce uranium supplies.

Even if Uranium Participation Corp doesn't get bought out, it is primed to benefit from a recovery in the price of uranium.

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.