December 5, 2010

Forget Gold and Oil, Buy Uranium!

Published on Sunday December 05 2010
Recent market volatility and uncertainty about the prospects of the dollar have pushed commodities to center stage. Gold, oil, even silver have risen without a real barrier to growth ahead. One metal, though, which has received little attention but poses atomic possibilities, is uranium.

Uranium is not traded in an exchange, but two firms, the UxC Consulting Company and TradeTech, have developed spot price indexes which have come to be accepted by the industry. UxC even sells future contracts at the CME. TradeTech’s uranium spot price index rose to a two-year high on November 30, reaching $60.25 per pound. By November 3, UxC’s future price for January 2011 stood at $61.00, while November 2015 was selling for $65.75.

An analyst told me they see prices at $65 for 2011, and have set a target of $75 per pound for 2012. “The fundamentals are strong and there will be financial speculation pushing them up, it’s a double-win,” said the analyst.

Uranium trading is highly volatile. Nick Carter, vice president of UxC, explained that 8 or 9 producers account for approximately 80% to 90% of world production. Much of the world’s uranium comes from regions that are themselves volatile, such as Kazakhstan, Niger and Namibia. Finally, Carter explained that the market “is very small,” making it susceptible to violent price swings.

“In 2007, oil prices jumped to about $137 per pound as lots of investors, hedge funds, bought into physical uranium,” said Carter. A look at the historical price chart proves the violent nature of the market. Uranium went from around $45 a pound to $137 in a few months; it made its way down almost as quickly.

“Before, this market was driven by investors, but now it’s shifting to a producer-cost market” explained Carter. The change is being caused by the expiration of the HEU-LEU contract, signed in 1993 by Russia and the US. The treaty, which expires in 2013, allowed the duty-free export of Soviet uranium extracted from nuclear warheads. Its expiration will put additional strains on the market.

Demand, in the current market, comes from, surprise surprise, China. As of January 2010, the Red Dragon had 11 operating nuclear reactors and 20 more under construction, or 1.9% of production, according to the International Energy Agency’s 2010 Nuclear Technology Review. “China has a very ambitious nuclear program and they have announced they will expand [their nuclear energy capacity] to about 80 gigawatts by 2020,” said Carter.

The U.S. dwarfs any other nation in terms of nuclear capacity, with 437 reactors in operation and 56 under construction. Actual capacity represents 20% of total energy production in the U.S.; at a global level, total capacity represents 14% of world energy production.

Buying physical uranium doesn’t seem like the best way to tap the growing market. Global X Funds has released a Uranium ETF (URA) last month. URA had gained 16.3% in about a month, from its November 5 inception to the closing price on December 3.

Miners are another way to tap the market. Cameco Corporation, based in Saskatoon, Canada, is one of the largest uranium producers in the world, accounting for 16% of global production, according to its website. The company, trading in both the NYSE and the Toronto exchange, boasts a market cap of $14.8 billion and recently hiked its annual dividend in Canada by 43%! Going from 28 Canadian cents to 40, CEO Jerry Grandey said “[the dividend hike] demonstrates our confidence in our business and in the long-term fundamentals of the uranium market.” Cameco is the largest holding the URA ETF. Its stock price has sky-rocketed, gaining 78.3% since early July, returning to its pre-Lehman values.

Mining behemoth BHP Billiton is another option. The Australian miners own the “world’s largest uranium deposit,” the Olympic Dam. BHP is in the midst of a two-year process to expand what will be the company’s “single largest investment within Australia.” BHP, which recently gave up on its attempt to take over fertilizer’s top dog Potash, has performed strongly since the summer, gaining 43% since early July.

Ian Wyatt of Seeking Alpha suggests that “the big money will be made [with] small-cap stocks like Uranium Energy Corporation which has seen shares rise 180% since August 31.” The company has been focusing on acquisitions, especially in the Southwestern area of the US (Texas, Wyoming, New Mexico, Arizona, Colorado, and Utah), developing extended exploration databases. Through November, the company began drilling and production at different projects in South Texas.

Uranium is a violent commodity with huge prospects for growth. As the push for cleaner and cheaper energy continues, the radioactive metal will come to the fore. All four BRICcountries are already using nuclear energy, with Korea, Mexico, and others in the mix (track them through the Global Nuclear Energy ETF PJN). The market has its attractiveness, but, like radioactive materials, it carries huge risks.

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