Update: read Three ways to play the uranium boom for more expert advice on how to invest in uranium.
“Uranium, after decades of being the unwanted stepchild of energy sources, is now likely to offer better percentage returns…than oil, gas or any other energy alternative,” says Doug Casey, the American commentator on natural resource investments.
Already investors in “the other yellow metal” have done better than those invested in gold. The spot price of “yellowcake” – uranium oxide, or U3O8 – has tripled over the past three years.
Uranium in its enriched form is the fuel of nuclear power stations – 440 of them generate 16% of the world’s electricity.
Only a handful of mines in Canada and Australia produce uranium as their primary product, although some is also recovered as a by-product of mining other metals, usually gold.
However, annual output of 47,000 tons only meets 58% of demand. There has been a shortfall every year since 1985, the difference being met by drawing on government and private inventories, recycling spent fuel rods and tailings, and running down stockpiles of weapons-grade material since the end of the cold war.
Most of these secondary sources are running out. Remaining stockpiles of both yellowcake and weapons-grade metals are expected to be fully depleted by the end of this decade.
Meanwhile, demand for nuclear fuels is growing. 30 new nuclear power stations are under construction, with several dozen more in the planning stages. China alone, hungry for energy resources of all kinds to fuel its phenomenal economic expansion, intends to bring on line 27 new reactors over the next 15 years. India plans 31 additional reactors, Russia 25.
For decades political opposition to nuclear power has held back the growth of the industry. That opposition is now eroding for these reasons:
- Demand for energy resources of all kinds is expanding by nearly 3% a year, and at a higher rate than in the past because of the increasing importance of energy-intensive economic growth in developing countries.
- Higher prices for electricity and low interest rates on borrowed capital have made nuclear power a commercially attractive alternative to other major energy sources.
- Other energy resources suffer from disadvantages that make atomic power an increasingly attractive alternative. Oil and natural gas reserves are largely in the Mideast and other potentially politically unstable areas, or are difficult to access (deep under seas or ice). Coal is dirty, awkward to handle and dangerous to mine. Renewables have limited potential or are not yet commercially viable.
- Nuclear power is the clean alternative to all hydrocarbons as it doesn’t produce any greenhouse gases. This reality divides the environmental lobby, which has been its strong opponent for many years. James Lovelock, a founder of Greenpeace, has said: “Only nuclear power can halt global warming.” European countries such as Britain will not be able to meet their Kyoto treaty commitments to reduce output of greenhouse gases unless they take the nuclear route.
- Nuclear power is now safe thanks to modern reactor design. A Chernobyl-type accident is technically impossible with the pressurised water versions offered by leading manufacturers such as Areva and Westinghouse. The experimental pebble-bed design in final stages of development in South Africa is said to be “100% safe” because it won’t need any water to control fission.
As a result, atomic power is making a comeback.
Uranium: cost-competitive with other energy sources
The US Department of Energy recently announced incentives to encourage power stations to apply for licences to build new nuclear plants, which will be the first to be allowed in America for a quarter-century. Finland is already building one – the first European country to do so since the Chernobyl accident in 1986. Britain seems to be about to scrap its decades-long ban on the building of new nuclear power stations.
The high costs of hydrocarbon fuels and low interest rates have transformed the economics of electricity generation. It is very expensive to build an atomic power station – typically up to $2bn for a 1,000 megawatt unit, compared to $1.2bn for an equivalent coal-fuelled unit and just $500m for one driven by natural gas. But running costs are low – uranium fuel is only 2% of the cost of nuclear power.
UBS estimates that in Germany it now costs only 1.5 US cents per kilowatt hour to generate electricity in nuclear power stations compared to 3.1 to 3.8 cents using natural gas and 3.8 to 4.4 cents using coal.
These figures are distorted by factors such as the subsidy effect of carbon credits system, low depreciation provisions and waste disposal cost assumptions – yet spokesmen for the nuclear power industry insist that new plants can be built that will be commercially competitive without any subsidies.
This view receives support from the International Energy Agency which, in a recent study done jointly with the OECD, argued that the cost of generating power from new nuclear plants would be between $21 and $31 a megawatt hour, compared to $37-60 from gas-fuelled units.
However, the comparison would be less favourable should interest rates rise and/or gas costs fall substantially.
Uranium: cleaning up the waste of a dirty past
Most of the green lobby continues to oppose new nuclear plants because of fears about disposal of the highly radioactive waste. That is probably not a technical problem – such waste could be encased in glass and buried deep, for example in worked-out uranium mines. But the costs of waste disposal are still unclear.
One of the public relations difficulties the British Government faces in giving the go-ahead for new nuclear power stations is that taxpayers face a huge bill – estimated at £56bn – for cleaning up after the UK’s post-war “dirty” weapons and nuclear power programme.
In the advanced nations the private sector is wary of financing atom power without government guarantees because of political, financial and technical risks. However, such official underpinning could well come about because of considerations such as reduction of dependence on imported energy, and the need for more “clean” electricity generation.
And in any case, Asia’s developing nations are going to build many more nuclear units, boosting demand for uranium. With supplies from stockpiles tailing off, it looks as if a shortage will develop before the end of this decade.
It won’t be easy to address the problem. Although the world has abundant reserves, few deposits are rich enough to be mined primarily for uranium. And mining companies are wary about committing capital to major expansions after years of painfully low prices, although the biggest of them all, BHP Billiton, plans to treble production at its Olympic Dam mine in Australia.
There are also some political difficulties to be faced.
The technologies used to enrich yellowcake to make the fuel rods for nuclear power generation can also be used to produce weapons-grade material. This makes supply of uranium to nations which already have nuclear armaments, or could wish to acquire them, a sensitive international issue.
The two nations that are the biggest exporters of uranium and have the largest reserves, Australia and Canada, only like selling to countries that submit to international inspection of their nuclear power facilities. Important future buyers such as China and India are not likely to accept that condition.
However, some of the countries with substantial reserves, such as Kazakhstan and Namibia, are unlikely to be much concerned about who buys their uranium.
Yellowcake has recently been trading at about $33 a pound or $73,000 a ton. At that level, prices are sufficiently high to encourage new exploration and bring previously unprofitable mines back into production. It’s estimated that operating costs at Paladin Resources’ new Langer Heinrich mine will be about $12 a pound.
London-based investment commentator David Fuller considers uranium “the best of the long-term energy stories.”
Uranium: where profits could fizz… or go flat
If you’re interested in investing in nuclear power, here are some ways of doing so:
– Specialist mining companies, most of them listed on the Canadian and Australian stock markets.
The biggest and lowest-risk publicly-traded uranium producer is Cameco Corporation (CCO, Toronto). Its interests encompass mining, exploration and even nuclear power generation in Canada, including the largest and highest-grade mine.
Denison Mines (DEN, Toronto) is the second biggest primary producer, with interests in Canada’s McClean Lake mine and mill, and major undeveloped deposits.
Energy Resources of Australia (ERA, Sydney), part of the Rio Tinto group, is the only other primary producer, with reserves of 54,000 tons of uranium oxide at its Ranger mine.
All of these are locked into low-priced contracts, but those are due to run out soon, when the benefit of current much higher prices should flow through.
There are several dozen more speculative stocks, of which the most interesting are Paladin Resources (PDN, Sydney), which is developing a mine in Namibia coming into production in a year’s time; and Southern Cross Resources (SXR, Toronto), which is merging with Aflease and plans to start production in South Africa in 2007.
– A different kind of security is the Toronto-listed Uranium Participation Corporation (U, Toronto), which is a “pure play” as its assets consist of stocks of uranium oxide in concentrates.
– As an alternative to investing in uranium, you may prefer nuclear engineering companies such as France’s Areva (004524, Paris), the world’s biggest. Last year it had sales of $8bn from mining uranium, designing power plants and processing nuclear waste. It is 95% owned by the French government, with the remaining 5% in non-voting shares listed on the Paris bourse. It has the political advantage of not being American, British or Japanese, which puts it in the best position to profit from China’s huge programme of nuclear plants.
“Security concerns over global oil supply and fears of global warming have shifted public opinion,” say analysts at Canada’s Haywood Securities, “with nuclear energy becoming an acceptable option again.”
By Martin Spring in On Target, a private newsletter on global strategy