When the walls of Cigar Lake mine in Canada collapsed two years ago, flooding the world’s largest undeveloped source of uranium, nobody expected the uranium sector to drown with it. The talk was of ‘Peak Uranium’ and a bright future for nuclear energy. But having raced from $7 to $138 a pound in just six years, uranium was due a major correction – and it got one. Now that the spot price of uranium has sunk to $65 a pound, and taken the uranium mining sector with it, the talk is of burst bubbles rather than atomic booms.
But the market may now be too pessimistic. Uranium ran ahead of itself for a while, but the underlying demand for nuclear power is growing ever more rapidly. China has set out a plan to build dozens of nuclear reactors. And Russia has embarked on a formidable nuclear energy project, almost single-handedly orchestrating a nuclear plant-building arms race in the Middle East, as it sponsors building across the region. There are 440 reactors in operation around the world just now, with 35 more under construction and another 94 planned for the next eight years, reports the World Nuclear Association.
Supplying those new reactors is no easy task. The 440 existing reactors need about 77,000 tons of uranium a year to keep them running. But in recent years, uranium miners have only been able to satisfy two-thirds of that demand. The shortfall has usually been made up by sourcing recycled uranium from old Soviet warheads – the US relies on Russia for 50% of its uranium. But those stockpiles are rapidly depleting, with nuclear shipments from Russia set to fall by around half by 2013.
Supply will also remain tight because of the nature of the business. Mining uranium is even trickier than producing other commodities. Miners need special ventilation and shorter hours below ground to extract the radioactive ore, and securing mining permits from local governments is fraught with difficulty. It can take anything from five to ten years to get a uranium mine up and running.
The industry also suffers from long-term neglect. In the eighties and nineties, with uranium at $7 a tonne, exploration and mining was completely uneconomic. It has taken years to make up for the resulting rundown in mining infrastructure. Even today there is still a dramatic shortfall in nuclear engineers, with 28% of the nuclear workforce expected to reach retirement age over the next few years.
But there are at least two big reasons why uranium mining will continue to gather pace. Firstly, nuclear energy is just about the only feasible solution to global warming – nuclear power plants produce no carbon emissions. As France has proved (it generates about 80% of its energy via nuclear), you can power cities cheaply, cleanly and efficiently with nuclear energy.
Secondly, the world is still struggling to keep up with escalating energy demand from Asia, which is only set to grow as populations in China, India and other emerging economies start plugging more and more kettles, fridges and PCs into their walls. The cost of fossil fuels is soaring as a result, making nuclear power even more attractive.
So which uranium stocks should you buy? Well, when it takes anything from five to ten years to build a mine, taking a bet on junior miners might be foolhardy, notes Jennifer Barry for Market Oracle. Unless you’re happy to gamble, it’s better to focus on companies sitting on large recognisable deposits, rather than explorers. Below we have a look at two well-established uranium companies well-placed to profit from the global nuclear building spree.
The two best bets in the uranium sector
Despite the difficulties at Cigar Lake, the biggest and most well-established uranium producer is still Cameco (NYSE:CCJ). The $12bn company has suffered as production from the project has been delayed until 2011. But even without developing Cigar Lake, Cameco sits on massive reserves of the yellow metal, accounting for 20% of world production. The group is valued on a forward p/e of 15.5, which is a discount to some its peers in the sector, and with a price to earnings growth ratio of just 0.11, that valuation looks especially cheap.
But the simplest way to play uranium is to buy the metal itself, says Jennifer Barry. Uranium Participation Corporation (Toronto:U) buys uranium directly and stores it at power plants. The aim is to give investors exposure to the uranium spot price. Accordingly, its shares have sunk in line with the metal, falling from a 52-week high of $17.50 to $7.92, but now could be a good time to get in again. And it’s the closest thing to a pure play you’ll get – as Jennifer Barry points out: “You don’t have to worry about country risk, permitting issues or difficulties of fuel enrichment.”