One of the best investments we can make right now is to buy into supplies of relatively secure, low-cost uranium – the feedstock for nuclear reactors. The simple story is that the uranium supply trails far behind demand. The added wrinkle is that supply cannot easily increase.
“In the world of commodities, demand is rarely the compelling reason to get long,” observes Robert Mitchell, a general partner at Portal Capital, “Instead, you want to own a commodity where supply is incapable of responding to even a small bump in bids.” In other words, you want to buy the commodities where it is very difficult to increase supply. Though hardly a new insight, it’s one that investors sometimes forget.
One commodity that aces this simple test is uranium.
Just looking at the raw numbers, the annual mined supply of uranium provides little more than half the annual demand. Most of the balance comes from decommissioned warheads. Furthermore, uranium production is constrained, both geologically and politically. A few years ago, Cameco’s enormous Cigar Lake project went “offline” due to massive flooding. This property will not come back online until 2013!
A large, offline mine is a very big deal in the uranium world, as nearly 60% of the world’s mined uranium comes from only ten mines. Cameco’s MacArthur River mine alone provides 15% of the world’s production. For comparison, the top ten mines in the gold sector produce only 19% of the world’s supply.
Politically, uranium production is also problematic. Let’s take a look at just a pair of snapshots from around the world. Consider them postcards from the frontier of the uranium market. (Even if you don’t care about uranium, this is an issue that affects many commodities, including oil.) First up, the blue men of the desert…
The Tuaregs have been roaming the deserts of North Africa since at least the seventh century. For hundreds of years, they prospered from the lucrative trans-Sahara caravan trade. Tuaregs trafficked in gold, salt, ivory and slaves across the bazaars of North Africa and its trading hubs, such as Timbuktu. Because the indigo dyes they use in their veils and turbans rub off on their skin, people call them the “blue men of the desert.”
The rise of maritime trade in the 16th century led to the decline of the great overland trade routes of Africa, as it also contributed to the demise of the old Silk Roads across Asia. Today, the Tuaregs live in poverty – even though Tuareg lands in Niger and Mali sit on the third largest reserves of uranium on the planet.
Mining interests have tried to push the Tuaregs off these lands. In response, Tuareg fighters have clashed with Niger troops and ambushed mining personnel. The Niger government, by the way, is not exactly a hallmark of stability, either. Niger just had another coup d’état. The mining contracts signed so far are about as good as Confederate money. Risks abound.
So even though Niger has handed out over 130 prospecting licenses, mostly for uranium, only 10% are active, because of the Tuareg revolt and political uncertainty. Niger may hold some of the world’s richest uranium reserves, but they aren’t worth a pile of eggshells if you can’t get them out of the ground.
Another postcard comes from Kazakhstan – a great, big, empty country in Central Asia. It’s the ninth largest country in the world by area, bigger than Western Europe. Yet it has only 16 million people – that’s about 15 people per square mile. Kazakhstan, though, is one of the world’s largest uranium producers. It has one-sixth of global reserves. Kazatomprom, the state uranium company, is the largest producer of uranium in the world.
Kazakhstan is also a relatively risky place to do business. Recently, Kazakhstan arrested the head of Kazatomprom and seven other executives. The sale of some uranium assets is under scrutiny. Among these assets are Uranium One’s mines. There is a possibility, though insiders say it is highly unlikely, that Kazakhstan nationalizes these assets. That would make Uranium One, a publicly traded stock, essentially a zero overnight. (Oil companies have also had issues in Kazakhstan.)
In any event, the world is depending on Kazakh’s plentiful uranium. It will not come cheaply. Current production is profitable under $50/lb. But the low-hanging fruit is always picked first. Getting Kazakhstan’s other vast uranium resources on stream will require uranium prices north of $80/lb. to maintain similar profitability.
Current spot prices – meaning for immediate delivery – are only about $42/lb. The long-term price is around $65/lb. Most uranium is sold at the long-term price under contracts. (The uranium spot price peaked in the summer of 2007 at $136/lb.)
Kazakhstan and Niger are just two examples of why it’s not going to be easy or cheap to increase uranium production. Yet we’ll need lots more uranium. The demand for uranium is building in intensity like a heap of hot coals.
The market has been in deficit for years, as it burns off Cold War stockpiles, which are finite and dwindling. Another way to look at it: Uranium demand is on its way to hitting 226 million pounds per year. Yet last year, the top dogs – which make up 90% of the market – produced only about 110 million pounds of uranium.
There are already 436 reactors up and running today. And there is a surge in demand coming in the next decade from the hundred or so new reactors expected to come online. Yet the industry is about 400 million pounds short of meeting that demand.
Jerry Grandey, president and CEO of the second largest uranium miner, says the challenge before the industry “will not be easy.” New production has been hard to come by. Miners have generally been unable to keep up with production targets. As evidence, he cites the fact that world uranium production is up only 24% since 2003, even though the price of uranium is up more than fourfold over that timeframe.
I’ve been canvassing people in the uranium business to get a sense for what it looks like on the ground. I had an interesting conversation with Chuck Melbye, who has been in the mining business for five decades. His resume is impressive and too extensive to recount here. (Mining also seems to run in the family. His son is president of Cameco Inc., the marketing arm of the big uranium producer.)
Anyway, we talked about all things uranium. We talked about projects in the pipeline. We talked about uranium deals signed by China, Japan and Abu Dhabi and one in the works for India. We talked about the slow process to bring on new mines and how expensive and uncertain it all is. We talked about the diminishing stockpiles of uranium.
In the end, Melbye’s view echoed much of what I’ve been hearing. “The uranium price is depressed,” he says. “It shouldn’t be. It’s going to take off one of these days. There is going to be a uranium shortage in three to four years.”
So let’s see… strong demand, plus constrained supply, equals investment opportunity! Tune in tomorrow for a specific investment idea…
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