With the spot price of uranium soaring nearly 1,000% over the last 6 years, there’s little question the easy money in the sector has been made. If, however, you pick your investments closely, there is a lot of upside remaining in the uranium bull market.
Demand for uranium continues to soar, thanks to a global resurgence of interest in nuclear power as a mass energy solution. On the Asian continent alone, 57 new nuclear power plants are projected by 2015. For these countries, nuclear is not just an option, but an imperative.
A corresponding growth in demand for uranium fuel is inevitable. But uranium supplies are already very tight, with new mine supplies already running about 40% behind demand. That deficit largely explains why uranium has skyrocketed in recent years, moving from just over $7 in January of 2001, to over $72 today.
Consequently, interest in uranium has exploded and, as you would imagine, the market has become flooded with freshly-minted “uranium explorers”… close to 400 companies at last count. Make no mistake, the vast majority are nothing more than overpriced, over-hyped shells with little more in the way of assets than mildly radioactive moose pasture and aggressive corporate promoters who know how to spin a good story.
So if you’re looking to profit from rising uranium prices going forward – and we are convinced they will continue to rise – you’ll have to pay a lot more attention to the securities you select. We’ll discuss some of the key criteria to consider on that front momentarily, but first a quick look at the uranium spot price.
To understand where the spot price is headed you first have to understand the purchasers and their roles. The primary purchasers of uranium are nuclear power utilities. Historically, they have contracted for fuel for a set period of time, stockpiling when they became convinced that prices would be rising.
One important point to understand about uranium is that, unlike oil and gas, higher spot prices trigger no consumer protests, or Washington hearings, complete with grandstanding politicos trying to “protect” their constituents from the greedy price-gougers – a nearly monthly affair for oil and gas executives. The reason is that the amount of uranium used in creating nuclear power makes it a relatively minor component in the overall cost. A double in oil’s spot price would result in energy cost increases of 40% or more for oil-based power generation plants and send the cost of gasoline at the pump soaring. A double in the spot price of uranium, however, would result in a mere 5% increase in the cost of electricity from a nuclear power plant. That’s why you haven’t heard anyone complain about the 10-fold price increase in uranium since 2001. Indeed, uranium could triple from here and the utilities would hardly blink.
Uranium is still cheap by any measure. It is cheap in terms of what the power-generation market is willing (and able) to pay; it is cheap in terms of the growing supply deficit; and it is cheap in terms of its previous record-high price. In inflation-adjusted terms, the price of uranium has been as much as 70% higher than it is today – a price level we expect to see taken out during this uranium bull market.
If you’re looking strictly to ride the rising tide, stick with a fund such as the Uranium Participation Corporation (TSE: U)http://www.google.com/finance?q=TSE%3AU, as that will appreciate pretty much 1-to-1 with the spot price of uranium, less storage and management fees, of course.
If, however, you are looking at getting (much) more bang for your uranium buck, then you’ll want to look to get positioned in a portfolio of carefully selected junior uranium stocks. Juniors can widely outperform the spot price of uranium alone.
The secret to finding winning uranium stocks? Start by aligning yourself with high-quality management teams with proven uranium expertise. A surprising number of companies now claiming uranium expertise have little to no experience with this specialized metal. Next, look for “early mover” companies — those which were actively acquiring projects before uranium became the flavor-of-the-day. They are most likely to be sitting on the most prospective concessions, in the best geological and political settings.
Finally, look for companies that are actually doing the hard work necessary to prove-up their resources, because verified pounds in the ground will be, for most of these companies, the trigger that gets them taken over – at much higher prices — by a larger company with the specific skill sets to move the project into production.
And make no mistake, finding an economic uranium deposit, then bringing it to market is a Herculean task – far harder and more complex than, say, a gold or silver deposit, and even those are challenging in the extreme. Consequently, it is hard to overly stress the importance of investing with a proven management team; of the nearly 400 uranium companies fighting over your investment dollars, only a handful actually are worthy. Caution is the keyword.
During this second phase of the cycle, the uranium price is headed to $100, then $200. As the market matures and investors become more informed about uranium, the pretenders will be exposed and the contenders, those working hard to prove-up economic deposits, will be rewarded. Getting positioned today will still get you in ahead of the crowd, but don’t be in a rush, and don’t make the mistake of jumping into a pretender that has already had a big run up on nothing more than hype.
for The Markets and Money Australia
Marin Katusa is a researcher and writer for Casey Research, publishers of the Casey Energy Speculator, one of the world’s leading monthly newsletters dedicated to uncovering junior oil, gas and uranium companies poised for significant increases in production and share appreciation.
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