The last few days has seen an awakening amongst many of the financial gurus of the virtues of investing in Uranium producers and we must admit that the factors in favor make a convincing case.
In fact many of these plus points have been made in previous posts featuring uranium on this site over the last two years or more and yet the spot price of the yellow cake has stayed moribund in the $35-$40 a pound range since falling from over $135 a lb in July 2007.
In the course of this time no justifiable reason has been evident for this drop and subsequent stagnation of the price until the present time.
We understand that the current situation is that the demand for uranium to power the world’s nuclear plants is just about being met by the producers together with a rapidly diminishing source from decommissioned nuclear weapons.
The low spot price has taken many of the potential producers and exploration companies that mushroomed when prices were high out of the equation leaving only around ten established producers accounting for the majority of present supply. There are about thirty small miners making up the balance.
Bearing in mind that production costs have to be under $50 a pound to be profitable no new mining operation has been started and given the lead-time of at least eighteen months to be up and producing, there is clearly a chance of a situation where a shortfall may occur.
We should make clear that the overwhelming majority of mined uranium is sold as forward contracts where the price can be up to around $60 a lb., clearly not an option for a start up miner.
The Chinese are reported to be stockpiling up to twice the annual amount they currently need as their target is a further 60 nuclear reactors up and running by 2020. Further fresh demand can be expected from other countries committed to building new nuclear reactors with India in the lead.
Although there is no shortage of uranium (oxide) waiting to be extracted, much of it is located in politically risky regions, but as has been the case with oil, this is likely to be no more than a hiccup if demand and price warrant the expenditure and risk.
Cameco Corp (CCJ) is the blue chip of Uranium producers and should be the principal beneficiary in terms of price should the market gurus prove correct.
Market Vectors Nuclear Energy ETF (NLR) gives investors exposure to a worldwide group of publicly traded companies in the nuclear industry and is a good entry into the sector on the ‘not all the eggs in one basket’ principal.
A word of warning, all these plus points have been in the public domain for a long time, we remember writing about the diminishing source of uranium from nuclear warheads nearly three years ago and yet, today, there is still availability.
We ourselves are long term holders of both CCJ and NLR but have resigned ourselves to tucking them away in a bottom drawer, not discarded but still hopeful that they will recover to at least mid 2007 prices.
That the nuclear industry and uranium producers will eventually turn up trumps we think is a good odds – on bet. In the meantime we suspect, as so often happens when the tipsters, market advisors and gurus unite and are in full cry the price will rise and then within a week or so when the dust has settled fall back to below the price that they started before being talked up.
We suggest that leave this sector for a couple of weeks, let things settle down and then may be a good time to pick up some stock for the long haul. While you are waiting, due diligence, meaning lots of research, would be a good idea. Who knows, you may pick out an obscure uranium miner ripe for take over when the nuclear market takes off.