10.02.2008
The Uranium Market
An Investment U White Paper Report
By the Investment U Research Team (Analyst: Horacio Marquez)
Dear Reader,
Despite its five-year, 1,250% run, the uranium market isn't even close to peaking. In fact, from a fundamental standpoint, it's a bargain.
Dwindling supplies, coupled with surging demand, could push prices substantially higher over the next 6 to 12 months. And as the cost of production remains relatively fixed, companies like Cameco (NYSE: CCJ), the world's largest uranium producer, are looking ahead to record profits.
To be sure, the pursuit of an alternative to fossil fuels has provoked an unbridled increase in demand for this power-rich commodity. And much of that, of course, comes from China…
Yet Another Commodity "Gap"
China's prolonged growth spurt has created a number of profit opportunities in recent years. In the commodities market, they've come in the form of wide supply and demand gaps.
In the past three years, for example, China's:
• Insatiable demand for steel caused prices to double. And investors made 553% on international Mittal Steel Company in 13 months.
• Copper requirements pushed Phelps-Dodge, the world's largest miner, up 253% in 16 months.
• Voracious need for oil drained supply from OPEC and pushed prices up by 63%… Investors in Valero Energy, the nation's largest refinery, made a tidy 431% in 24 months.
• Coal demands launched Fording Canadian Coal 268%.
• Aluminum demands, to supply its soaring appliance and auto factories, pushed Empire Resources higher by 1,257%…
If you didn't cash in on these opportunities, the uranium market is your "second chance."
A $50 Billion Nuclear Initiative
The tide of global opinion has turned toward a solution for climate change, and as the world's second largest contributor of greenhouse gas emissions, pressure has been put on China to clean up its act.
The health of the Chinese population is suffering from densely contaminated air. China burns more coal than the European Union, United States, and Japan combined, and pollutants from coal-fired power plants account for approximately 400,000 premature deaths a year.
So it comes as no surprise that China is making a massive effort to embrace alternative energy sources like nuclear power. In addition to the nine nuclear reactors already operating in China, the government in Beijing is looking to build 30 more plants.
That's the largest nuclear power initiative ever undertaken, and the price tag is likely to exceed $50 billion USD. For its money, China would end up with 11% of the world's nuclear energy capability.
What this all adds up to is a huge run on the uranium markets…
At the end 2003, when China first announced its plan, uranium was valued at $14.50 per pound. Now it sells for $133 - a 820% increase. And it's not done yet…
According to the Australian Foreign Ministry, with whom China has been negotiating, imports of uranium to China are set to increase from 2.5 million pounds per year, to an unprecedented level of 44 million pounds per year. That would be an increase of 1,760%, and close to one-quarter of the world's total uranium supply.
Unfortunately, supplies are running out…
The Commodity Crunch Leading To Record Profits
The world's leading uranium-mining countries have both seen a decline in production in recent years. Between 2005 and 2006, production has dropped from 11,628 tons to 9,862 tons in Canada, and from 9,516 tons to 7,593 tons in Australia.
Last year, the world's largest undeveloped uranium deposit (Canada's Cigar Lake mine, owned by Cameco) was suddenly rendered useless by a flood. This disaster put a halt to the extraction of 7 million pounds of uranium that were expected to be made available this year. Even worse, another 12 million pounds of uranium will come off the uranium market through 2009.
Is The Uranium Market Evaporating?
What used to be a uranium market surplus has also evaporated…
In 1993, the United States and Russia agreed to dismantle nuclear warheads left over from the Cold War and use the uranium to power nuclear reactors. This resulted in an excess supply of uranium for more than a decade. Now, more than 80% of that excess has been used up.
The industry's leading journal, The Uranium Market Outlook, has stated that above-ground uranium is at an all-time low, citing 30 years of underinvestment, stringent regulations, and an overall lack of exploration of uranium deposits.
International Nuclear, Inc., has reported that commercial reserves of uranium fell by 50% from 1985 to 2003. It has also reported that in 2004, only 54% of the uranium consumed in the world came from mining. The rest came from the depletion of existing reserves.
Countries like Japan and France rely heavily on uranium as a power source and are determined to secure supplies. But China's future demand remains a challenge.
There simply isn't enough within the uranium market to satisfy the world's current needs. Indeed, $133 a pound may seem cheap in a matter of months.
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