New Uranium Bull
What comes to mind when I say the word uranium? If I gathered a small yet diverse sample of today's population and asked this same question, common one-word responses would include nuclear, weapon, toxic, dangerous, atomic, reactor and so on.
Though each of those descriptions can be justly warranted in one form or another, I'd like to focus on some other synonyms that demand growing attention. These include energy, commodity, investment, progressive and necessary.
For years now we have been heralding today's commodities bull, with the firm belief we are still in the early stages of a terrific secular uptrend. Several key commodities such as gold, silver and oil have warranted the majority of our focus for a myriad of reasons. Among the many, precious metals hold alluring traits that grip investors. They are timeless in holding their value as well as easy to invest in both physically and equitably. Oil of course has been a mainstream hot commodity that affects virtually every person on this planet in one way or another.
The fundamentals of this commodities bull are rock solid. Global financial markets are starting to realize that commodities of all types are not unlimited in their supplies. The population of this planet is growing at a breakneck pace, and in our high-tech industrial era we require more and more energy to keep things moving.
It is becoming readily apparent that demand for commodities is growing at a pace that supply is just not able to keep up with. Because of this, prices are noticeably rising across the board. The CRB Commodities Index, which is comprised of 17 geometrically averaged commodities, achieved a 24-year high earlier this year. Gold, silver and oil represent just a fraction of the commodities contracts that comprise this index.
Though gold, silver and oil are the most exciting and leveraged commodities for individuals to invest their capital, other opportunities also abound in this commodities bull. Our mission at Zeal is to explore and uncover investment and speculation opportunities wherever they lie. Of recent, some defensible hype has been given to a commodity of a different sort, uranium. We believe the hype, and will take a look at why we think some fantastic opportunities will present themselves in this uranium bull.
Before we visit the investment side of uranium, let's gather a high-level understanding of what it's used for. Uranium is a chemical element extracted from ore bodies around the earth that when refined becomes a highly dense radioactive metal. When uranium ore is discovered and mined in sufficient quantities, it can be chemically converted into uranium dioxide and a variety of other chemical forms for industrial use. The most common use is for fuel in nuclear reactors, which is used to produce energy in the form of electricity.
As a designated "alternate energy source", nuclear power has been recipient to an abundance of press, research and debate in recent years. Economics and environmentalism have been the catalysts catapulting it into the limelight. As global energy consumption is dramatically increasing, a glut of attention has been directed to the potential shortage of the mainstream natural resources used to produce this energy, hence fueling the realization of the need for alternate sources of energy.
With energy consumption on the rise, we are also seeing more and more exposure given to its negative environmental implications and byproducts. Environmentalism is now in vogue among today's global bureaucrats. The voice of the people pushing for a cleaner and safer environment has been creating a loud buzz. That buzz, along with scientific research and exposure has pushed mainstream politicians to take notice, adding to their agendas the daunting task of cleaning up the planet.
The most talked about environmental issue is global warming, which is caused by the greenhouse gases released from burning oil, natural gas and coal. In the search for cleaner and safer alternate sources of energy, nuclear power is getting more looks than ever before.
President Bush is among many world leaders that are trying to open the eyes of global economies to the efficiencies and effectiveness of nuclear power. He has recently embarked on a tour plugging his energy bill, which among other things promotes nuclear energy as a safe and secure way to satisfy the global demand for a cleaner energy source. Among the many provisions of this bill, there lies within incentive programs for the use and construction of nuclear power.
Over the last 40+ years nuclear technology has demonstrated significant leaps in safety and scalability. The nuclear community has coined nuclear energy as "clean energy", and truly has a case for such. It's been tagged clean energy because unlike coal, gas and oil, it does not emit carbon dioxide, sulfur dioxide, or any other waste product into the atmosphere. Instead, the reactors burn the radioactive nuclear fuel generating massive amounts of heat in which the byproducts are reprocessed and recycled within the reactor.
Along with the positive promotion of this clean energy, there also exists opposition and resistance. There are those out there that perceive nuclear fuel as an environmental concern in itself with perceived safety risks that are too vast to ignore. Here's why. When nuclear power or nuclear reactors start to get publicity, what comes to the forefront of most people's thoughts are Three Mile Island, Chernobyl and radioactive waste.
Unfortunately the nuclear power industry is stuck with this bad rap due to some anomalous events that have taken place in the past. The Chernobyl accident in 1986 was a true anomaly that occurred in a reactor that was built and licensed in a time and location with little accountability. Corners were cut and guidelines and safety procedures were not followed as they should have been in the construction and maintenance of those plants. In reality, that accident has zero relevance to reactors built in most of the rest of the world because of the strict safety design, engineering and procedures that go into them, such that did not go into the four built in Chernobyl.
The accident at the Three Mile Island plant in 1979 actually proved that if an accident does occur, it can be contained. Part of the core melted due to a malfunction, in effect destroying the reactor, but was in turn contained with nobody being harmed. When a nuclear power plant is constructed today, over half of the costs involved account for safety measures.
As for radioactive waste, that is something that just the thought of makes people cringe. Everyone has heard the stories and seen the movies that portray the environmental catastrophes that nuclear waste can cause. Everyone on the planet is most likely familiar with the symbol that accompanies it. You know, that notorious symbol for radiation, called tri-foil, which consists of three equidistant black prongs surrounding a circle in the middle, usually on a yellow backdrop. Danger, Danger!
Producing energy on a large scale, specifically electricity, will almost always produce a waste byproduct. Renewable energy sources such as solar and wind are the only exception. Unfortunately, those energy sources are dependent on a fickle environment, and cannot produce a consistent highly scalable energy source.
Interestingly, a nuclear power plant producing the same megawatts as a coal power plant would produce vastly less waste than that of the one using coal. I won't bore you with the numerical detail here, but the one burning coal sends millions of tons of waste into the atmosphere each year, whereas the one using nuclear fuel, because of its recycled and internal power source, produces a minuscule amount of waste.
The radioactive waste produced by a nuclear power plant is required to be properly isolated and should never enter or pose a threat to the environment and the air we breathe. There are strict guidelines in place for the disposal of radioactive waste. When properly educated, most people will agree that isolated, buried radioactive waste is better for the future of our environment than precipitously releasing toxic emissions into the air we breathe.
Environmental issues aside, the world is ramping up for the next generation of energy production. Most first-world, and even some second-world countries are ramping up their nuclear programs to harness this power. Both governments as well as private entities are starting to understand not only the environmental advantages of going nuclear, but the economic advantages.
Today there are 439 operational nuclear power reactors around the world and there are another 140+ either under construction, planned or proposed. In order to ramp up their future super-economies, India and China have highly escalated their nuclear programs and between the two of them are planning to build over 60 reactors over the next 15 years.
Did you know that in the United States there are 103 operational nuclear power reactors and it is estimated that they provide over 20% of this country's electricity? There are 20 other first-world countries that also use nuclear power to generate at least one-fifth of their respective country's electricity. France, Belgium, Sweden and several former Soviet Union countries use nuclear power for over 50% of their respective country's electricity.
It's estimated that 16% of the world's electricity is currently generated from nuclear power. These numbers are going to grow, and many other countries will join and move up the list of those producing and utilizing nuclear power.
Just like most other commodities today, as the demand for uranium exceeds its supply, the price of uranium will drastically rise. Let's take a look at how uranium has fared historically and how it has done compared to the general commodities markets. In our chart today, we show the comparison between historical uranium spot prices and the illustrious CRB Commodities Index.
As you can see below, there is a strikingly similar correlation between uranium and the CRB. When commodities are hot, so is uranium. Likewise when commodities are down, uranium has the same fate. In the commodities bull in the 1970s, both general commodities along with uranium shot to the moon. This positive correlation continues throughout the various market cycles we see below.
As we take a closer look at the numbers, you will notice that even though there is a near parallel trending relationship, uranium is much more volatile in its swings. Similar to the dramatic increase we saw in the 1970s, today's trend looks awfully familiar.
As recent as early 2000, the spot price for uranium was hovering around $7 per pound. As of the most recent monthly spot quote, uranium is now trading at $29 per pound. Even with this spectacular gain in just five short years, experts in the uranium field expect prices to continue to soar based on simple economic fundamentals.
Uranium, similar to any other industrialized natural resource such as oil or coal, is a non-renewable source of energy in which its supply is solely dependent on how much can be taken from the ground. Since major world governments are not stockpiling nuclear bombs anymore, as far as we know, global demand for uranium should be directly tied to its industrial use in nuclear power reactors.
Uranium as a commodity has not always been in the forefront of the hot metals markets. With the environmental and economic incentives of nuclear power, uranium is now becoming very popular. Uranium is a metal that investors should keep an eye on as a power-play in this continuing commodities bull. So now we ask, how does an individual investor take advantage of this bull run in uranium?
In order to effectively speculate and invest in uranium in the financial markets, we first need to understand how it trades in the global markets as well as its history. Prior to 1968, the only supplier of uranium in the western world was the U.S. Federal Government via the U.S. Atomic Energy Commission (AEC). As the Cold War was dying down and the commercialization of nuclear energy was beginning to become attractive, an open market for uranium was created.
To this day, trading uranium in the financial markets seems almost as difficult as it is to enrich the radioactive element itself. Unlike many of the major metals, uranium has never been traded in the formal futures markets nor has it existed on any kind of a tradable commodities exchange. Uranium is actually traded, in a sense, through long-term contract prices negotiated directly between the buyer and seller.
Most of these long-term contracts vary from transaction to transaction and typically range from two to five years in length. Some of the smaller-sized contracts on the lower side of the time scale will use a flat fixed price over the entire term of the contract. Most contracts though, specifically the large-quantity long-term type, will base the negotiated price according to long-term contract price indicators, or term prices.
These term prices are formulated based on current market indicators with heavy weight on the spot price. Many of these contracts have an adjustable measure that slides with current spot to some degree to adjust for future economic trends in uranium.
These examples only begin to explain how uranium contracts can look. In most cases, there is a much more intricate design these contracts have written into them. There can be any type of formula negotiated between the buyer and seller built into the long-term design of the contract.
Next we ask, where do these parties get spot and term market quote information if uranium doesn't have a readily available quote system? The dynamics of this are interesting. The parties involved in the contract will solicit these spot and long-term price indicators from two or three reliable private companies that provide market price indicators for nuclear fuel. Among other services, these third-party companies will help the buyer and seller establish a base price, usually measured in dollars-per-pound, that will adjust according to the terms of the contract.
Now we have a modest understanding of how uranium prices are conceived. Though it seems different in formula from other commodity pricing schemas, when you step back and take a high-level peek it truly isn't. Even though the uranium market is not as actively traded or influenced by the investing public as other commodities, its prices do adjust according to the same principles. It all boils down to supply and demand.
As the production of nuclear energy ramps up, we can comfortably speculate that demand for nuclear fuel is going to significantly increase over time. Let's look at it from a commoditized perspective. As implied, uranium is the mineral that is harnessed and used to make nuclear fuel. In 2004, total global uranium consumption was estimated at 180 million pounds. Of that 180 million pounds only 104 million pounds, or 58%, was supplied directly from mining.
Since mining couldn't keep up with demand, commercial, private and government stockpiles, along with recyclables from dismantled nuclear weapons were tapped and accounted for the difference. These stockpiles are swiftly dwindling. Utilities do not have sufficient long-term storage to continue production at their current pace. When these stockpiles run dry, the underlying issue will be exposed that there is a major shortage of uranium being pulled from the earth.
The supply and demand anomaly we are seeing today will only get worse down the road. With China and India leading the way, demand is going to dwarf supply in the next 10, 20 and 30 years. There are two ways the supply and demand gap will close. First, miners will really have to step up production, and second, prices are going to have to significantly rise. As a result of this, those companies on the supply side of the equation will realize enormous profits as the price for their product shoots to the moon.
Since there is not an easy nor formidable way for the common investor to trade directly in the uranium market, the next best thing is stocks. Those companies that mine uranium are and will be highly leveraged to its rise in price. Their mining expenses are fixed for the most part, so as the underlying price of uranium rises it will directly add to their bottom-line profits.
The challenge for investors and speculators looking to leverage their capital with this uranium bull is to find solid publicly traded companies that mine uranium and are positioned to capitalize as the markets demand. Unfortunately it's not as easy to find these companies as say gold, silver or other base-metal producers.
There are very few companies out there that mine uranium as their core product. Those companies that do will greatly benefit from this bull market. Of the 104 million pounds produced globally last year, approximately 80% of that was produced by only eight companies.
The lion's share of today's uranium production is isolated to just a few regions around the world. Australia and Canada accounted for over 50% of the mined uranium last year. We will see even more from Australia as it by far houses the world's largest uranium deposits with over one million tons of resources. Other global resource leaders are Canada, Kazakhstan and several countries in southern Africa.
There are going to be some serious growing pains as new uranium mines inch towards production in the coming years. We will keep an eye not only on those mines popping up in the global hotspots, but also some exploratory regions that are now becoming economically feasible to mine.
When looking for those companies that will have a competitive advantage, we are also watching those miners that have untapped uranium reserves, as well as those that produce uranium as a byproduct of mining other minerals. As the open-market price of uranium rises, there will be several miners that will change the focus of what they mine and will find it economically feasible to mine deposits that in the past were not so.
There are many untapped uranium fields around the planet, but very few with high-grade ore deposits. Mines with low-grade deposits that in the past were money losers because of the production costs are now being reopened or have moved forward with construction.
There are small mines all throughout the West and Midwest of the United States that are reopening because of this increase in demand and pricing. States such as Colorado and Wyoming are seeing a flurry of activity on this front. As demand increases, miners will tap their uranium reserves like never before.
With this being said, we need to be leery of whom we chose to invest in. Along with the legitimate miners, the pretenders have come out of the woodwork to capitalize on this bull. Similar to junior gold companies, uranium juniors have begun to spawn of recent. Some of these juniors are strong, but many have come online and are leeching public capital into their worthless resource claims that will most likely never get mined.
At Zeal we are diligently researching those mining companies that are or will be positioned to capitalize on this uranium bull. Through our research and analysis, we have identified several mining companies that have a high probability of riding this bull and providing us with spectacular gains.
As we continue to watch the uranium bull unfold and monitor its tactical trends, we will recommend such stocks to our Zeal Speculator and Zeal Intelligence subscribers when appropriate. Please join us today as we continue to watch this commodities bull unfold.
The bottom line is not even today can uranium supply keep up with demand. In the future, it will be even more of a strain as secondary stockpiles dwindle and annual usage rises. Uranium is a mineral that will fly with this commodities bull, and those companies that mine it will be well positioned to capitalize on the rising prices chasing huge global demand.