By Palash R. Ghosh | December 2, 2010 14:27 GMT
A growing demand for nuclear energy across much of the globe will undoubtedly make uranium a prized commodity, as new power plants proliferate.
Investors seeking to capitalize on this evolving energy trend might consider a new exchange-traded fund, the Global X Uranium ETF (NYSE: URA), one of the very few investment vehicles in the world that can be regarded as a "pure play" on uranium.
Reuters
Cameco's chief geologist Doug McIlveen stands in a tunnel inside the uranium producer's Cigar Lake mine
Cameco's chief geologist Doug McIlveen stands in a tunnel inside the uranium producer's Cigar Lake mine
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Launched in early November, this ETF has already amassed in excess of $90-million in net assets, suggesting tremendous optimism about the future of nuclear power.
The fund comprises uranium mining companies as well as firms that manufacture mining equipment catering to miners.
Uranium, a radioactive metal used to generate electricity and a key component of fuel for nuclear power plants, generally cannot be physically acquired and held, but --- perhaps surprisingly -- trades on the futures market of the New York Mercantile Exchange. Consequently, uranium carries a spot price, just like more familiar commodities like oil and gold.
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However, in some cases, contracts for the metal are arrived at privately between suppliers and businesses (often at prices that differ from the prevailing market spot price).
The fund is presently dominated by three stocks: Cameco Corp. (NYSE: CCJ), a Canadian-based nuclear energy company which is the world's largest uranium producer; Paladin Energy Ltd., an Australian uranium producer; and Uranium One, another Canadian uranium miner.
Collectively, these three corporations produce about 20 percent of the world's uranium.
About half of the components in the index are based in Canada, with another third from Australia. The largest uranium deposits in the world are located in Australia, Kazakhstan, Canada, Namibia, Niger and Russia.
About half of the components in the index are based in Canada, with another third from Australia. The largest uranium deposits in the world are located in Australia, Kazakhstan, Canada, Namibia, Niger and Russia.
Uranium reached an all-time high price of about $140 per pound in mid-2007, then dropped dramatically to $40 and has climbed to about $60 in the past few weeks.
Mining analysts at Salman Partners are forecasting an average price of $78 in 2011, $104 in 2012 and $95 in 2013.
As with most everything else these days, China is at the center of the nuclear/uranium story. Last month, China Guangdong Nuclear Power Corp. inked a 10-year pact to purchase uranium at a price above the spot price at the time of the agreement. Not surprisingly, uranium prices have since spiked.
Uranium's supply-and-demand dynamics are extremely favorable now, according to Bruno del Ama, co-founder and CEO of Global X Management, which runs the URA ETF.
"On the supply side, because of the low spot price we’ve had for the past few years, there's been very little investment in uranium mines, and so supply has been quite limited," he said. "Also, the decommissioning of nuclear warheads by Russia and the U.S. is coming to an end, further reducing supply. On the demand side, dozens of new nuclear reactors are being planned around the world."
Indeed, according to the World Nuclear Association, there are at present about 440 nuclear plants in the world, but only about a dozen suppliers. Another 60 nuclear reactors are currently on the drawing board, primarily in China, South Korea and Russia.
The International Atomic Energy Agency forecasts that a minimum of 73 gigawatts of net new nuclear capacity will be added globally by 2020, and that capacity will more than double by 2030.
In fact, Cameco's CEO Jerry Grandey recently declared that the company's output climbed to 22 million pounds from 21.5 million, and that it expects production to double by 2018.
In this scenario, the price of uranium (and, by extension, the value of uranium stocks) are likely to move upward.
Del Ama explained that while it is very expensive to prepare and launch a uranium mining operation, the actual operation of the mine is not excessively costly. Hence, uranium mining companies often have relatively fixed costs of production, but can sell the extracted uranium at higher prices, thereby creating higher margins and stock valuations.
Of course, risks abound, and volatility could be high.
For example, consider Cameco – like many other uranium stocks, share prices have almost doubled since early July (largely in anticipation of greater demand for the metal). But the stock remains well below its highs from June 2007 (when, not coincidentally, uranium prices also peaked).
Thus, these companies are highly dependent on the price of the underlying commodities as well as investor expectations for the prospects of the nuclear power industry.
In addition, uranium stocks are also likely to incur disproportionate losses during a bear market or another global recession.
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