By: Sean Brodrick
The price of uranium is jumping again! This week, the white-hot metal went from $91 to $95 a pound, according to TradeTech’s Nuclear Market Review. Remember, this metal was trading at just $75 per pound in January … $55 in October … and $45 last July. That’s a ferocious uptrend!
We’re in undiscovered country now. Heck, my 2007 target was $100 per pound and now it looks like we might hit that by April! Where do things level off?
Sprott Asset Management analyst Kevin Bambrough has said that a sustained supply deficit could cause uranium prices to spike north of $500 per pound by 2015. To be sure, Bambrough doesn’t believe $500 uranium would be sustainable.
I agree it’s hard to come to grips with $500-a-pound uranium, but my analysis shows that such a price might very well be sustainable. Here’s why …
Pound for Pound, Uranium
The cost of uranium makes up a very small portion of the cost of electricity from a nuclear power plant. The cost of coal or natural gas, in contrast, makes up a far larger share of the cost of producing electricity.
For example, if the price of natural gas doubles, the cost of electricity from a gas-powered plant would increase by about 40%. But if the price of uranium doubles, electricity from a nuclear power plant would only go up about 5%.
Let me show you why that is …
The uranium used in nuclear power plants comes in pellets. Typically, a pellet of uranium weighs around seven grams or 0.24 ounces. This pellet is capable of generating as much energy as three and a half barrels of oil.
At $60 a barrel, you’d need to spend $210 for oil. On the other hand, it costs around $1.43 to buy 0.24 ounces of uranium at the current price of $95 per pound.
See, the price of uranium has doubled in the last year and it’s still dirt cheap when you look at how much energy it produces.
Even if uranium goes to $500 per pound, that would only raise the cost of a uranium pellet to about $7.50 — not even close to the cost of an energy-equivalent amount of oil today.
Bottom line: In the context of rising fossil fuel prices, $500 per pound for uranium actually might be sustainable.
But let’s be a little more conservative and look at it another way …
One thing we might do is start pricing uranium in ounces, rather than pounds. Measured in troy ounces (like precious metals), uranium now trades at $6.51 per ounce. Meanwhile, silver, another metal with a lot of industrial uses but without the energy component, trades at $13.40 per ounce.
Now, nobody’s going to walk around wearing uranium jewelry (I hope!), but here’s my point: The price of uranium would have to double just to trade on par with silver. I think that would be fair since uranium is at least as inherently valuable as silver.
Moreover, I think the price of silver is going to $20 per troy ounce. If uranium kept pace, that would spell a price of $284 per pound!
None of this is going to happen overnight, and nothing travels in a straight line, so expect ups and downs along the way. But all signs point to higher uranium prices down the road.
Just based on historical prices, uranium is a long way from its inflation-adjusted high of $140 per pound. And the supply/demand squeeze has the potential to easily push the price of the white-hot metal beyond that target, too.
Demand Increasing Exponentially,
There are huge forces ramping up demand for uranium. And new supply just isn’t there. Heck, despite the 99% increase in uranium prices last year, production from mines actually fell 5% from a year earlier.
More than 100 nuclear reactors are under construction or in the planning stages, a huge 25% increase over the number of existing reactors. Japan’s planning 11 … China’s working on 30 … and India and Russia are each going to build 20.
So far, the U.S. is planning a handful of new nuke plants. However, in my opinion, U.S. utilities are totally blowing it when it comes to securing their future uranium supplies, especially in the face of soaring prices.
Once they decide to build a nuclear facility, utilities have to secure their fuel supply for up to six years out. But people in the industry tell me that U.S. utilities have done practically nothing in this department!
I believe that by the time they decide to follow the path already well-trod by the world’s other major uranium consumers, they are going to pay a lot more than $100 per pound.
The U.S. Energy Information Administration (EIA) reports that U.S. civilian nuclear reactors have unfilled uranium requirements of 365 million pounds for 2005 through 2014. For the same time frame, they’ve only locked-in purchase contracts for 181 million pounds.
In short, even if they don’t build another plant, U.S. utilities are going to have to scramble to fill as much as 67% of their uranium oxide requirements. That means they’ll have to buy more than 36 million pounds per year over the next decade. Current global production is only 100 million pounds per year!
Add in demand from new plants and the rest of the world, and it’s not a pretty picture. Higher uranium prices look more and more certain.
My Favorite Ways to
If you want a pure way to play rising uranium prices, check out the Uranium Participation Corp., a Canadian fund that tracks uranium. The symbol on the Toronto Stock Exchange is U. In the U.S., the symbol is URPTF on the Pink Sheets. (On Yahoo, that would be URPTF.PK.)
Another way to go about it: Buying individual stocks. The advantage is that you can get a lot more leverage by investing in miners. Just make sure you understand your appetite for risk before you go this route. The profit potential is great, but it won’t always be a smooth ride.
And perform a lot of research before you jump in. Mark Twain’s description of a gold mine as “a hole in the ground with a liar on top” also applies to some uranium explorers. For that reason, it’s critical that you pick companies with strong management teams.
Yours for trading profits,
P.S. If you’re looking for a few good companies to start with, check out my Small Uranium Wonders report, which highlights six great miners. I’ll also send you four updates throughout the year, telling you when to sell. Just call us at 800-400-6916 and say you want “The Small Uranium Wonders” report or order online at my secure website.
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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-- Posted Wednesday, March 28 2007 | Digg This Article |
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