Down With Uranium?

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• Liberals…with guns?
• Vermont and its nuclear problem
• The exact kind of situation we want to invest in

I’ve been a resident of the beautiful state of Vermont for just about a year and half. And just like any new place you move to, I found that my expectations were close, but just not quite on the mark.

In that regard, Vermont, more than any other place I’ve lived, is something of a contradiction. You’ve probably heard that Vermonters are notoriously liberal. And that’s mostly true. But what you don’t hear is that Vermonters are voraciously independent-minded – almost to a fault. Some Vermonters would rather do it the wrong way than do it the same old way. It’s refreshing, and sometimes frustrating.

And our liberal state also has some of the most lax gun-laws in the country – maybe the world. In some parts of Vermont, you can walk down the street with a loaded .357 magnum on your hip, in plain view, and no one will bat an eye. Vermont is also the only state in the country where you can hunt fish with a gun. I’ve heard northern pike can be vicious, but seriously? We also don’t have any restrictions on concealed carry. As long as someone hasn’t been convicted of a felony, they can pack heat in Vermont. Are we politer for it? I can’t tell.

Yes, Vermont is probably the best place to go skiing on the East coast – but it’s also gorgeous and extremely livable in the summer. To that point, it does get pretty darn cold during the winter – usually there’s a week or two where we dip into the negative 20s. But the hottest days of the summer will scratch into the low 100s on occasion.

The biggest contradiction might be that Vermont gets a good chunk of its electricity from a nuclear plant called “Vermont Yankee.”

I know…you’re thinking: “liberal state” and “nuclear power” do not go together very well. And you’re right. It seems that Vermonters have been trying to close Vermont Yankee ever since it opened. Lately, the calls for its closure have grown much more shrill and frequent after a small amount of nuclear waste water *may* have leaked into the Connecticut River – the river that separates Vermont and New Hampshire, passes through the middle of Massachusetts and eventually outlets into the ocean on the Connecticut coast.

So it’s not just Vermonters, but New Hampshirites, Bay Staters and Connecticuters that are peeved at Vermont Yankee.

And of course, there’s a grumbling ground-swell of malcontents around the world angry at nuclear power in general, in much the same way that people don’t like Wal-Mart (NYSE: WMT), McDonald’s (NYSE: MCD), Exxon (NYSE: XOM) and any of a number of unpopular, world-dominating companies.

And like those boring old blue chips, nuclear power isn’t going anywhere.

The fact is, even if Vermont Yankee gets closed, which it very well might, there are still another 435 nuclear plants around the globe. And according to the World Nuclear Association, another 327 reactors are scheduled to be online by 2030. China alone is planning to build another 120 reactors by then.

Even better- the WNA estimates that world usage of uranium will be 68,646 tonnes in 2010 – but by 2030, they expect that number to swell to more than 343,000 tonnes.

Again- most of that demand will come from China, followed closely by India and Japan.

So what’s next?

Sometimes it’s tough to reinforce a contrarian viewpoint. All I hear on the news in Vermont is that nuclear is bad. I don’t actually believe that nuclear is bad, and I’m kind of worried about my electricity bill if we get rid of one of the biggest contributors to the grid in this area. But if the popular media, and general feeling about nuclear is that it’s bad…then it’s probably a great place to think about investing.

Taking a quick look at uranium prices, the weekly spot price is currently $41.75/lb - well off the highs of nearly $140/lb back in early 2007. But as our all-star Trademaster analyst Jason Cimpl says, “Just because something is well off its highs doesn’t mean it’s a good time to buy.”

I think he’s right. The price of uranium has been on a race away from its highs. And since it could very well make new lows – which would put it below $7/lb, maybe now’s not the right time to build a position.

So we’ve got prudence on our side, but when will we know when it’s time to buy? I really like the long-term trend for higher uranium prices. It’s one of those inevitabilities, like rising oil prices, that I want to get my portfolio out in front of.

The easiest way to test the waters of the nuclear energy industry might be to buy the exchange traded fund The S&P Global Nuclear Energy Index (NASDAQ: NUCL), which tracks the biggest uranium producers and nuclear power companies in the S&P 500. It’s not a pure play on uranium prices (it’s actually split 50-50 between uranium producers and nuclear power providers) but it gives us an idea of how the industry as a whole is doing.

Of course, like a lot of ETFs this one came into the market near the top. This exact scenario happens with commodity funds especially, because frequently it’s only when a given commodity is at its priciest that fund managers get enough pressure from investors to launch a new ETF.

The added liquidity from this fund might have even helped to drag uranium prices down from their highs a bit.

In any event, ETFs, by definition, can’t outpace the sum of their components. I’ve talked about how I’m not a huge fan of ETFs before for this very reason. The upside is much better with individual companies- BUT it’s a good way to give yourself some initial exposure to the trend because it limits your downside. We’ve held some uranium majors in the past, and had a good degree of success so we’ll be looking to add more exposure in the future.

In our Global Commodity Investing portfolio we recently sold Ivanhoe Mines Ltd (NASDAQ: IVN) for a nice 107% gain. They mine pretty much everything, including uranium.

Click here now for a risk free 90-day trial subscription to Global Commodity Investing.

Right now, I’m having a conversation with Jason Cimpl about adding a uranium miner to the portfolio. He’s leery of uranium for the short term, but he’s a trader. I’m looking at the long-term trend here, and even if uranium loses another 50%, it’s only a matter of time before the trend reverses. Looking at the numbers for the next few years, the world will be using much, much more uranium than we use today. That means higher prices for uranium.  I'll be looking for dips in uranium's price to build any position in miners and producers.  

In the meantime, we recently recommended a small company that specializes in another type of energy commodity. It’s currently trading much cheaper than its peers, and like the uranium companies on our radar, it’s a great play on a cheap, and relatively scarce commodity that we know China is trying to get its hands on. Click here to get the full story.

Thoughts on uranium and/or nuclear power? Send your comments here: editorial@resourceprospector.com

As always, the uranium story is a situation we expect to cover in more detail in Global Commodity Investing, and with commodity prices across the board still beat down, the time couldn’t be better to take a free trial subscription.

Good investing,

Kevin McElroy
Editor
Resource Prospector