Radioactive Warning

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• The Supply Story
• Bomb Power
• Wait and See
  

 

There are always at least two sides to every commodity story, the biggest being supply and demand.

In yesterday’s issue of the Resource Prospector, I talked about demand for uranium. After following and untangling the threads, it seems like demand is slated to rise. That’s according to two of the biggest authorities on the subject, the World Nuclear Association, and the Nuclear Energy Agency.

Today, I’ll tackle the supply side of the equation – and I’ll show how current annual production of uranium falls well short of annual consumption.

I unearthed a WNA chart to better show this contrast, which I believe will be the real catalyst for higher uranium prices.

Okay, so looking at this chart, there’s already a huge gap between production and consumption.

It begs the questions: why haven’t prices spiked yet? Where is the supply coming from to meet current demand?

The answer is: nuclear bombs. A New York Times article from November 11, 2009, revealed that nuclear power plants in the United States get a large amount of their fuel from dismantled Russian and U.S. bombs.

From the article:

“Salvaged bomb material now generates about 10 percent of electricity in the United States...

Today, former bomb material from Russia accounts for 45 percent of the fuel in American nuclear reactors, while another 5 percent comes from American bombs, according to the Nuclear Energy Institute, an industry trade association in Washington.”

That’s a situation that can’t last forever. The program to dismantle bombs for nuclear fuel (called Megatons for Megawatts) has so far claimed to have produced 11,047 tonnes of uranium – or about 25% of the supply needed for one year. But even if demand stays the same, there is a very finite amount of de-weaponized uranium left in government stockpiles. How much exactly, we can’t be sure. Government officials are understandably tight-lipped about uranium stockpiles.

But, one dismantling program in Tennessee says that it has used up over half of its stockpile since 2005 when that particular program was initiated. That’s just one example of one supply of de-weaponized uranium.

President Obama is hosting a summit right now with world leaders on the topic of nuclear disarmament. But, there are no definite plans that either Russia or the United States will produce more fuel from weapons.

In fact, the program to dismantle bombs to make nuclear fuel is set to expire in 2013. But nuclear power plants typically buy their fuel 3-5 years ahead of time, so unless world governments can somehow ramp up their efforts to dismantle bombs, we’ll be looking at a substantial uranium supply crunch.

Of course, none of this de-weaponized uranium is being sent to China, or India or anywhere outside of Russia, the United States or the EU.

But can’t uranium miners simply increase their output?

That’s the problem: cheap uranium, like cheap oil, is getting increasingly difficult to find – and artificially low uranium prices bolstered by government stockpiles has a deleterious effect on uranium miners. As more uranium miners go out of business or sit on their supply, more of the government’s uranium will be depleted.

That’s the most exciting factor for me: supply. We know the stockpile of de-weaponized uranium is falling, and quickly, with no certain plans to add more.

How to invest? Given some of the uncertainty involved with the nuclear summit in Washington D.C. right now, it might be best to wait and see what, if any plans come about in terms of future nuclear weapon dismantling. The only news that would convince me that uranium prices aren’t headed higher would be a very specifically outlined plan and timeline to dismantle more weapons for nuclear fuel.

I have a feeling that any other news will be very bullish for uranium prices. One way to gauge the health of uranium prices AND nuclear power generation is to look at the nuclear iShares ETF that tracks both uranium miners and nuclear power plant stocks: NUCL. 

I wouldn’t recommend buying this ETF as a way to profit from rising uranium prices, but I think it’s a good way to see the overall vigor of the industry. Keep an eye on this ETF as the Nuclear Summit wraps up.

Today, I’ll be chatting about uranium with the best energy analyst I know of: Gregor Macdonald, the chief analyst for Energy World Profits. I’m hoping to add a uranium position to the Energy World Profits portfolio if he agrees with my findings. If you’re interested in investing in energy stocks, I suggest taking a look at Energy World Profits – our advisory service all about energy. You can click here to take a 30-day test drive to see if the service is for you, and if it’s not, we offer a money back guarantee.

Good investing,

Kevin McElroy
Editor
Resource Prospector