Why I Continue to be Bullish on the Uranium Market
The fear around nuclear energy is
palpable.
The catastrophic events in Japan on March 11 have
put a damper on the momentum of what was fast becoming a nuclear
renaissance. For the past several years, nuclear proponents promoted
nuclear energy as a clean, efficient, reliable and safe alternative to
dirty fossil fuels - and the world agreed.
A wave of new orders from BRIC countries as well
developed nations created a nuclear renaissance. Then over the past nine
months, the price of uranium began to climb. Dormant since the 2008
recession, uranium rose from US $42 per pound to a 52 week high of US
$72.65 in February.
The spot price of uranium fell over 25 percent in
the days following the earthquake and subsequent tsunami in Japan. Value
investors helped the troubled commodity regain ground buy buying the
plunge. But the question is still on everyone’s minds: what’s going to
happen from this point forward?
On Monday, Germany announced it will shut down all
of its nuclear reactors by 2022. The new policy is a complete reversal to
the proposal to enhance Germany’s nuclear energy established by the
government only seven months prior.
The German Chancellor, Angela Merkel, stated to
reporters on Monday, "Our energy system has to be fundamentally
changed, and can be fundamentally changed...We want the electricity of
the future to be safer and, at the same time, reliable and
economical.”
The decision by the German government to end its
dependence on nuclear energy has once again riled the uranium
market.
I believe the German decision is just creating
short-term noise in the uranium market. Once this
noise, created by the Japanese catastrophe and Germany’s recent decision,
is gone, uranium stocks will once again reflect earnings - and while
sales to reactors in Japan and Germany may slump, the world's other 436
reactors will be as hungry as ever for uranium fuel.
Because as people are recovering from the Japan
disaster – and possibly hating nuclear power more than ever – the supply
and demand fundamentals of uranium have not changed in a significant
way.
***The bottom line is that
even in the wake of the Japanese catastrophe, uranium’s supply crunch
lives on.
If we look out over the next eight to 10 years,
which is the amount of time it takes a nuclear power plant to become
fully operational, the market is still about 400 million pounds short of
projected demand.
The top 10 producers, which make up almost 90
percent of the uranium market, only produced 110 million pounds of
uranium in 2010. In other words, uranium producers need to produce nearly
four times the amount just to meet estimated new demand. The new supply
will have to come from somewhere, or the price of the existing supply
will need to increase to clear the market.
For uranium miners the market is red hot. For
investors, shares of the best uranium mining stocks could represent the
best energy investment opportunity in decades.
The World Nuclear Association’s (WNA) chart below
sums up why now is the time to get into uranium related investments. The
world will be using more uranium for years to come - and many great
investment opportunities appear in the midst of a supply
crunch.
The supply crunch easily has the potential to
become even more strained with 63 percent (note this is not the same as
top ten producers mentioned above) of the current uranium production
coming from only 10 mines worldwide. Additionally, the global supply of
mined uranium is susceptible to supply shocks if one mine floods, or
stops production for other reasons.
***The most direct way to profit from the coming
growth in nuclear energy and the shortage in uranium is to buy shares in
the most productive uranium miners in the world.
As I stated in
this letter over a month ago, the
tragedy in Japan, and subsequent fear in the market, has presented us
with the opportunity to invest in several well-managed and fundamentally
sound uranium companies. For well-informed investors with the patience to
tolerate volatility for a couple of months, I think this could
potentially be the single best opportunity to buy and hold uranium
stocks.
I will continue to track
the nuclear/uranium story closely and report back to you here
in Small Cap Investor
Daily. Feel
free to send in questions, or companies, that you would like me to
discuss. My address is editorial@smallcapinvestor.com.
As you know, I am long-term bullish on uranium fundamentals, and suggest that you join me for what should be a prosperous ride.
