* Uranium demand expected to grow 32 pct by 2015
* Spot uranium up 43 pct, to average $65/pound in 2011
* Risk seen for new projects in unstable regions (In U.S. dollars unless noted)
By Julie Gordon
TORONTO, Nov 18 (Reuters) - After weathering a tough third quarter,Canada's uranium producers are looking at much brighter prospects astheir shares surge, spot uranium prices jump and growing demand fornuclear fuel pushes expansion into overdrive.
Not surprisingly,China is driving the underlying trend. Its ambitious program of buildingnuclear power plants promises double-digit growth in demand foruranium, a trend that should benefit Canada's established producers andjuniors alike.
In addition, the Asian superpower could prompt around of mergers and acquisitions as it looks for ways to control thesupply of uranium needed to feed its fleet of reactors.
Globaluranium demand is expected to grow 32 percent by 2015, according to RBCCapital Markets, a forecast that already has share prices climbing.
Analysts are urging investors to jump on the bandwagon and buy sharesof Cameco <CCO.TO>, Uranium One <UUU.TO>, Paladin Energy<PDN.AX> <PDN.TO and other industry stalwarts.
"Over thenext 10 years, without a shadow of a doubt, we're going to needsignificant expansions in uranium production," said BMO Capital Marketsanalyst Edward Sterck.
By 2010, China aims to produce between 80gigawatts and 112 GW of electricity from nuclear power, up from acurrent capacity of just 11 GW. In order to start and fuel those newreactors, it will need to buy an additional 82 million pounds ofuranium.
In 2010, total global production for uranium isestimated to be about 187 million pounds. Annual demand is estimated at190 million pounds.
"In terms of the producers, pick one that hasa high degree of exposure to spot prices," Sterck said. "There may beprice spikes."
Uranium spot prices have risen nearly 44 percentsince June, hitting $58.50 a pound this week. This momentum has helpedpush shares in Uranium One up as much as 142 percent, while Paladin hasrisen almost 60 percent and Cameco 66 percent.
Stocks slippedearlier this week, as China's nuclear rollout was questioned. But with23 new reactors already under construction, the country appears to be ontrack to achieve its lofty nuclear ambitions.
"We think thatbetting against China's ability to attain its goals is dangerous," RBCanalysts Adam Schatzker said in a note to clients.
BUYING THE SOURCE
But building reactors is just the first step for China. Securinguranium supplies to fuel those power plants will be its next bigconcern.
To that end, the Chinese have already signed threelong-term supply deals, one with France's Areva <CEPFi.PA> and twowith Cameco. Analysts say China will soon take the quest for securesupplies a step further.
"In nearly every other commodity,China's gone out there and bought assets to ensure that they have someform of captured supply," said Sterck. "They haven't done that inuranium yet."
He said juniors are a prime target, as they arecheaper, and have longer timelines to get into production, which mesheswell with China's nuclear rollout.
Sterck said he favors ExtractResources <EXT.AX> <EXT.TO> as a key target. Other promisingnames are Mantra Resources <MRL.TO> and UR Energy <URE.TO>.
But Sterck doesn't rule out a mid-tier producer being gobbled up byChina, or a diversified miner with uranium interests. He sees Paladin,which has no majority shareholder, as a prime takeover target.
While he says the climate is ripe for mergers, he emphasizes that higheruranium prices will drive any deal-making. Higher prices will boost thevalue on projects that companies had put on the back burner after spotprices tumbled from a peak of about $135 a pound in 2007.
Analysts are calling for spot prices to average around $65 a pound in2011, but there are still risks for investors looking to add uraniumproducers to their portfolio.
Most of the demand is long-term, and much of the future supply is located in politically unstable regions of the world.
RISKY REGIONS
In 2009, Kazakhstan surpassed Canada as the world's top producer ofuranium. Neighboring Uzbekistan and Kyrgyzstan also have large, untappeduranium deposits.
But the Central Asian states are rife withpolitical and social unrest -- at least 75 people were killed earlierthis year in a bloody Kyrgyz revolt.
Fidelity Management fundmanager Joe Overdevest said that when picking uranium stocks, like anynatural resource, the location of the company's projects should be a topconcern.
"Number one is political stability, where the actual supply is coming from," Overdevest said.
"The future supply coming online is in countries like Kazakhstan,Namibia, Uzbekistan," he said. "These are not countries that are themost stable politically, so that kind of adds an element of potentialrisk to future supply."
While the uranium sector has not yet seenforeign-owned companies lose their resources to nationalism, oil majorshave lost stakes in their Kazakh projects to the government.
Themajority of Uranium One's projects are in Kazakhstan and Paladin'sLanger Heinrich project is in Namibia. Meanwhile Cameco, the blue chipof uranium miners, operates primarily in Canada with one major Kazakhproject.
According to Thomson Reuters I/B/E/S, FidelityManagement holds a 7.9 percent stake in Uranium One, along with smallerstakes in Paladin and Extract.
Overdevest said that while project location is a top concern, there are other factors for investors to consider.
"Number two: how much growth they are offering?" he said. "And numberthree is execution: a lot of companies can promise production, but canthey actually execute on it?"
($1=$1.02 Canadian) (Editing by Frank McGurty and Rob Wilson)