Financial Post
Uranium
Fuel for nuclear reactors benefiting from both underlying demand and fears of global warming
John Greenwood, Financial Post
Published: Monday, March 26, 2007
I's illegal for individuals to own and extremely dangerous even to get close to. The few markets that exist for it are highly regulated and private. Yet strange as it sounds, uranium has become one of the biggest stars of the commodity boom, with hedge funds and assorted other speculators scrambling to tap into the excitement around a sector that only three years ago was on its knees.
Hardly a week goes by without the launch of a new mining company or fund looking to join the party. "There [are] hundreds of outfits today that didn't exist a few years ago," said Peter Farmer, chief executive of Denison Mines Corp., a leading Toronto-based producer, and president of Uranium Participation Corp., a company formed for the sole purpose of owning physical uranium.
According to UX Consulting Company LLC, uranium spot prices have moved up ninefold since 2002, sitting at about US$91 a pound today. And the upward momentum may still have room to run, with analysts saying stocks with solid fundamentals may continue to benefit from the underlying demand for uranium.
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Uranium Participation Corp. president Peter Farmer plays down buyers' concerns, saying that without growth in prices, utilities will not have a secure uranium supply.
Peter Redman, National Post
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Unlike other raw materials and foodstuffs that are benefiting from exploding demand, the forces at work in uranium only partly involve the economic expansion in China. The main driver is rising concern around the world over global warming. More than half of the electricity flowing through electricity grids globally is generated by power plants that are fuelled by coal and other fossil fuels, major culprits in the greenhouse-gas problem.
Since nuclear generators run on uranium and, therefore, don't contribute to climate change, many countries are starting to see it as part of the solution. So after decades of decline, the nuclear industry is going through a renaissance as utilities around the world announce new plants.
That's good news for uranium miners, since nuclear generators are their biggest customers.
"This is completely different from the boom in other commodities," says Bart Jaworski, an analyst at Raymond James. "It's coincident with what's going on in metals, but there are different drivers, because the demand for uranium is from power utilities."
Mr. Jaworski is calling for demand to keep growing for the next five to 10 years, based on the worldwide resurgence in nuclear power.
"If demand remains strong, we expect prices will continue to be propelled to much higher levels," said Adam Schatzker, an analyst at RBC Capital Markets.
Mr. Jaworski said it's not too late for investors to benefit. "You want to buy shares in companies with strong growth profiles, financial capacity and experienced management teams."
Since Canada is the world's top uranium producer, there is plenty of choice close to home, including Cameco Corp., the world's biggest producer. Its shares have moved up about 10% in the past six months, closing last week at $46.53 for a 16% return in the past 52 weeks.
Other smaller players include SXR Uranium One Inc., Forsys Metals Corp. and Denison Mines Corp., all of which have seen their shares more than double since October.
While the argument for higher uranium prices is strong, there are risks. Mr. Jaworski said the biggest one is the possibility of a disaster such as the meltdowns at Chernobyl in 1986 or Three Mile Island in 1979, which could put a damper on public support for the industry. But that is unlikely since advances in technology have dramatically improved reactor safety, he said.
Another worry is that the U.S. Department of Defence, which keeps a stockpile of uranium from decommissioned nuclear weapons, could flood the market. But he said that risk is also remote because the U.S. government has indicated it won't interfere with the market.
As of the end of January, there were 435 reactors operating around the world, with about 28 under construction and a further 64 in the planning stages, according to the World Nuclear Association. Russia alone is planning 20 and China and India have also unveiled major investments.
All that new capacity and the demand expected to flow from it is what is pushing up uranium prices, and the situation is being exacerbated by a supply crunch, since the uranium mining industry only recently twigged to what was going on.
There are only a few places in the world where uranium ore, or "yellowcake" as it's called, occurs in sufficient concentration to be economic. The biggest supply is in Northern Saskatchewan.
Typically, it takes many millions of dollars and several years to find a new mine. Because of concerns around uranium falling into the wrong hands, companies are required to pass through a maze of regulatory hurdles and red tape before they can get the necessary approvals to start producing uranium. In all, it takes about a decade to turn a proven deposit into an operating mine.
The trouble is that for the past two decades many producers have been struggling to stay alive. Ever since Three Mile Island and Chernobyl, uranium prices have been languishing well below the level where companies could afford even to finance new exploration.
"For the past 20 years there has been no investment in new uranium mines," says Thomas Neff, a professor at the Massachusetts Institute of Technology's Center for International Studies.
The bottom line is that while governments around the world were rushing to build new reactors, the uranium-mining industry -- crucial to the success of a nuclear renaissance -- was floundering. Because of the long lead time needed to get a new mine up and running, there is the worrying possibility that some of those new reactors may not be able to find fuel to run on.
"The take-home message is that if we're going to increase use of nuclear power, we need massive new investments in capacity to mine uranium and facilities to process it," Prof. Neff said.
In fact, not everyone was taken by surprise by the nuclear boom. A handful of alert money managers saw what was coming.
Back in 2004, Audit Capital, a Portland, Ore.-based hedge fund, bought up millions of pounds of uranium at prices as low as US$20 per pound. Uranium Participation Corp., a Toronto-based company formed for the sole purpose of owning uranium, started up in 2005, and last year U.K.-based Nufcor Uranium Ltd., which trades on the London Stock Exchange's AIM market, started a hoard that has grown to 2.3 million pounds.
Given the recent rise in uranium prices, it's not surprising that some uranium buyers are crying foul. Indeed, some U.S. utilities complain that the funds are opportunistically benefiting from the nuclear renaissance and that it will be homeowners who will end up paying the price.
Uranium Participation Corp.'s Mr. Farmer dismisses that argument. He says when mining companies were trying to keep their heads above water in 2003, none of the power generation companies offered to pay more for their uranium. Now the shoe is on the other foot.
"The utilities have got to realize that without the growth in prices they will not have [a secure uranium supply]," he says. "There's got to be enough profits to finance investments in exploration. You got to pay a fair price."
jgreenwood@nationalpost.com