Commentary: The contrarian case for Uranium is compelling
BOSTON (MarketWatch) — Uranium prices have slumped. In the wake of the disaster at Japan’s Fukushima Daiichi nuclear plant, the price of a pound of uranium on international markets has tumbled all the way down to about $56.50, compared to $73 in early February. A few years ago it briefly topped $130.
Uranium has tumbled while oil has been booming. Today you can get two pounds of uranium for the price of one barrel of West Texas Light crude.
And yet the world needs energy. More and more of it. According Jonathan Hinze, vice president for international operations at uranium specialists UX Consulting, you need 10.4 barrels of oil to generate the same amount of energy as one pound of uranium. It’s not quite as simple as all that, but the comparison is not a facile one either.
You make money in this business by buying low and selling high. It’s easier said than done, of course. When things are low, nobody wants them.
It’s easy to see a bear case for uranium — or, at least, a case for this sharp sell-off. Fukushima has cast another cloud over the public image of the nuclear power industry. It is harder to sell the idea of more reactors — here or overseas. China has scaled back some nuclear plans and is reviewing safety issues. Germany is speeding up its move away from nuclear power altogether. Japan was forced to raise the level of its nuclear disaster to the same as Chernobyl. The headlines are terrible.
All this is known. It may already be reflected in the price of uranium.
But there is another side of the story.
The world may not like nuclear power, but it probably doesn’t have the luxury of going without it either. Energy needs are soaring. BP’s latest analysis predicts 40% growth over the next twenty years. Forecasts are always questionable. We can argue about the number, but hardly over the direction. We already know the story. In Asia and in other emerging markets, hundreds of millions of people are moving from the peasantry to the industrial middle class. They want cars, air conditioning, flat screen TVs and vacations abroad.
We’re going to need a lot more energy, from pretty much every source we can find. Coal, natural gas, oil, wind farms, solar paneling, and, barring miracles, nuclear reactors. No matter what you think of renewable and clean energy, nobody thinks they can provide all the answers.
The Chinese know this. They have trimmed expansion plans from 90 new reactors to 70, says Hinze, but they are still expanding. The same goes for other countries as well. The Germans are able to be so “green” at home, says UXC’s Jonathan Hinze, partly because they are able to buy some of their energy from nuclear France.
Everybody knows there are serious safety and environmental concerns. But so there are with nearly all sources of energy. Coal and oil are environmental disasters. Even hydro-electric has its issues. Consider the environmental cost of China’s now-infamous Three Gorges Dam.
There are about 450 nuclear plants in the world. Since Three Mile Island, 22 years ago, we’ve had two serious accidents. One, Chernobyl, involved monumental incompetence by a corrupt third world dictatorship. Fukushima was a forty-year old nuclear reactor that was hit by an extraordinary natural disaster. Those of us who grew up with the movie The China Syndrome half expected a catastrophe of Biblical proportions. I’m not making light of Fukushima, but I am arguing for perspective. People are killed down coal mines, or on oil platforms, all the time. It just doesn’t make the news.
The French get three-quarters of all their energy from nuclear power, and they have not had an accident yet (I apologize for tempting fate here, but one has to report these things.)
In a nutshell: There’s a very strong likelihood that the world, in due course, will decide that it needs many more nuclear reactors, and that the benefits offset the risks.
What of uranium?
Nuclear reactors need to replenish about a third of their uranium every twelve to twenty-four months. Currently the world’s reactors need about 70,000 metric tons a year. But the mining industry supplies something over 50,000 metric tons. Most of the rest comes from recycling old nuclear weapons. That’s a program that’s been going on for years. It is due to come to an end in 2013. (although some Russian weapons will still get recycled on an ad hoc basis, says Stephen Kidd, deputy director general of the World Nuclear Association).
As for other supplies? Uranium is abundant in the world, but not in usable quantities, or in a usable state. For the latter it needs to be mined and processed. Uranium was in a bear market through the eighties and nineties, with the result that there was little exploration and production. The world has been ramping up — quickly — in recent years. Major areas of production include Canada, Australia, and Kazakhstan.
According to the World Nuclear Association, the lowest-cost uranium mines — those with operating costs below $30 a pound — can only produce a maximum of about 60,000 metric tons a year. After that the costs start to rise pretty sharply. If you want 75,000 metric tons a year, the last tons will cost you about $60 a pound. In other words, today’s price is in the ballpark of the marginal cost. “There’s probably not a lot of room to go down further from here, given the fundamentals,” says UXC’s Hinze, though he adds that in short-term trading anything can happen.
None of this is conclusively bullish for uranium, naturally. But it is intriguing. No one wants this asset.
If you are a private investor, take a look at Uranium Participation Corporation
(PINK:URPTF) , a Canadian closed-end fund that simply holds physical uranium. “It’s not exciting,” says David Wago, analyst at GMP Securities. “It just holds uranium in a warehouse, gathering dust.”
Shares in URPTF have been hit even harder by Fukushima than the price of uranium itself. From an intraday peak of $10 in early February they have plunged to $6.75. There’s little mystery why. Closed-end funds typically attract small scale investors. They are the first to panic and dump stock. That’s why closed-ends typically fall hardest in a rout.
Uranium Participation Corp. on Thursday said the net value of its uranium was 7.94 Canadian dollars ($8.34 U.S.) per share as of March 31. Since then, uranium prices have come down 5.5%. So Uranium Participation’s uranium is worth about $7.88 a share.
And yet the shares now trade for just $6.75, or 14% less. So you’re effectively buying the uranium for $48.40 a pound.
None of this is conclusively bullish. Commodities generally look overbought, and ominously popular. Uranium could keep falling in price. A decade ago it was only $7.50 a share, and the only floor one can ever be completely sure about is $0. Nonetheless uranium at $48.40 a pound may tempt contrarians.
Cenovus 3-month chart 
