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Growth in Nuclear Plants May Fuel Uranium Rally

Thursday, 17 Jul 2008 | 2:47 PM ET

Is now the time to be investing in uranium?

Nuclear Power Plant
Nuclear Power Plant

Some experts believe there will be a "renaissance" in nuclear power-plant construction in the next few years, thanks to high gas prices and concerns about the environment. So the need for uranium, the main fuel in such plants, is expected to grow sharply.

“We are seeing some tremendous demand,” said Sean Broderick, a commodities analyst for Weiss Research. "Nuclear power is really looking good when you are comparing it to some other options."

It still could be a risky move. A thinly traded commodity tied closely with an industry with sometimes very negative connotations, the downside seems very real.

Investing In Uranium

Last year the spot price of uranium dropped steeply from $130 per pound to the current price of about $60 because some nuclear plants were shut down, speculators sold the commodity and the Department of Energy announced it was releasing some of its uranium supply.

That price, however, represents a bottom and is set to spike, Broderick said. More nuclear power plants are being built around the world, and U.S. may end its longtime moratorium on new nuclear plants because of the surge in oil prices and worries about carbon emissions.

For that reason, investors should think about buying uranium soon, said David Barclay, a commodities analyst for Lehman Brothers. Prices are expected to increase to about $90 by 2009, but drop steadily after 2010, according to a report by Lehman Brothers.

The easiest way for an average investor to play the market is to buy nuclear energy Exchange Traded Funds or ETF's in Market Vectors Nuclear Energy offered through asset manager Van Eck Global, Broderick said.

This fund tries to closely follow the total return performance of the DAXglobal Nuclear Energy Index, according Van Eck's Web site. The index follows the major players in the nuclear industry, including companies that are involved in mining, storing and enriching uranium. The index also follows companies involved with the building of power plants.

David Talbot, a uranium analyst for Dundee Capital Markets, also said ETFs are the most efficient way for an average investor to get involved in the uranium boom because trading uranium can be tricky.

"There’s a lot of risk involved in mining stocks, in uranium particular," he said. "There's socio-political issues, strict government regulations...for a regular person to get involved in the space they would have to have a certain level of knowledge of uranium."

Along with ETFs, Talbot also suggested investing in mutual funds that specifically target uranium.

But, if investors are looking to get closer to the commodity, then they are going to have to look outside of the U.S. to Canada.

Broderick said he recommends investing in Uranium Participation, which trades on the Toronto Stock Exchange.

Cameco and Paladin Energy are Talbot's "go to" stock-picks for the uneducated investors who are looking to gain exposure in investing in uranium.

Possible Risks

The spawning of new nuclear power plants around the globe is something Mark D. Herlach calls a “nuclear renaissance,” but Herlach cautions investors to watch out for possible factors that could hurt their portfolio.

Herlach, a lawyer who specializes in energy transactions for Sutherland Asbill & Brennan, said although there is a worldwide growth in nuclear projects it’s best to understand how uranium purchases work with utility companies.

There is more demand for uranium when the nuclear reactor is initially built than when it is refueled, so demand slows down after the initial construction of the power plant. There is, however, a lessened demand that continues after the plant is built.

The demand growth for uranium is set to drop after 2010 because of how uranium purchases are made, Barclay said. The demand for uranium is expected to increase 33 million pounds from 2007 to 2013 because of the need to fuel new power plants, he said.

Another factor to be aware of is that the Department of Energy has reservoirs of uranium, which could be released, and drive market prices down, Herlach said.

Also, Barclay cautions that because supply of uranium primarily comes from a select few major producers and mines, such as Cameco or the Rio Tinto Group, any adverse news from major suppliers could have a negative influence on the market.

Despite the risks, however, there are two primary reasons to have faith the uranium market will again boom: the energy crisis and growing environmental concerns.

Cheap Energy Needed

Electricity
Electricity

With energy demands rising and fuel prices soaring, uranium for fuel is starting to look like a more economical option.

Although fossil fuels are initially cheaper to produce energy becomes a fierce competitor when the carbon price is factored into the equation.

At rate a of $45 per ton of carbon emissions, nuclear energy, which emits zero carbon emissions, is the cheaper option for producing electricity when compared to the millions of tons of carbon released by an average coal powered plant, according to a report released by the Congressional Budget Office released last May.

Uranium is currently trading at a price that is $30 lower than the current long-term price of $90, which makes the spot market appealing for utilities to source for materials, Barclay said.

The global demand for uranium is expected to increase by about 33 million pounds between 2007 and 2013, according to a report released by Lehman Brothers. The boost in demand for new reactors will outweigh the demand lost by reactors being shut down, Barclay said.

Countries in the Asia-Pacific region are already building more nuclear power plants. There are currently 18 power plants under construction in East and South Asia and another 110 planned, according to the World Nuclear Association Web site.

China’s demand for uranium alone is expected to rise from about seven million pounds in 2007 to 13 million pounds in 2013, Barclay said.

Cutting Carbons

Cutting carbon emissions is another key reason why the demand for uranium is growing.

Oil Refinery
Oil Refinery

“Concerns over global warming, security of supply and the price of fossil fuels are all acting to make nuclear power increasingly attractive,” Barclay said.

Nuclear energy, which was once perceived as a threat to the environment because of nuclear accidents like Chernobyl and the Three-Mile Island incident, is now being reconsidered as a more environmentally friendly option for providing electricity versus it’s carbon emitting competitor coal.

A single 1-GW nuclear power plant can cut up to 7 million tons of carbon emissions a year, according to International Energy Agency.

Broderick said nuclear power is more favorable as an alternative to biofuels right now because the technology for harvesting energy from wind or solar power is simply not as available or developed.

Even in the United States both Presidential candidates are looking to nuclear energy as a potential source for cutting carbon emissions.

Sen. John McCain (R-Arizona) plans to set into motion the construction of 45 new power plants by 2030 if elected, with a long term goal of eventually building 100 new power plants, according to his Web site.

Sen. Barack Obama (D-Illinois) also believes nuclear energy is necessary and wants to make sure safe progress is made within the nuclear industry, according to his Web site.

"We haven't gotten anything going yet, but we will eventually," Broderick said.

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