Uranium Intriguing

The Fukushima disaster was a terrible moment for uranium and nuclear investors. A tsunami basically destroyed a few reactors on the Japanese coast and then the water shorted out emergency systems leaving reactor cores to overheat, melt and leave irradiated material into the water. This was horrible and some reports say that this material may not dilute in the ocean and that it could possibly wash ashore in California in the next 3-4 years. Not good.

However, the alternative argument is this – Japanese nuclear inspectors gave a free pass to these very old reactors for years and that the problem was HUMAN error or negligence. And it is true that comparing nuclear disasters to other kinds of disasters makes nuclear look very good. For example, when natural gas lines and explode, blow up houses, and kill people, we don’t all shut down our natural gas lines right?

Truth is, the fear of nuclear bombs and the potential devastation of a bomb blast is what people equate nuclear reactor leaks to.

Where does this lead?

Bottom line, the world still needs nuclear-generated electricity. Japan in fact, will likely restart a good number of their reactors. The alternative is using natural gas imported from Australia paying 15+ dollars per mcf (in comparison, the current US price is ~2.50/mcf!).  Not gonna happen – anyone want to go through a Tokyo summer with no AC? Furthermore, Germany, will have to import more gas from old friend Russia and depend on the big bear for their energy needs if they turn off nuclear. Does anyone like being DEPENDENT? Furthermore, newer designs and such things as SMR’s (small molecule reactors) are making it easier to build and support nuclear energy.

Investment Thesis

Uranium is in the DUMPS. No one wants it and from the looks of charts of uranium stocks, not even the craziest speculator seems to want it. But I think it looks intriguing. A few days ago, the long term price of uranium moved up for the time since early 2011. FYI – uranium trades on the spot market (rarely) and through long term contracts (predominantly). Spot price ~ $50/lb and long term prices ~ $61.50/lb.

Prices moving up – though this could mean nothing – could be signs of the market realizing that there are some serious forces in the works that will make uranium much more scarce. Here are a few:

Source: Wikipedia

• We are in an annual deficit when comparing pounds consumed vs pounds produced – a big deficit
• Increased supply is not easy to come by though there are some developing mines in the works that are within 3 years of production if approved by regulators
• Many new nuclear reactors are under construction, approved for building and in the planning stages, particularly in Asia.
• Uranium is a  very small part of the overall cost of producing nuclear energy – therefore, growing countries know that nuclear power = energy independence
• Other alternatives can not scale to provide the consistent (baseload) power needed by large cities.
• And very importantly, the Megatons to Megawatts program, which masks the annual deficit in uranium production, expires next year. This is the program that converts old Soviet warheads to reactor-usable uranium and is sold to the US.

With these dynamics, and uranium investments priced below dirt cheap levels, it makes sense to explore this sector. Uranium itself could be decent investment (as Jim Rogers says, investing in the commodity can often be better than investing in the commodity stocks), large uranium producing companies are another option, as are small speculative miners.

The key here, is do your research and never take advice from some guy you read on the web ( ie me!). Idea farming is good but you have to do your own follow up and if you decide to invest in any idea, the way you invest should be based on your risk tolerance too. For example, here in uranium the risk level from least to most is in this order:

1. uranium itself
2. diversified uranium sector funds
3. large uranium miners
4. smaller or micro uranium explorers/mine developers

All in all, be careful out there!