uranium mining companies, investing in uranium

Commodities are booming – but this one looks very cheap

23.04.2008

If there’s one area of the commodities markets that’s looking extremely cheap right now, I would say it’s uranium. Or rather uranium junior mining companies.

Uranium is in a bear market; the trend is most definitely down. But we are reaching a point where it’s hard to see how some of them can get much cheaper.

The problem is people have been calling the bottom in uranium for some six months or more now and they’ve all been wrong…

Nuclear energy development is gunning ahead at nuclear speed

The fundamentals for uranium remain extremely strong. At the moment nuclear power is probably the closest thing we have to the silver bullet that is going to deal with the looming global energy crisis. Despite the fear which surrounds nuclear energy, France – 80% of whose power supply is nuclear – has demonstrated that even relatively small nuclear reactors can fuel entire cities cheaply, efficiently and cleanly.

Meanwhile nuclear energy development in Asia is gunning ahead at, well, nuclear speed. We all know about China’s appetite for energy and what they are capable of. Last month they completed a brand new airport in preparation for the Olympics. The entire process took four years. (It took us six just to get planning permission for Heathrow).

It seems they are applying that same speed of construction to the nuclear sector. Reuters recently reported that a senior Chinese energy official told state media that China is ‘expanding nuclear power construction plans faster than earlier planned … installed power capacity by 2020 could be 50% above the initial goal.”

The original plan was for an operating power capacity of 40 gigawatts by 2020. That’s roughly equivalent to the total power demands of Spain. It’s a mere 4% of China’s energy needs. But that figure is now going up to 60 gigawatts.

The supply is unlikely to meet the demand

Uranium supply on the other hand is not increasing by a corresponding amount. Though uranium is an extremely common metal – as common as tin or zinc – there are numerous problems mining it, many of them to do with permitting, and it takes well over five years to get a mine into production. Much of recent supply has come from old military stockpiles, a source which is quickly drying up.

In the 1980s and 90s, uranium got so cheap – as low as $7 a tonne (it is ten times that price now) – that uranium mining and exploration became completely uneconomic and almost completely disappeared. This meant that very little new uranium was actually coming to market as the noughties got underway.

This uranium story became widespread throughout 2006. Then there was that flood at Cameco’s (the world’s biggest uranium mining company) Cigar Lake mine and that was the catalyst for a run in uranium prices that ran through to spring 2007 and reached bubble proportions.

Since then the sell-off in the sector has been agonizingly painful and many companies are off 80% or more from their highs.

Here’s a long-term chart for uranium:

Adjusted for inflation, it looks more like this, though the recent pullbacks are not shown:

And, finally, here’s the uranium price over the last two years:

Now, that two year chart is identical to my anatomy of a bubble chart that I am fond of posting:

There are so many people who will have lost money as the sector sold off last year it is likely to be quite some time before this memory is erased and the sector really gets moving again.

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But most companies have retraced to well below their original 2005 -06 break-out points, which leads me to think we are somewhere in the late capitulation phase, possibly even as low as the despair, final wash-out phase.

The hugely bullish fundamentals for the metal haven't changed. The Chinese are operating at breakneck speed. The uranium supply just isn't there. As the prices of coal, natural gas and, in particular, oil continue to rocket, the need for this alternative fuel could quickly become recognized again by the market.

That move will likely take some months to unfold, but it will come eventually - of that there is no doubt - and you want to be positioned for when it does. We may even have further to go to the downside. But now is certainly an opportunity to buy these things cheaply. I'm not diving in, but it's not a bad time to be gently accumulating. There are plenty of good juniors out there.

For the record, the ones I own – not necessarily the best – are: Mawson (CA:MAW), which has operations in Sweden; Uranium Power Corp (CA:UPC) in the US; and Cue Capital (CA:CUE) which has operations in Paraguay.

Turning to the wider markets…

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The FTSE 100 fell 18 points to close at 6,034. Miners were the main gainers while banks were among the main fallers as Royal Bank of Scotland unveiled its record £12bn rights issue.

Across the Channel, the Paris CAC-40 fell 37 points to end the day at 4,872. And in Frankfurt, the DAX-30 fell 58 points to 6,728.

On Wall Street, US stocks fell as a wide range of earnings disappointed. Chemicals giant DuPont said weakness in construction and car markets would hurt its growth, while McDonald’s said same-store sales in March were “slightly negative.” The second-quarter outlook from tech giant Texas Instruments also came in below expectations. The Dow Jones fell 104 points to end at 12,720. The broader S&P 500 closed 12 points lower at 1,375, while the tech-heavy Nasdaq fell 31 points to close at 2,376.

In Asia this morning, Japanese stocks regained a little ground as a surge in oil and metal prices helped commodity-related stocks. The Nikkei 225 rose 31 points to 13,579.

Crude oil was trading at around $117.92 this morning. Meanwhile Brent spot was trading at $115.41.

Spot gold was trading at around $920 an ounce this morning, while silver was trading at $17.69. Platinum hovered around $2,025.

Turning to forex, sterling was trading at 1.9886 against the dollar, and at 1.2447 against the euro. The dollar was last trading at 0.6261 against the euro and 103.02 against the Japanese yen.

And this morning, news comes that rice has hit a record price of $24.745 per 100 pounds as fears grow that Thailand, the world’s biggest exporter, will have to impose export restrictions. This “would be very much like Saudi Arabia reducing oil exports,” said James Adams of the World Bank to Bloomberg.

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