A high-risk play on the new uranium boom
By
Dominic Frisby Dec 01, 2010
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Uranium saw a spectacular blow-off in 2007, scorching the fingers of many an investor.
The price had risen from $7 a pound in 2000 to almost $140. Some investors ended up holding stock in mining companies that had risen by as much as 10,000%.
At the turn of the century the number of uranium companies listed on the Canadian stock exchange was in the low double digits. By 2007, there were more than 600.
It was clearly a bubble. But, as with so many bubbles, there was some underlying truth to the story. Even now, a good while after the bubble had popped, and the inevitable purging of the sector took place, those fundamental drivers have not gone away.
So is it time to get back into uranium?
Demand for uranium is rising fast
The last few months have been very good for most commodities. Uranium is no exception. The spot price has risen from around $40 per pound in July to $60 this week.
Much of this can be put down to the speculative excitement that has swept the commodities sector. This has been driven by inflation concerns and the Federal Reserve's decision to do more quantitative easing (QE).
But even so, the numbers coming out of China are simply astonishing. A few months ago, the vice president of the China National Nuclear Corporation said that the state-controlled company is expected to spend $117.6bn on developing the nuclear industry by 2020.
China currently has a capacity of 11 gigawatts (GW) of nuclear power. In 2008, it had 9GW, and was aiming for 40GW by 2020. But that figure is about to be revised up to 70GW, according to Reuters. And a recent study by McKinsey puts it closer to 120GW.
To put that into perspective, that would mean China consuming half of current global uranium production (circa 50,000 tonnes). Where's it all going to come from? The vice-chairman of one of China's other nuclear companies says: "China is relatively rich in uranium reserves and can completely satisfy the needs of Chinese nuclear energy development for 2020."
But I'm not so sure. If this was the case, then why the series of investments in exploration projects in Niger, Namibia, Zimbabwe and Mongolia? Then there's the recent deal with Cameco, the uranium major which supplies about 20% of global production. The company is to supply China with 20 million pounds of uranium up to 2025. They've also signed a memorandum of understanding on joint uranium exploration overseas.
As Steve Kidd of the World Nuclear Association puts it: "China's own domestic uranium resources are, to be frank, not fantastic."
And that's just Chinese demand. What about all the other developing nations who are moving to nuclear power? It's the same old commodities story that you all know – rampantly expanding demand meets restricted supply.
As oil gets more and more expensive and technically difficult to produce, the case for nuclear becomes ever more compelling. Nuclear – for all its many drawbacks – is the closest thing we have to a silver bullet that can deal with the looming energy crisis.
How you can play the uranium boom
So how can you play it? The current issue of MoneyWeek magazine takes a look at the sector (subscribers can read the piece here. If you're not already a subscriber, get your first three copies free here.)
But for those of you who like to speculate – and as always, with junior miners, we're talking high risk here – I have found a nice little junior mining play on Chinese uranium demand.
Vena Resources (TSX: VEM; DE: V1R) is an exploration company operating in Peru. It's listed in Toronto and Frankfurt (so you will need a broker who trades either or both of those markets to buy it) and also in Lima. The market cap is around CAD$40 million. You can see the chart below.
Vena operates what is known as the project generator model. This means that it finds potential mining properties, then signs joint venture deals with senior partners. The partners will then pay for most of the exploration and development costs.
It can mean that blue sky potential is slightly limited. But it also lessens the risk. So the company is less vulnerable in bear markets.
Vena has a zinc mine it is putting into production next year. This is in a deal with Trafigura, the world's third-largest independent oil trader. It is also developing some gold properties with Goldfields, one of the world's largest gold producers.
Why this company excites me
But it is the company's uranium assets, which it's developing in a deal with Cameco, which excite me.
First, entertain yourself by taking a look these pictures of some of the green, almost luminous rock from Vena's properties. That's autunite, which contains uranium. It's not in the same densities as the high-grade rock in Canada's Athabasca region. But it's still sufficiently concentrated to make a mine economically viable.
It's radioactive, of course. Indeed, it looks almost extra-terrestrial.
Vena declared a 43-101 compliant resource this week (this just means it complies with Canadian standards on reporting mineral discoveries). The aggregate is north of 22 million pounds of U308. The system is open in all directions – in other words they haven't found where it ends. The next drill programme starts up again in January. The hope is that the resource will increase, perhaps dramatically.
I met the boss last week, Juan Vegarra, on his way back from China to the US. I was impressed enough to buy some stock. (I also interviewed him – you can hear the interview on my podcast here.)
Let's see. China has a deal with Cameco to supply uranium, and is looking at joint venture exploration. Cameco has a joint venture with Vena.
Given that Peru is a convenient place from which to export raw materials to China, and given that management were on their way back from China, it doesn't take Sherlock Holmes to deduce that something could be going on here.
In short, it looks promising. But if there's one thing I've learned about mining exploration, it's that you should never risk more than you can afford to lose.
Don't chase it up – if you're interested look to buy at around C$0.45.
Our recommended article for today
Agricultural commodities have soared in price this year. But milk has yet to join the party. That may soon change, says David Stevenson. Here, he looks at the dairy sector, and picks one particularly attractive stock to buy now.
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