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Saturday, December 4, 2010
Uranium, the feedstock for nuclear reactors, is finally making its move...
From a low of about $40 per pound in the summer, uranium spot prices recently graced $53.50 – an increase of 32% since the lows of June. It's now challenging two-year highs.
I've been telling my readers since January uranium is on its way up. My favorite large company to profit here, giant miner Cameco (CCJ), is up 38% for us. One of our smaller ideas is up nearly 50%. These are huge gains in a short time... And there's plenty more ahead...
What I like most about the bull case for uranium is that it's hard to refute. Being unable to come up with a strong case to the contrary is about the most convincing evidence there is for an investment idea. The philosopher Karl Popper (1902–1994) would've appreciated this.
There is a reason Popper is the most popular philosopher among investors and traders. His ideas can make you money. Popper turned the usual search for truth on its head. He thought – and I am simplifying here – we would do better to try to find out where our ideas are wrong, rather than try to prove them correct. He thought you couldn't prove a statement, you could only falsify it.
George Soros, the billionaire investor and trader, is probably most associated with this idea of finding the faulty premise. In Popper's world, there were only two kinds of ideas... those that have been falsified and those that have yet to be.
As an investor, I see this as a useful way of looking at the world. And this was how I approached the uranium question. How is it wrong? In the end, I had a tough time refuting the bull case. In fact, I couldn't. And that was why I got so excited about uranium. I couldn't see how the price of uranium would fail to rise. It seemed inevitable.
First, there is demand. Just look at the number of nuclear reactors under construction. According to Geordie Mark at Haywood Securities, there has been a 61% increase in the last two years. There has also been a 54% increase in the number of reactors planned and a 45% increase in the number of reactors proposed.
Take a look at the countries with the largest number of planned and proposed reactors: China, 159; India, 60; Russia, 44; USA, 31; Ukraine, 22; and South Africa, 15. According to a Morgan Stanley report, the new plants will eat up 32,900 tons of nuclear fuel. This is almost half of the demand from this year's 443 commercial reactors.
Plus, existing reactors are getting extensions. As Mark says, "We're also getting something of a sea change in views on existing reactor fleets, certainly from Europe, where we're seeing policy changes to extend reactor fleet lives." So Germany, Sweden, Belgium, and others are looking to extend their existing reactors.
All of these reactors – new and old – will need uranium. Most of this demand will have to come from the mines. For years, uranium demand has outstripped what the mines produce. The shortfall, so far, comes from existing stockpiles. But these stockpiles are dwindling.
This takes us to supply. The price of uranium is simply too low to support new investment. Most new projects won't make any money, even at $52 per pound. Mark at Haywood Securities estimates we'll need a price north of $65. Even then, "it would probably have to be higher than that to warrant risking venture capital for exploration," Haywood says. "Also, you need to see higher prices for investment in large-scale, leveraged, development-stage projects."
As it is, the uranium industry is having a hard time raising production. We've had some significant shortfalls from large mines, such as the Energy Resources of Australia's Ranger mine and BHP's Olympic Dam mine.
So I think you could see a number a lot higher – easily over $100 per pound at some point. Importantly, the market can easily support such a price.
The uranium price really has little impact on the economics of a nuclear reactor. The uranium is maybe 10% of the cost of nuclear energy. Most of the costs of nuclear energy are upfront. It's not like oil: When oil went over $140 per barrel, lots of businesses practically had to stop... They couldn't afford to operate at that price. It had a big impact on costs. That's not true with uranium.
Remember, the peak uranium price was $136 per pound in 2007. Most other commodities are pushing all-time highs. Uranium has a long way to go. Uranium also has probably the best, most clearly defined demand curve of any commodity.
As I say, I can't falsify it. I don't see any threat to the bull case for uranium in the works. At some point, as with all investment ideas, we'll find a way to falsify our case for uranium. (It is the fate of all investment ideas to spoil, like milk left out too long on the counter.) But that day seems a way off yet. There is lots of room to run – so hang onto those uranium stocks!
Matt Badiali agrees it's a great time to buy uranium. He shares a list of six stocks showing huge gains since June. "As you can see, these companies performed unbelievably well over the last four and a half months," Matt writes. "And I expect more big things for this group." Read more here: Triple-Digits in 4 Months from a Brand-New Bull Market.
CHART OF THE WEEK: STOCKS... OIL... WHAT'S THE DIFFERENCE?
In this week's chart, we update you on an amazing correlation in the market right now. We guess not one investor in a thousand knows it exists...
Many investors buy commodities like crude oil and believe they are "diversifying" their portfolios. But what they don't realize is that often, commodities and stocks move in the same direction, at the same pace. It has become one huge "risk on, or risk off" trade. Today's chart shows this idea at work...
Below is a "performance chart" of crude oil and the benchmark S&P 500 stock index. It plots the performance of both assets over the past year. Crude oil is the black line. Stocks are the blue line.
Stat of the week
In The Daily Crux