Chinese energy needs send uranium market soaring
Shirley Won
RTGAM






The uranium market is crackling again, set afire by China's quest to secure nuclear fuel. And after watching the price of the radioactive metal crater for much of the past three years, investors are once again optimistic.

"Uranium is in a new bull market," says Rob Lauzon, a portfolio manager who oversees energy investments at Middlefield Capital Corp.

"We have seen the spot price move from $40 (U.S.) a pound [last March] to over $62. … I think in the next two years, it will settle in that $70 to $75 range. If we look out five years from now, we can probably see $80- to $100-a-pound uranium."

The spot price, which is determined by private contracts, hit bubble territory when it peaked at $136 a pound in June, 2007, as hedge funds put money on the metal's future. But the price plunged during the global credit crisis and remained depressed amid a flood of fresh supply from Kazakhstan in 2009.

Market watchers see higher uranium prices ahead because of tightening supply and rising demand, particularly from China and other emerging markets. Barring a major nuclear accident, demand is expected to remain buoyant as developed countries embrace nuclear power as a clean fuel.

Spot prices jumped in November after China signed three long-term contracts to buy a total of 140 million pounds of uranium from Cameco Corp., French nuclear giant Areva Group and Kazakhstan's state-owned miner.

"It's really the size of these individual deals that caught the market's eye," said Patricia Mohr, a commodities specialist at Bank of Nova Scotia. "China was tying up a large chunk of world supply between now and 2020. What will happen is that utilities in other countries are going to be keen to tie up new supply as well."

As much as 80 per cent of current world uranium production has already been sold to utilities under long-term contracts, she said. Meanwhile, demand is expanding.

China is expected to double the number of its nuclear reactors to about 80 over the next few years, Ms. Mohr said. "We have been waiting for some time now for new emerging Asian countries to really hugely expand their nuclear power, and it appears that it is now taking place."

She forecasts an average spot price for uranium of $70 a pound in 2012 as production from Kazakhstan slows that year and in 2013.

Russia is unlikely to continue recycling uranium from its nuclear warheads into commercial reactor fuel to be sold to the United States, and that is expected to buoy prices, Ms. Mohr said.

Salman Partners metals analyst Raymond Goldie is even more bullish on uranium. "The world's supply of uranium is about 140 million pounds and demand is about 180 million pounds a year," he said. "So there is a shortfall of about 40 million pounds.

"It looks we could face a shortage of uranium within a year and a half, if current stockpiles are something below 50 million pounds. On that basis, we could easily see the price of uranium double within a year or two."

For the retail investor impressed by the bullish case for uranium, there are several ways to play the sector:

Stocks

Investors can stick to producers such as Cameco Corp. , Paladin Energy Ltd. and Uranium One Inc. But in rising markets, a better way to play the sector is through junior miners. These stocks are more volatile but can provide more rewarding returns, said Dundee Securities analyst David Talbot, who expects uranium prices to rise to $75 a pound by 2013.

He likes Rockgate Capital Corp. , which has a uranium-silver project in West Africa; Hator Exploration Ltd., whose projects are focused on the Athabasca Basin in Saskatchewan; and UEX Corp., which is 23 per cent owned by Cameco and is also an explorer in the Athabasca Basin.

Mutual funds

Middlefield Uranium Focused Metals Class is 70 per cent invested in uranium securities, while the rest is in gold and base metals stocks. The top uranium holdings include Cameco, Uranium One and Paladin Energy.

Closed-end funds

Uranium Focused Energy Fund: Run by Middlefield Capital, this fund is 90 per cent invested in uranium stocks with the remainder in oil and gas securities. The largest holdings are Uranium One, Cameco and Paladin Energy.

Uranium Participation Corp.: Run by a subsidiary of uranium miner Denison Mines Corp., the fund buys and stores uranium. Its value moves with the commodity price.

Exchange-traded funds

Global X Uranium ETF: Launched in November, this ETF is a pure play on the commodity, and tracks an index of the world's largest uranium miners. Cameco represents nearly 20 per cent of the fund.

Market Vectors Uranium + Nuclear Energy ETF: This ETF provides exposure to companies involved in the nuclear energy industry, and has nearly 40 per cent of its capital in uranium miners.

PowerShares Global Nuclear Energy Portfolio ETF: It tracks globally traded companies in the nuclear energy industry. About 45 per cent of its holdings are industrials.

iShares S&P Global Nuclear Energy ETF: Cameco and Paladin Energy are among its top 10 stocks, but the ETF is 43 per cent invested in electrical utilities.