Australia is very close to signing a deal to sell uranium to China, and the impact could ripple all around the world.
An opportunity for investors? Heck, yeah!
Uranium is a major energy play — the critical natural resource for nuclear power plants, providing 16% of the world’s electricity.
And that brings up three important points:
#1. Today there are 441 operational nuclear power reactors around the world. Their demand for uranium fuel is enormous.
#2. Total global uranium consumption was estimated at 176.3 million pounds in 2005. Of that, only 92.6 million pounds, or 47%, was supplied directly from mining. The rest came from stockpiles, and those stockpiles are dwindling fast.
#3. Demand is set to skyrocket! According to a report by the International Atomic Energy Agency (IAEA), 130 new nuclear power plants are either being built or are in the planning stages. Some analysts put the number of planned reactors as high as 160!
As a result, by 2015, demand for uranium will likely hit an astounding 212 million pounds per year.
Add it all up, and you’re looking at uranium shortages for at least the next decade.
So is it any wonder I’m so psyched about uranium stocks? Heck, the price of uranium jumped 76% last year. It’s already up by another 8% this year. And,
according to Bloomberg, it’s poised to jump 27% to $50 a pound just in the next six months.
What do you think that will do to stocks leveraged to the price of uranium? Zoom, that’s what!
Asian Tigers with
Radioactive Appetites
If you thought India and China’s demand for oil was insatiable, wait till you see their demand for uranium! The facts:
China’s current nuke capacity is sorely inadequate. China has only nine reactors in operation at three nuclear plants, with total capacity of a meager 6,600 megawatts. That provides a pitiful 2.3% of China’s power consumption.
China’s goal is to ramp up its nuclear capacity so fast it will make your head swim. You know China’s energy needs are growing at a breakneck pace. But did you know that it wants its nuclear capacity to grow even faster? The target is to more than quintuple its nuclear capacity — by 36,000 megawatts — by 2020. And still, nuclear power would only cover 4% of China’s needs!
Chinese demand for uranium should go through the roof! China is planning on building two new 1,000 megawatt nuclear reactors each and every year — 28 in all. Result: China’s annual uranium needs will jump from 3 million pounds per year now … to 10 million pounds per year by 2010 … then 18 million pounds per year by 2020.
That’s the relatively conservative estimate by The World Nuclear Association, and it’s huge. But in my view, considering China’s exponential economic growth, they’re going to have to ramp up their capacity even faster as demand continues to exceed expectations.
Where is China going to get all the uranium? Mostly from Australia!
Resource-rich Australia has far and away the largest reserves of uranium on the planet.
It has nearly double the uranium of Kazakhstan and almost triple those of Canada. The United States, still considered a large player, is actually a distant eighth on the charts.
And Australia’s uranium resources will likely be expanded through exploration. Indeed, right now, its uranium industry is far from fully developed. Despite the fact that it has nearly one third of the world’s reserves, it currently supplies only about one fifth of the world demand, selling to customers in the U.S., Japan, South Korea and Europe.
If Australia starts exporting uranium to energy-hungry China, guess what! You’re going to see a veritable gold rush in Australia’s uranium fields. And China is just one side of the uranium story in Asia.
Don’t forget India!
The facts …
India’s current nuke capacity is minuscule: Nuclear power generates only about 3.7% of India’s electricity with a pitifully small 2,700 megawatts. To grow this, it desperately needs more uranium.
Big ramp-up: India has an additional eight reactors already under construction, and it plans to have 10,000 megawatts of nuclear capacity by 2010; 20,000, by 2020. So India’s uranium requirements are forecast to grow from around 1 million pounds per year currently to 2 million pounds per year by 2010 … and more than 4 million
by 2020.
But India’s own uranium production will likely be just 1 million pounds by 2010. That means it’s going to be a huge net importer of uranium.
Uranium — Is Red Hot. But Australian
Uranium Companies
Are Still Cheap
A key reason: Anti-nuclear activism!
Back in the 1970s, anti-nuclear activists in Australia successfully lobbied to limit the number of mines in the country. In response, Australia adopted a Federal policy that only three mines would be allowed to produce uranium at any given time.
Meanwhile, on a state level, only two of Australia’s eight states — South Australia and the Northern Territories — permit uranium mining, and they make the regulatory hurdles very high.
So traditionally, this has kept the Australian uranium industry in a straightjacket, and kept their uranium shares down.
What most people don’t seem to realize, though, is that the regulatory climate is now changing rapidly.
The big change began a decade ago, in 1996, when the “Three Mines†policy was overturned on the federal level.
Then, last year, when a Labor government was voted into office in the Northern Territories, and it tried to ban new uranium mines, it was overruled by the federal government — a major victory for the industry.
Most important, as the price of uranium keeps rising, the desire of politicians to open up the industry is rising in tandem. Result: Local governments are under big pressure to open up to nuclear power and uranium mining.
This gives you the best of both worlds: Cheap prices for uranium companies plus the prospect of an explosive rise as the shackles of old regulations are unlocked.
China Could Eat Up All of Australia’s
Uranium Exports in a Single Gulp
Right now, Australia probably won’t export uranium to India because the country is not a signer to the nuclear non-proliferation treaty.
But Australia’s upcoming deal with China alone will easily gobble up any uranium it can export.
Exports to India will come later. And no matter what Australia does, India still desperately needs to get uranium from somewhere for its fuel-starved reactors — never mind all the ones it wants to build. And no matter where India buys the ore, its demand will continue to drive up the world price.
Still More Surging Demand
For Uranium: From Russia!
Russia has consented to sell some of its uranium to India to tide it over for a while. But it can’t commit much for the long term because it can’t even meet its own uranium needs.
Last year, Russia’s three uranium mines produced 3,325 metric tonnes — just one-fifth of the 16,000 tonnes Russia consumes per year by its reactors, military, and export obligations. In fact, Russia had to draw on reserves (including from old warheads) to fill its demand for 2005.
Meanwhile, their plans are ambitious: Just recently, Russian President Vladimir Putin said nuclear power in Russia would be expanded from 15% to 25% of its energy needs by 2030.
Nice trick! To get from here to there, Russia needs to add a whopping 40,000 megawatts of nuclear energy each and every year.
Will they pull it off? I don’t know.
But the Kremlin seems dead serious about it. And for starters, they’re going to pump $10 billion into exploring and expanding uranium resources — both on Russian soil and in neighboring Kazakhstan.
So we have a massive three-way uranium race shaping up among China, India and Russia. But if you think they’re the only ones, think again! Miners and mining companies from many countries are fanning out all over the globe to every backwater and dirt-patch with a whiff of uranium on it.
My conclusion …
The Great 2006 Uranium
Rush Is Now Under Way!
And Australia — with its huge uranium reserves … excellent infrastructure … access to an educated workforce … and some of the best engineers on the planet — is smack in the middle of it.
What’s more, its companies operate all over the world — not only in Australia, but also Africa and Asia. So that makes its uranium companies even better positioned to ride the coming boom.
Right now, Australia earns about $300 million a year from uranium exports. Cameco Corp., the world’s largest uranium supplier, says that the value of Australian uranium exports to China alone could be worth hundreds of millions of dollars.
A Profit Bonanza of
Historic Proportions
The stocks of Australian junior miners are already hopping with anticipation. Some are solid companies. Some are not. How do you tell the difference?
Basically, it’s a matter of rolling up your shirt sleeves and getting into the nitty-gritty of the company’s operations and finances. And that’s what I’m doing right now.
I have found some great opportunities in Canada for subscribers to my Red-Hot Canadian Small-Caps, a service we sold out earlier this year.
Plus, I have several Australian uranium stocks on my radar. And within about ten days, I’ll be ready to give my best picks to subscribers of my brand new service, Red-Hot Asian Tigers. In the meantime …
Here’s How You Can Play the Uranium
Game Right Here in the United States
Here in the U.S., I haven’t found the same opportunities that I see in Canada or Australia. But there are still ways to play the rising price of uranium.
For example, USEC Inc. (USU) is the world’s leading supplier of low-enriched uranium, a critical component in the production of nuclear fuel for reactors to produce electricity.
USEC supplies low-enriched uranium to both U.S. and international utilities for use in over 150 nuclear reactors worldwide. And it’s even the agent for the United States government for a nuclear non-proliferation program with Russia.
Yet the company trades at just 0.7 times sales and 1.22 times book value. CHEAP! And this is even though its revenues were up 10% year over year. Plus, I see even bigger revenue increases ahead for two reasons:
1) Much of the uranium delivered during the year was contracted several years ago at prices well below today’s market.
Under the company’s revenue recognition policy, USEC does not recognize the revenue until the uranium leaves USEC’s enrichment facility as low enriched uranium. So at the end of last year, $106.8 million in revenue was deferred until subsequent quarters with an expected gross profit of $51.1 million.
2) And talk about booming business! At the end of 2005, USEC had a backlog of customer orders totaling $5.9 billion, an increase of $1.2 billion from a year earlier. No wonder USEC wants to build a new gas centrifuge facility in Ohio!
And yes, prices are soaring.
On the stock chart, USEC shares have found support at $11 and should go back to assault highs near $16. If it breaks though there, the all-time high of $18 could be next. After that, the sky’s the limit.
USEC is a good, solid stock. But I think it pales compared to the red-hot opportunities we see in Australia and Asia. (Click here for our latest report.)
Yours for trading profits,
Sean
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About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
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