Uranium has found a bottom…
A few years ago, uranium was the one of the last metals to enter the Commodity Super Cycle — a Malthusian ramp-up driven by demand from booming markets such as India, Brazil, and China.
It was this same demand coupled with hedge fund speculation that pushed oil up to $147.50 a barrel and copper up to $8,684 per metric ton.
We all remember how this commodity spike ended at the start of 2008…
Many of those hedge funds who took on leveraged risk got hit by margin calls are now out of business.
But before it ended, my readers were able to bank 258% on a small Australian uranium mine that was working the Mount Isa project.
That company sold out to Paladin Energy (PDN.AU) in 2007.
Boom times in uranium
The spike in uranium was based on demand from new power plants. In that regard, nothing has changed.
There are currently 440 nuclear power reactors in operation and 59 under construction.
There are also plans and proposals for 493 new nuclear reactors globally as of last month. This is up from 435 at the end of December.
China is planning more than 150 new nuclear reactors by itself.
This would be enough to explain the halt in the slide in uranium prices, which topped out above $140 in 2007.
That said, if you are looking for an event-driven explanation — look no further than dirty deeds and dangerous places such as the African nation of Niger.
Kidnappings in Niger
Our old friend Paladin Energy was recently forced out of Niger, letting its takeover bid for a uranium miner expire.
According to Mining Weekly:
Seven people employed by French nuclear firm Areva and its construction contractor were abducted last week in Niger’s uranium-mining region by a group associated with Al-Qaeda in North Africa.
Areva has since evacuated expatriate employees from the north of Niger, and France sent antiterrorism forces and reconnaissance aircraft to the country on the government’s request.
In light of these events, Paladin decided to let drop its takeover bid for NGM Resources for the simple reason that it can’t keep its people safe.
Niger currently ranks number three among uranium producing countries.
It is little wonder that people in the know are buying uranium at these levels.
Prices go up from here
The price of uranium isn’t as flexible as that of other energy sources; it takes a lot of time and a great deal of start-up cost to build a plant.
Unlike a coal or natural gas power plant, the cost of the uranium makes up a small percentage of the total cost of operation.
Furthermore, uranium demand is steady and increasing. One cannot shut down and start up a nuclear reactor when fuel prices get too high. People do change driving and heating patterns in reaction to oil and gas prices.
Uranium demand is projected over decades, and will not fluctuate as much with the greater economy. Power plant companies seek long-term contract pricing in uranium to insure steady profits and consistent costs. They need this to prove returns and acquire high up-front financing.
Long-term pricing going up
As you can tell by the chart above, the spot price is bouncing off $48/lb — that’s up from the year low of $40/lb.
More importantly, the downtrend has been broken and we are starting to see higher highs as well as higher lows.
The recent upswing was most likely due to demand from the Chinese who want to build inventory (just as they are doing in oil). They are followed by buyers from Japan and India.
That’s the spot price, which changes every week. The long-term contract price on uranium is $60/lb — up from $58/lb three months ago — but down from the peak of $95/lb in late 2007.
In light of these circumstances, uranium production companies are starting to move — and fast.
Cameco Corp. (NYSE: CCJ) is up 33% in the past three months. Denison Mines (ASE: DNN) is up 60% since June. Uranium One (UUU.TO) is up 61% since mid-May.
Capitulation low
There is no doubt about it: The weak hands and fast money are out of the uranium market.
The uranium segment has been hated and vilified over the past two years. And yet, the construction of new power plants continues apace…
There have been no canceled contracts; on the contrary, we are entering a new golden age of nuclear power.
I’m putting together a report on a small, proven uranium miner in Mongolia. Look for that next week.
In the meantime, my buddy Nick Hodge has discovered a South Korean upstart with the best nuclear power plant technology in the world.
How do I know?
Because they are consistently winning contracts against the best of the United States, France, and Japan. This company has the likes of General Electric (NYSE: GE), Areva (A9R.F), and Hitachi (HCBLY.PK) running scared.
I love this stuff.
Christian DeHaemer
Wealth Daily
