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A good time to consider uranium

22 Mar 2010 by Jim Fickett.

Uranium is cheaper now than it was when I bought in December. While I wish my market timing were perfect, the decline is within my expectations of volatility. The long term prospects are bright, and the present price seems cheap.

In December I increased my holdings in uranium from 2% of the portfolio to 3%. The purchase was part of a long-term strategy of gradually increasing commodity holdings as protection against future inflation. My reasoning at the time was given in this Investment post. As the Ux Consulting Company summarized well last year,

The market that we now find ourselves in is like no other in the history of uranium. Production is far below requirements, which are growing. HEU [Highly Enriched Uranium, mainly recycled weapons] supplies and the enrichment of tails material make up a large portion of supply, but the fate of these supply sources is uncertain. Supply has become more concentrated, making the market more vulnerable to disruptions if there are any problems with a particular supply source. Another source of market vulnerability is the relatively low level of inventory held by buyers and sellers alike.

How has the outlook changed?

In the short run results are rather discouraging: the price is down about 10% from where I bought it. Yes, of course I wish I had bought a little later. But as noted in the Dec post, the purchase was made with the expectation of volatility:

Although my best guess is that the price is somewhat low right now, I do not place a great deal of faith in that estimate. Rather my reasons for getting in now are (1) the price is certainly not out-of-line high, and (2) both public policy around uranium (e.g. decisions about recycling weapons) and large-scale mining of uranium are quite unpredictable. There will be major ups and downs, and it is a pretty safe bet that sometime in the next 10 years the price will be significantly higher than it is now.

The spot price for U3O8 was $40.75 per pound on 12 Mar 2010. Well-informed people think the price is low right now. They could be wrong, but people with access to much better information than retail investors are worth listening to. Gene Clark, of TradeTech, a nuclear power research firm, wrote in January

A recent development, and arguably one that may have far-reaching implications for the modus operandi of the market, is the involvement of financial institutions. …

For 2008, the investor community as a whole were net sellers —the first time in the market’s history — which helped cause the price to fall to the current level of US$45 per pound U3O8. …

the spot price is projected to generally remain in the range of US$45-60 per pound U3O8 over the next 24 months.

Denison Mines, the large Canadian producer, in reporting their 2009 results, wrote on 11 Mar:

The Company expects [in 2010] to achieve an average realized uranium price of $54.34 per pound, based on an assumed long term price of $64.00 per pound a spot price of $49.00 per pound U3O8

Jean Nortier, CEO of Uranium One, gave a fairly typical analysis of future prices in an interview with Mine Web on 12 Mar 2010:

On the supply side, the market as you know has been generally disappointing and although there has been a very good supply response in Kazakhstan, we need to see a lot more material to replace the secondary supplies that are currently feeding the market - the UE agreement [a reference to Megatons to Megawatts ] is coming to an end in 2013 so we have to see primary supply respond and it's not responding fast enough. So we remain very bullish on the uranium price. Just a last point on that is that there is a lot of uranium in the world - there is enough uranium in the ground and there's enough uranium in situ so although we definitely forecast higher prices, I think that if we get to $80 to $100/lb there will be enough of an incentive for new production to fill any shortages that we foresee.

Some major producers, including Uranium Resources and Areva are having to reduce production until the price improves. Reducing supply obviously supports the price.

The biggest price risk is in possible conversion of further weapons material to fuel (what's good for the survival of the species, in this regard, could be bad for the investment, and vice versa). As I wrote in Dec,

The sum total of all uranium in US and Russian weapons is equal to about 12 years' worth of mine production; so significant further reduction in weapons could depress the price for some time

Unfortunately for the species, but supporting the price of uranium, Russia does not look particularly anxious to reduce its weapons stockpile. From the Financial Times last Thursday:

A top Pentagon official has expressed concern at what she describes as Russia’s increasing reliance on nuclear weapons …

In an interview with the Financial Times, [Michèle Flournoy, the defence department undersecretary for policy] said that while Mr Obama had stressed “the importance of reducing the role of nuclear weapons . . . if you read recent Russian military doctrine they are going in the other direction, they are actually increasing their reliance on nuclear weapons, the role in nuclear weapons in their strategy”. …

Greater reliance by Moscow on nuclear weapons would complicate the US's planned next step with Russia - a more ambitious treaty to make big cuts in their nuclear arsenals.”

In short, I think that from a long-term perspective the present uranium price is cheap. If you want to buy most commodities, at the moment your philosophy has to be “buy high because it will go higher”. But with uranium, you can follow the old adage, “buy low, sell high”.

At the end of January, the Canadian Globe and Mail also had a good overview article on buying into uranium for a long-term energy investment.