Buying uranium as a store of value

12 Dec 2009 by Jim Fickett (statement on the authority of the WNA corrected 21 Mar 2010)

This week I increased uranium from about 2% of my portfolio to about 3%. This is not meant to be a speculative bet aiming for a high payout, but rather a store-of-value investment that helps protect against eventual inflation.

As detailed in the Commentary section earlier, I expect inflation to become a problem in a few years. As a defensive move, I plan to increase my holdings of commodities. This will be done gradually, buying into individual commodities at various times when I feel each is at or below long-term fair value.

My personal style is to have a fairly large portion of the portfolio be rather boring, aimed mostly at maintaining value, and then to have a smaller portion with some more speculative investments. Uranium goes in the boring part. I think that (1) uranium is either fairly priced or perhaps cheap, and (2) there will be enough volatility that I can get out later at a decent profit – enough to cover tax and inflation.

At some point I'll put up some reference pages on uranium. For now, the concise summary is as follows:

Demand will increase consistently.

• Public policy is going to gradually become more negative on carbon fuels (I'm speaking here of global averages), and nuclear power will grow
• There are certainly people who oppose nuclear power, and I would not be surprised to see it grow only slowly in the US and Europe; however most of the growth is in eastern Europe and Asia, and in those regions the demand for power carries more weight, and protests less weight (China has 11 operating reactors, and 141 more under construction or planned)
• The World Nuclear Association (WNA), who publish many authoritative reports in the area project that demand will more than double by 2030

Supply will be adequate but bumpy.

• There is probably enough uranium in economically recoverable deposits to last many decades, however bringing new mines to production is technically difficult and politically difficult
• Currently mines (so-called “primary supply”) are incapable of fully satisfying demand; about 13% of demand is currently satisfied by reprocessing excess nuclear weapons
• The main program for converting weapons uranium to reactor fuel, Megatons for Megawatts, ends in 2013
• 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; however keep in mind that Russia invaded Georgia and that Putin greatly regrets the fall of the USSR
• “Secondary supply”, including weapons, recycling from power-plant and mine waste, and civilian stocks, is difficult to know and more difficult to predict, however it is telling that the WNA is strongly urging greater efforts to increase long-term supply
• A top commodities analysis team, at Macquarie, foresees a temporary shortage in 2011-13.

As an aside, the vision of essentially infinite supply via breeder reactors is still not economically viable (subscription required for this article).

The price is probably a little low right now.

• Knowledgeable insiders thought in early 2008 that the price was in the neighborhood of a long-term floor; it is now about 40% lower
• The Macquarie team think the price is unlikely to be lower on average long-term

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.

My holdings, by the way, are in the Canadian company Uranium Participation Corporation (U.TO or URPTF.PK). This is essentially a big warehouse full of uranium oxide, managed by Denison Mines, one of the large mining companies.