When I started my first blog back in 2004 the first commodity I became bullish on was uranium. At the time the metal was trading around the mid twenties. Uranium was in the process of emerging from a twenty year bear market which had been precipitated by the Three Mile Island and Chernobyl accidents. There was virtually no interest in uranium and nobody even talked about it. At the time I think there were around four or five publicly traded uranium companies and only Cameco was worth even considering as an investment. So it was the ultimate contrarian play. Fast forward a few years and uranium was on the front page after never having been able to get into the paper. Everyone loved uranium and the stock promoters in Vancouver brought around 500 uranium companies to the market. As there are only a few competent uranium teams around most of these were worthless. The uranium price got to around $138 per pound and uranium frenzy made it to the front page. Of course too many people were on one side of the boat and the inevitable rollover/correction took place with the price of uranium falling to the low $40 dollar range before recently moving back up to $54. The interesting fact is that even with all of the attention and a significant price rise last year the production from mine sources is still not sufficient to meet current reactor demand. The supply gap is being filled with blended down material from the dismantling of old nuclear weapons and from old stockpiles. I would like to review the current status of the uranium market and then tell you about my 2009 stock of year pick which I think can take advantage of the opportunities available in the current uranium market.

Current Uranium Market

There are currently 439 reactors operating in 30 different countries around the world. These reactors require around 167 million lbs of uranium per year against a mine supply of around 108 million pounds per year. In addition there are currently 36 reactors under construction with seven in China, six in India, and seven in Russia as the main countries that are expanding their nuclear fleets. In addition to the reactors that are under construction there are 99 reactors that are in the planned stage. Again the majority are in the so called BRIC countries which makes sense in that as these countries economies grow they require tremendous increases in electricity supply. For true blue sky potential there are 232 reactors that are being proposed, although with the current financial situation these may or may not ever be built.

As I pointed out earlier current annual uranium demand is around 167 million pounds against mine supply of approximately 110 million pounds. Companies have been trying to increase production but have been encountering difficulty. Cameco has had flooding issues at Cigar Lake which are unresolved and may never be resolved. This mine alone was supposed to supply 17 million pounds of annual supply. Uranium One closed their Dominion mine in South Africa and Denison has closed a mine in the US that they just opened last year. KazAtomProm the Kazakh national uranium company that many analysts were relying on to help fill the gap is having all kinds of issues that are typical of operating in an emerging economy. They have reduced production forecasts by 14% for 2009. The bottom line is that supply is not keeping up with demand. As a matter of fact a recent Wall Street Journal article stated that many nuclear operators are getting nervous about long term supply.

Japan’s Kansai Electric Power — which accounts for nearly a third of the country’s total uranium demand — says it plans to buy uranium mines to ensure its long-term supply of the fuel. Its chief manager says he worries that in coming years he won’t be able to buy what he needs “no matter how much you are willing to pay.”

To add to all of this news the recent signing of the nuclear deal between the US and India is also going to lead to an unknown amount of Indian demand. indias reactors have been running at a reduced rate because of a lack of fuel.

So the bottom line is we have insufficient mine supply and no real prospect in the near future of closing the gap over the next few years. There is ongoing new construction of nuclear plants and more plants are being proposed. The market for uranium became very speculative last year and has already had its correction and has now bottomed. The supply and demand fundamentals for uranium are outstanding and a position in the Uranium Participation Fund may be appropriate for investors. For more risk averse investors who want to leverage their returns to the anticipated rise in uranium price the stock of the year pick for 2009 may be appropriate.

John Polomny
The Real Deal