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Not too late for investors to participate in the uranium boom

by Wayne Cheveldayoff, 2006-05-18

The price of many commodities may be peaking but uranium is expected to enjoy a boom for many years to come, offering investors good opportunities to make money along the way.

The price of uranium has quadrupled in three years to $42.75 (U.S.) per pound. With uranium fundamentals still favourable, some analysts have predicted the price will continue to climb to $75 per pound or more.

What is driving the uranium price is the simple fact that supply is well short of demand and above-ground stocks are minimal. The world is producing approximately 100 million pounds per year but consuming in the order of 175 million pounds per year.

In the 1990s, as a result of the end of the Cold War, a large amount of uranium was released from U.S. and Russian inventories and extracted from dismantled nuclear weapons.

The flood of uranium from these sources depressed the price. As a result, exploration and the development of new mines virtually ceased.

But that flood has ceased. Now, nuclear power plants and other users of uranium are being forced to pay much higher prices to get what they need and some are naturally buying for future requirements.

The price action suggests that market participants are gradually realizing that demand will continue to grow and new mines will not be built in time to supply what the world needs.

China has committed to an ambitious nuclear power development program that will see at least two new nuclear plants built every year between now and 2020. Japan and India have recently announced increases in their nuclear generating programs. Russia’s requirements are also rising.

So, with the price going up, won’t that curtail demand and bring the market into balance?

That type of demand destruction from a sharp price increase might be true over time for most other commodities, but uranium is a special case. The cost of uranium for a nuclear power plant is a very small fraction of the total cost. So, nuclear power generators will be willing to pay virtually any price to get their ‘yellow cake’.

In effect, a high uranium price won’t stop current nuclear plants from continuing to operate and won’t deter Asian countries from their plans to develop new plants, especially given the high price of other energy sources and their reluctance to be dependent on oil and gas from politically unstable areas of the world.

Putting this all together, a well-known uranium research and consulting firm, Ux Consulting Company, predicts that in 2020, world requirements for uranium will be between 225 and 275 million pounds a year while production will only be about 150 million pounds a year – still a major supply shortfall.

Uranium does not trade on a commodity exchange, so it is difficult for the media and others to keep track of its price. For the convenience of market watchers, Ux Consulting publishes the current uranium price and a historical graph on its website at www.uxc.com.

Among the ways for investors to participate in the booming uranium market is the Uranium Participation Corporation, which holds uranium, trades on the TSX under the symbol U and is managed by Dennison Mines. Shares were issued last year at $5 each.

However, since it is the only such exchange-traded fund holding uranium, its shares have commanded a premium to net asset value (NAV). At the end of March, the NAV was $6 per share, while the market price was $8.75 per share. If the uranium price continues to climb, the share price can be expected to climb as well. But with the premium so high, if uranium for some reason goes down, the share price could lose ground faster than the price of uranium itself.

Investors may also want to consider investing in the shares of uranium companies such as Cameco (TSX: CCO), the largest uranium producer in the world, or Dennison Mines Inc. (TSX: DEN), also a producer with a variety of mines. There are many junior uranium explorers but these are high risk and even if they find an economical deposit, it would take many years to develop a mine. Another route would be to invest in mutual funds that are heavily weighted in uranium stocks.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2006 Wayne Cheveldayoff