Uranium may be radioactive but it is a friend to investors.
Despite the recent downtrend in other commodity prices, the price of uranium has continued to rise. It recently pushed through a new high of $54 U.S. per pound, up 25 per cent in the past six months.
Even though the price has quintupled since 2000, it will continue to rise to an average $59 per pound in 2007 and $63 per pound in 2008, says a report issued last month by German-based Deutsche Bank.
The report, by analysts Peter Richardson and Joel Crane, says the current concerns over the availability of supplies, which are driving the price, are “expected to persist through to the end of 2009 before a significant increase in planned mine production results in a temporarily oversupplied market.
“Renewed supply concerns are expected to emerge from 2013 onwards as the U.S.-Russian highly enriched uranium (HEU) agreement expires and removes a considerable amount of supply from the market.”
As a result, Deutsche Bank is forecasting price increases through to the end of 2008, a decline until 2013, and then renewed upward pressure.
The U.S-Russian HEU agreement, reached in 1993, allows for a significant amount of uranium from dismantled Russian nuclear weapons to be sold to U.S. power plants each year.
This secondary supply helps to make up the substantial difference between current worldwide mine production of about 100 million pounds per year and consumption by power utilities in the order of 175 million pounds per year.
But when the agreement expires in 2013, Russia is expected to keep its uranium for domestic use or for use in Russian-designed reactors in other countries. Russia would be at a significant advantage in marketing its reactors if it were able to offer uranium supplies on long-term contracts.
The big difference between current supply and demand, as well as prospects for a ramp-up in demand arising from dozens of nuclear plants being built in the coming decade, especially in India and China, have attracted some hedge-fund and other investment buying of uranium. However, Deutsche Bank says this is relatively small and, in any event, the upward swing in prices started long before investment demand came in.
Price triggers have included supply disruptions from fires and flooding in mines in Australia and Canada in 2001 and 2003.
Such supply problems persist, Deutsche Bank says. Uranium production from Australia’s three mines in the first half of 2006 was down 27 per cent from a year earlier due to acid plant problems and a cyclone. Additionally, production from Canada’s three major mines was down 33 per cent in the same time frame.
The uranium market is relatively small. Around $5 billion was consumed last year, compared with $57 billion of gold. And the radioactive metal is not traded on an exchange, so it has not been easy for investors to buy it or even keep track of the price – certainly not as easy as precious metals.
One way for investors to participate in the uranium boom 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 and recently traded at $9.
The Uranium Participation shares were a top pick of Toronto portfolio manager John Zechner on ROBTV’s Market Call Tonight on September 27. He said he prefers holding uranium directly in this way rather than investing in major uranium companies, such as Cameco, whose shares currently have a high valuation and are subject to the risk of mine problems.
Investors can also participate by buying shares in the large number of junior uranium exploration companies active in various parts of the world. However, this is very high risk. While all will search for uranium, only a few will end up finding enough for an economically viable mine.
The exploits of junior explorers are sometimes chronicled by advisory letters, such as the ones published by Peter Grandich (www.grandich.com), an analyst who has been consistently bullish on uranium in recent months while advising caution about base metals and oil and gas markets.
Those who are interested in uranium can keep track of its price on a website operated by UX Consulting Company (www.uxc.com), which also offers analysis of the uranium market.
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