Uranium Bulls May Have to Wait a Few More Years
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The uranium mining industry has certainly seen better days. In 2007, the price of uranium soared to a record high at $136 a pound. Sky-high oil prices had many in the market convinced at the time that nuclear power would replace oil-generated electricity worldwide.
Today, uranium trades at a two-year low of $45.75 a pound. Sentiment remains extremely negative toward uranium and nuclear power in general following Japan's 2011 Fukushima disaster.
Uranium investors hurting
Fukushima has hurt shareholders in both individual uranium stocks and uranium-mining-focused ETFs as well. One hard-hit company is the world's largest producer of uranium, Canada's Cameco (NYSE: CCJ). It accounts for 16% of the world's uranium production and is backed by about 435 million pounds of proven and probable uranium reserves. Its stock is down to less than a third of its value from its 2007 peak.
An ETF affected by uranium's woes is the Global X Uranium ETF (NYSEMKT: URA). Its portfolio is devoted entirely to uranium mining stocks. Its price is down about two-thirds from early 2011 levels. A second ETF greatly affected by the decline in uranium prices is the Market Vectors Uranium + Nuclear Energy ETF (NYSEMKT: NLR). Its portfolio has about 30% invested into uranium miners, with another roughly 42% invested into industrial firms involved in the nuclear industry. Its price is also down by about two-thirds, over the past five years.
Is there any hope for the uranium industry? Industry executives do believe that its fortunes will improve several years down the road, as demand picks up and supplies get squeezed.
One hoped-for source of demand is not surprising at all: China. The country is expected to announce an end to its one-year moratorium on new reactor approvals. But it remains to be seen whether China, with its new leadership team coming in, will want to make such a decision so soon. The Chinese government has stated previously that it wants to boost its share of nuclear power generation from the present 2% to 5% by 2020.
Other emerging countries including South Korea, Russia, and India will also have new nuclear reactors come online by 2020. Overall, the industry expects 95 net new nuclear reactors to be operational by 2021, with 60 of these currently bring constructed.
Limited supplies ahead
The most interesting aspect of the years ahead for the uranium industry, however, comes from the supply side. There are a number of factors which may serve to support prices in the long run, starting with the expiration of long-term contracts in 2016-17. These agreements account for the majority of sales agreements between the uranium miners and utility companies.
A very big factor will be the expiration in 2013 of a treaty between Russia and the U.S. that supplies uranium from decommissioned nuclear weapons. This uranium from Russia currently accounts for approximately 16% of total demand and supplies half of utilities' needs for uranium in the U.S.
Another big factor in the coming years will be diminished supplies due to cutbacks in mining activities. The cutbacks are thanks to current low prices for uranium. Cameco, for example, noted recently it needed a uranium price of $62 a pound in order to proceed with development of one of its new uranium assets. BHP Billiton (NYSE: BHP) said in August that it would halt its $20 billion Olympic Dam copper-uranium project in South Australia. The company also recently sold another of its uranium mines, Yeelirrie, in western Australia.
All of these factors of supply and demand do point to perhaps a brighter future in the years ahead for the uranium industry. It may not be time yet to turn out the lights on the uranium miners as a long-term investment.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.