Uranium a winner in 2011
... but all resources companies should fare well if world growth continues
THERE’S a common refrain running through predictions about where the best opportunities will lie in stock market investments in the new year: precious metals and resources companies. But quite a few analysts are clearly also unhappy about the current levels of South African and international share prices.
In the case of emerging markets, including SA, there’s mention of a developing bubble. And clients are being urged to consider protecting their portfolios – for example, through options.
Uranium is fairly widely regarded as a potential winning mineral of the year, with copper, gold, coal, diamonds, sugar and platinum group metals also being favoured. As for uranium, research conducted by various organisations shows we’re on the eve of a shortage and that the price could rise by about a third in the months ahead to between US$80 and $90/ lb. It’s currently $62,50/lb.
Whether these price predictions will materialise is, as always, anyone’s guess. But there’s no doubt nuclear energy should be seen as one of the world’s top growth industries. There are currently 439 nuclear power stations in the world, with 57 under construction and no fewer than 200 in the planning stage. The International Atomic Energy Agency reports the total demand for uranium last year was 70 000t. With the new power stations on the way, demand for uranium to fuel them will increase sharply. China is again playing a leading role. It currently has 11 reactors, with 23 under construction, and hopes to increase its output from the current 10GW to 150GW within two decades. Unlike other countries that would also like to build nuclear power stations but are under financial pressure – such as SA – China doesn’t lack funds to back its massive expansions.
Current global production is insufficient to meet the demand, but the shortfall is being made up with surface uranium, with the United States/Russian “Megaton to megawatt” programme making an important contribution. In terms of this programme, uranium from Russian nuclear bombs currently being dismantled is being supplied to the US. The programme should end in around two years’ time.
There are two listed uranium companies in SA – Uranium One and First Uranium – while some of the mining groups also produce uranium as a byproduct. However, risk-averse investors who’d like to share in uranium’s potential will have to look overseas. One interesting investment with relatively low risk is Union Participation Corp, which is listed on the Toronto Stock Exchange. This is an exchange-traded fund (code TSX:U) that invests directly in uranium itself. Almost all its assets consist of marketable uranium oxide concentrates (U3O8) or uranium hexafluoride (UFT). It doesn’t make use of leverage and is managed by a subsidiary of the well-known Denison Mines group, which produces uranium in the US and Canada. Its board is independent of Denison.
The cost of fuel for a nuclear power station only makes up around 4% of the cost required to produce electricity. Its price is therefore not seen as a very important factor. What is a priority is to have certainty about the availability of uranium. That’s why large players, such as China’s Guangdong Nuclear Power and the China National Nuclear Corp, signed long-term contracts with the Cameco Corp (Canada) and the Areva group (France) over the past few months. They also envisage undertaking joint projects.
If First Uranium and Uranium One can get themselves properly into gear, similar transactions should also become available to them.
What makes uranium such an attractive option is that demand should grow strongly for a long time, given the many new power stations that will start production in the years ahead. That’s in contrast to almost all the other resources products, which usually quickly respond negatively to a setback in the world economy.