Ura­nium a win­ner in 2011

... but all re­sources com­pa­nies should fare well if world growth con­tin­ues

Finweek English Edition - - MONEYCLINIC - LU­CAS DE LANGE bdl@vo­damail.co.za

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.

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