By some measures, merchant power assets look like a bargain, selling for well below their replacement cost. But whether low prices signal a buying opportunity or a value trap depends on the...
The Bullish Case For Uranium
Higher prices to come?
Idaho, which initially produced about 100 kW and which started operations on December 20, 1951.
Since then, nuclear power has grown dramatically. As of June 30, 2010, about 372 GW of installed electric net capacity is operating at 438 nuclear power plants in 30 countries. Of these, the overwhelming majority are 20 years old or more. A further 61 plants in 16 countries are under construction that will add 59 GW of net nuclear capacity.
From 1951 to the end 2009, the world’s total nuclear electricity production is 64,600 billion kWh. By June 2010, the industry had logged 14,092 years of the cumulative operating experience. Current usage is about 80,000 tons of uranium per year. 5
Since the initial nuclear reactors that were designed to produce electricity came on line, uranium prices have been largely stable, usually below $20 a pound, with two exceptions. The first uranium spike came in the wake of the 1973 oil embargo, when all energy resources saw an increase in price. Adjusted for inflation, this was the highest price uranium ever reached. Then, from 1976 to 1980, the price was level, although historically high at slightly more than $40 a pound in nominal dollars. From 1980 to 2004, the price dropped back to the $10 to $20 per pound range and remained there until 2004.
Starting in 2005, uranium prices began increasing as supply concerns arose (see Figure 1) . Very few new mines had been developed and brought into production because of the persistently low price. Then, oil took off for $140 a barrel, and like 1973 through 1976, other energy sources followed suit.
Adding to the pressure from the oil complex, the Cigar Lake flood disaster pushed the market into excessive exuberance. Cameco, the largest uranium producer in the world, had the Cigar Lake mine targeted for production in 2007, and it was supposed to change everything, adding 18 percent to global uranium production. With the price of uranium at $60 a pound, that extra 18 percent would’ve brought prices back down, and in the meanwhile, Cameco was going to make billions. 6
However, that’s not what happened. In 2006, a retaining wall in the mine collapsed and a flood ensued. Cameco announced that not a single ounce of uranium would come out of the mine for at least five years. As the summer wore on, uranium prices eventually hit $138 a pound in mid-2007.
When oil prices declined, and as the first liquidity issues from the subprime lending market hit Wall Street, the bubble in uranium finally burst. The price is now around $60 a pound, up 50 percent from the March 2010 low of $40, and the question is what happens next? Will the price continue to move? How fast and for how long?
The market appears to be biased toward higher prices, but the timing of the move is far less certain because the knowledge is dated regarding deposits and technology, and permitting regulations have gotten tougher. There has been no broad development for the last 25 years, so updating and renewing