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The Bullish Case For Uranium

Higher prices to come?

Fortnightly Magazine - December 2010

Administration has earmarked approximately $54 billion for federal loan guarantees for new nuclear reactors. And it has granted the first $8 billion in loan guarantees to Southern Company for the construction of two reactors in Georgia.

Traditionally, investors could only really invest in uranium by buying or shorting mining stocks. Unlike other industrial metals, such as copper or nickel, the uranium exchange-traded futures market is relatively new and not especially successful. Some 85 percent of all uranium is sold under long-term, multi-year contracts, with deliveries starting one to three years after signing. These contracts range from two to 10 years duration, with most running three to five years.

The uranium landscape might be changing however. Uranium exchange traded funds (ETFs) have hit the financial press. These would allow retail investors to get in on the action as never before. More significantly, media reports suggested that Goldman Sachs’ purchase of the commodity trading side of Constellation Energy Group, part of which were uranium stockpiles, signaled increasing interest in the metal as an investment vehicle. And Deutsche Bank also continues to monitor and participate in the physical uranium market, as do hedge funds that choose to remain anonymous.

Goldman’s interest raises the issue of speculation. Speculation represents a two-edged sword in the market. On the one hand, speculators add liquidity, but at the same time, they can increase volatility and, by definition, increase demand. Every financial bubble since the Dutch tulip fiasco was the result of speculators overextending themselves.

A further source of heightened demand might be uprating—the process of increasing the licensed power level of a commercial nuclear power plant. One way of increasing the thermal output from a reactor is to increase the amount of fissile material in use. The NRC says, “As of January 2008, the NRC has approved 116 uprates, resulting in a gain of approximately 15,600 MWt (megawatts thermal) or 5,200 MWe (megawatts electric) at existing plants… Collectively, these uprates have added generating capacity at existing plants that is equivalent to more than five new reactors.” 12 In a world of increasing demand for electricity, uprating likely might become more common, boosting demand.

Market Effects

Having established that the price will trend higher as time goes on, the discussion now turns to the effects this new pricing environment will have on each class of market participant: mining and extracting firms, processors, utilities and substantial numbers of investors and speculators.

As a general proposition, higher prices are good for mining and extracting firms in the near and medium term. Revenues from existing operations rise, deposits that were uneconomic at a low price can become viable at a higher price, and more cash coming in means a greater ability to explore new locations. In the longer-term, price increases bring more competition as new parties enter the market in search of profits. However because it takes years to bring a new mine into production, higher prices seem unlikely to increase competition greatly for years to come.

Uranium processors occupy a position similar to that of oil refineries in the petroleum business. They