URANIUM RESOURCES (URA): CHART AND DISCUSSION THREAD

This peice has been posted before, I think???

But take note of the paragraph in between the dotted lines!

06 December 2006
Uranium is very hot—(from this last week's Moneyweek)


Why is nuclear power set to make a comeback?

The case for reducing our dependence on fossil fuels is overwhelming.
Climate is an important part of the picture. Whether global warming is real or not is an irrelevance; the political consensus is shifting behind the view that it is, and this means that the push towards lower-carbon energy sources looks unstoppable. Nuclear isn’t carbon-free – fossil fuels are still consumed in mining uranium, for example – but it’s still an improvement over
most other forms of energy production. However, the need to invest in nuclear isn’t just about climate change.

Equally compellingly, there are supply and demand issues. We live in an increasingly ‘plugged-in’ world, where access to electricity is vital and where, as countries such as China and India industrialise, we are going to need more and more of it. Demand for electricity will double between now and 2030, according to International Energy Agency (IEA) estimates.

Meeting that demand from non-nuclear sources would be difficult and costly. Spiralling prices for oil and gas in recent years show how tight the supply situation is for these commodities. Coal will play an important part, but the pollution that coal-powered plants produce is a major handicap. Newer, cleaner-burning can reduce this, but it comes at a cost. Renewables such as
wind and solar are even more expensive and are, in any case, only capable of meeting a small part of the extra demand. The fact is that with the current level of energy prices, nuclear is already cheaper than gas, almost as cheap as coal and far cheaper than renewables, according to the IEA.

Finally we have to take into the security of supply considerations. Most countries would like to reduce their dependence on the politically unstable parts of the world that control most of the world’s oil and gas (there are often suggestions that gas is a safer thing to be dependent on than oil, but who wants to end up relying on Russia’s benevolence to
keep the lights on?). Most of the major uranium resources needed to produce nuclear power are located in friendly, stable countries such as Australia, Canada and the US, and that’s a huge bonus.

On all of these grounds, nuclear looks very compelling and this is something governments are finally recognising. Around 30 new reactors are under construction in 13 countries, while others such as the UK and the US are working on ways to encourage plans for even more.

And this should be just the start, given that China talks about building two new reactors a year for the next 15 or so years. The companies that build nuclear plants are certainly optimistic; Toshiba forecasts that 130 gigawatts of new capacity will be built by 2020, for example (that’s equal to about 90 to 130 new reactors at modern plant sizes).

How can investors from nuclear power?

A boom such as this would mean a major investment opportunity – construction costs alone will be around $1.5bn per reactor. So what’s the best way to profit? Well, MoneyWeek is inclined to ignore the limited number of listed companies that actually operate nuclear power plants, since the economics of nuclear are not always compelling for private companies. Construction
accounts for around 75% of the cost of nuclear generation, which means that companies are highly exposed to changes in the price of electricity. The fluctuating fortunes of the UK’s British Energy, which was haemorrhaging cash a few years ago as power prices tanked, demonstrates this only too well.

This means that companies running new plants will be highly dependent on governments offering them deals that will reduce the risks inherent in their exposure to shifting electricity prices, perhaps by giving them subsidies or letting them sign long-term offtake agreements at fixed prices. This will probably happen, since few businessmen will want to build new plants without
such deals. But still we think it might be better to look at opportunities in the nuclear area that aren’t tied to a single country and so have less political risk.

Uranium stocks set to benefit

Firstly, investors might look at the companies that will be supplying the reactors with their fuel. Because nuclear power was out of favour for so long, uranium exploration work has been extremely limited, and consequently not enough is being produced. There is a severe shortfall in supply – both now and for the foreseeable future. At present, the shortfall is made up by reprocessing warheads from the ex-Soviet weapons stockpile, but this is likely to run out within a few years.

Meanwhile, the flooding of Cameco’s Cigar Lake project has made a bad situation worse. The mine was supposed to supply around 15% of world production from 2010, but the project may now have to be abandoned. A number of analysts have described this as being akin to the oil world losing Saudi Arabia.

So what’s the best way to profit from this? We’ve long favoured Cameco, (CCJ, C$41.55) but with the future of Cigar Lake uncertain, this is not the time to buy or add to holdings. Any further bad news could spark a sell-off, so we would wait to see how the situation develops. Among the mining majors, BHP Billiton and Rio Tinto both have uranium interests, but they only account
for around 1% of earnings. However, Rio’s uranium operations are held in a separate, 68%-owned company Energy Resources of Australia (ASX:ERA, A$19), which is the world’s second-largest uranium miner and the purest listed mining play (Cameco also has processing operations). With a very low price/uranium resource ratio of just 3.3 (or a still-reasonable ten excluding the politically-sensitive Jabiluka deposit), it looks the best value company in the sector.

Others worth investigating include UrAsia Energy (Aim:UUU, 168p), which has interests in three Kazakhstani assets, operated in conjunction with the
state-owned Kazatomprom. Dension Mines (TSX:DEN, C$26) has interests in two important Canadian projects, include the producing McLean Lake facility, while Paladin Resources (ASX:PDN, A$7.3) and SXR Uranium One (TSX:SXR, $14) are nearing production with assets in Australia and South Africa.
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"But if uranium prices were to rise sharply, the producers will probably not be the big winners in the short term. “With investors now riveted on the uranium sector, we believe that a mania phase is possible,” says Doug Casey in the Casey Energy Speculator. If this is the case, the big gains will be made from speculative junior exploration companies".
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The above paragraph puts Uranium Resources on the starting grid, URA hold some excellant leases, as we have already seen from recent drill reports! DYOR
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Casey suggests buying a basket of small speculative uranium stocks such as Abaddon (TSX:ABN, C$0.67), Azimut (TSX:AZM, C$5), Hathor (TSX:HAT, C$1.3),
JNR (TSX:JNN, CS1.86) and Triex (TSX:TXM, C$3.76), which should see their shares rocket if the boom develops into a mania. This strategy potentially offers high returns, but at high risk. It should only be a small part of a portfolio, and investors must be prepared to get out quickly once the mania subsides.

Unfortunately, there are no direct ways of taking a punt on the uranium price – it’s not traded on futures exchanges in the way that most commodities are.
The closest you can get is Uranium Participation (TSX:U, C$12) and Nufcor Uranium (Aim:NU, 285.50p), which are stockpiling uranium in the hope of price rises. Be aware that these are not exchange-traded funds, so the share price does not directly reflect the value of the uranium owned.