Of all the resources, uranium probably has the best long-term supply-demand fundamentals. This is partly to do with the resource’s peculiar market and unusual extraneous circumstances.
Uranium moves in long cycles, with secular factors affecting the supply-demand balance, and the price, for long periods. During the 1950s there was a build-up of stockpiles by both sides in the Cold War. More recently, we saw massive destocking, and other secondary supplies hit the market; during this period there were no new nuclear facilities to boost demand, the low price removed the incentive for new mines.
Supply-demand Inbalance
Now, following this long period of lower demand and less production, there simply is not sufficient uranium production for current needs, while there is relatively little in stockpiles and extraordinary secondary supplies. At the same time, demand (from new nuclear power plants) is building.
The most recent jump in the spot price may have a lot to do with buying from the new Uranium Participation Corporation, so it would be short-term and artificial in nature. Because of this, investors should be selective in buying, rather than chasing prices. But of course, the fact that the market responds to this kind of buying illustrates clearly just how tight supplies are.
The World is Going Nuclear
Looking ahead, there is likely to be a huge increase in demand. Nuclear power plants are most likely the wave of the future: China has plans for up to 40 plants; Japan, South Korea and France have all announced plans for new plants, and even in the U.S., President Bush commented that more nuclear plants may have to be built, as part of his energy plan.
Interestingly, opposition to new facilities may be more subdued going forward. Many environmentalists have publicly recognized that nuclear power is the cleanest of available sources.
The result is a huge gap over the next 10-15 years between expected requirements and production from existing sources (plus anticipated secondary sources). The World Nuclear Association, in fact, estimates that by 2020, supply (from existing facilities and secondary sources) will be only half the expected demand (40,000 tonnes versus 70,000 - 80,000 tonnes of demand).
This enormous gap arises from an over-reliance on inventories and secondary sources in the last decade, and the long lead times to permit new mines and bring them into production. To meet this new demand, there will have to be higher prices and new supplies; many of the properties being explored now will have to come into production.
Top Uranium Investments
So this is a great time to be building long-term positions in key uranium investments. We are focusing on four main areas
• Major producers that will benefit from higher prices; Cameco (CCJ, NY, 41.98) is the world leader; management would have to try very hard indeed not to benefit from higher uranium prices.
• World service leaders that will benefit from increased demand and market activity. Areva (CEI, France, Euro340) is a major recycler and leader in nuclear plant construction and management; it has lots of projects in the pipeline (including some in China) and a strong balance sheet. To be privatized by the French government, it currently trades on a “when-issued” basis.
• Top exploration companies that have the goods and are likely to bring properties into production. Strathmore Minerals (STM, Toronto, 1.85), with technically strong management, lots of properties, and a strong balance sheet, is arguably the best and out choice.
• Companies one likes for other reasons with exposure to uranium. We like three exploration companies, active in a range of metals, but with some uranium projects: Virginia Gold (VIA, Toronto, 5.49), one of our top picks for an exciting new gold discovery, with great management and a solid balance sheet; Altius Minerals (ALS, Toronto, 3.55), with numerous joint ventures in Newfoundland, as well as a royalty on Inco’s Voisey’s Bay nickel mine; and Bitterroot (BTT, Toronto, 0.30), the most speculative of the three, but with a joint-venture with Cameco, where any success would lead to a dramatic move in the stock price. (June 6, 2005)
Adrian Day is president of Adrian Day Asset Management, which manages money for individuals and small institutions in both global and resource accounts. He may be contacted at P.O. Box 6643, Annapolis, MD 21401, 410-224-2037
To learn more, follow this link: Click Here
