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URANIUM: THE OTHER YELLOW METAL
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Over the next decade or two, energy prices are going to reach
shocking levels, and the price of uranium, inextricably tied
to energy, is headed up as well. I first recommended uranium
companies in October 1998, when the metal was trading hands
at a paltry $9.50 per pound. Since then, U3O8 has risen to
$18, and I believe, due to growing global energy demand coupled
with the relative costs of alternative fuel sources, it's
going much, much higher.
Global electricity use is projected to increase by 66% from
13 trillion kilowatt hours in 1999 to 22 trillion kilowatt
hours in 2020. In North America, the growing demand for power
has reached the point where the grid is increasingly vulnerable
to massive failures, like that of last summer when the lights
went out on 50 million people.
To meet this demand, energy has to come from somewhere, and
nuclear power is the only sensible choice. This conclusion
is not mine alone… as I write there are 30 new reactors
in various stages of construction around the world. China
alone is planning at least one new reactor per year for the
foreseeable future. Even in the U.S., despite all the hand
wringing about nuclear power, the share of electricity generated
by the same has risen from just 4.5% in 1973 to over 20% today…
making it the second most frequently used fuel source for
producing electricity (after coal).
Oil currently accounts for 40% of the world's energy consumption,
and world oil consumption is projected to increase 2.3% per
year for the next 16 years - driving the demand to 120 million
barrels per day in 2020. Against that consumption, the world
is currently producing on the order of 77.5 million barrels
a day, but the threats to supplies coming out of the Middle
East, Nigeria, Venezuela and elsewhere (for instance, the
Strait of Malacca) are growing… and due to reserve depletion,
are only going to get more difficult and costly to recover.
As I write, oil is nearing $50/barrel. While that price will
certainly ebb - maybe all the way back into the $30/barrel
range - the days of $18 a barrel are almost certainly gone
for good. While higher oil prices carry many negative consequences
- on discretionary household spending, inflation and corporate
profits, to name a few - for the sake of this discussion,
what's important is that pricey oil makes alternative forms
of energy more appealing.
Natural gas? There is a general preference for natural gas
over oil and coal for power generation because it is clean,
and gas burning plants can be built relatively cheaply and
quickly. In fact, it is the fastest-growing component of energy
consumption, surpassing coal for the first time in 1999. Energy
mavens say that by 2020, it will exceed coal use by 44%, but
I doubt it. Gas will price itself out of the market before
that happens.
Coal and nuclear are the only feasible sources of mass energy
with anything like current technology. There are many hundreds
of years of cheap coal available, but the stuff is an environmental
nightmare compared to nuclear (which, despite what the scaremongers
would have you believe, is actually the safest, cheapest,
cleanest, and most practical source of mass power). Other
commonly discussed energy alternatives face distinct disadvantages,
or are years from mass commercial viability, or aren't mass
power solutions at all.
The looming energy shortage has even become
clear, however belated, to the U.S. Department of Energy,
which recently announced incentives to encourage U.S. power
companies to apply for licenses to build new nuclear plants
(the first in 25 years). In addition, the DOE is even considering
building a plant of its own. This is a big change from just
a few years ago, when the talk was of literally closing down
the industry, not only here, but worldwide.
DEMAND & SUPPLY
How great is the demand for uranium likely to get? Saskatoon-based
Cameco (CCO-T), the world's largest uranium miner, estimates
that even without the potential for added demand due to rising
oil and natural gas prices, global uranium demand should average
194 million pounds per year from 2003 to 2012, with the U.S.
using 40 million pounds of that amount from 2006 onwards.
What about supply? Uranium is more abundant than tin, and
ten times more abundant than silver. Yet, a chronic supply/demand
imbalance has developed in yellowcake, as U3O8 is known. The
best evidence of this is that the industry has been living
on inventory since 1985.
Supply is running at about 135 million pounds per year, with
mines contributing only 79.2 million pounds per year. In Canada
and Australia, the big dogs in uranium, largely as a result
of recent poor prices, few new mines have come on stream.
Of course, if prices continue to rise, prospectors will redouble
their efforts to find new deposits. But it typically takes
up to 10 years from discovery to production for a well-sized
mine.
The balance of the uranium needed to keep the world's lights
on today comes from above-ground supplies like HEU/weapons
conversion, MOX/breeders, and utility stockpiles. However,
these supplies are not growing, while demand is - rapidly.
Here is a quick look at each.
HEU. One source of reactor fuel is surplus weapons-grade
uranium referred to as Highly Enriched Uranium (HEU). From
the 1940s through the '60s, the military was the major consumer
of uranium, for use in nuclear warheads. But since the early
'90s, it has not only stopped building new ones, but has deactivated
many of those in existence. New weapons are built using the
HEU and plutonium from old ones, with any surplus available
for use as fuel. Due to the numbers of weapons potentially
involved, their deactivation could create a significant new
supply.
However, my guess is that military inventories of uranium,
as well as Russian civilian inventories, are going to pretty
much stay where they are. As the world moves towards a larger
and hotter stage of the Forever War, there's likely to be
resurgence in the nuclear arms race, which would reduce the
availability of HEU as reactor fuel.
MOX. "Mixed-Oxide" fuel, or MOX, as it
is usually called, is a combination of uranium and plutonium
and a product of the reprocessing of spent nuclear fuel rods.
Reprocessing is expensive, but so is enrichment. On the other
hand, reprocessing cuts waste storage, and that's expensive,
too.
It's hard to determine what real costs are relating to nuclear
power, since it's all so highly politicized. The only certainty
is that if we lived in a free market society, the costs of
building and running a nuclear plant would be a small fraction
of what they are now. A mixture of MOX and conventional fuel
is already used in some reactors in Europe, and it could ultimately
reduce uranium requirements by several percent.
BREEDERS. A breeder reactor is one that actually
creates more fissionable fuel than it uses. Their more widespread
use could, therefore, substantially reduce the need for newly
mined supplies. Both breeder and MOX are excellent technologies,
and both are negative influences on uranium prices. However,
both vastly increase access to weapons-grade material. As
a consequence, because of political realities - namely fear
of weapons proliferation - I doubt either will be much of
a factor, at least not in the political climate for some time
to come.
A general estimate is that, by 2010, annual supply from breeder
reactors will be on the order of 6 million pounds in MOX fuel
plus 4 million pounds in reprocessed uranium - meeting, perhaps,
5% of consumption.
UTILITY STOCKPILES. When uranium prices were
rising in the late '70s, many utilities hoarded material.
In the early 1980s, it was reported that some utilities held
over five years of fuel in inventory. Those same utilities
sold inventory as prices dropped, accelerating the decline.
With supplies again tightening and prices on the rise, expect
utilities to begin hoarding again, exacerbating the price
escalation. This is standard behavior in industries where
demand is inelastic relative to price, and prices are rising.
Today's low stockpile levels - about one year's worth - are
potentially a big positive for uranium.
SUMMING UP
Using the 194 million pounds per year demand forecast, and
subtracting roughly 50 million pounds of supply from above-ground
sources, results in a 144 million pound per year difference
that mine production needs to meet (nearly double current
output). That's not going to happen, except at much higher
uranium prices. While longer-term price forecasts are worth
little - there are just too many variables - I'll make a guess.
Uranium will trade over $25 within the next 12 months and
is quite capable of going to $30, $40 soon, and over $100
by the end of the decade.
Success in speculation requires a willingness to look beyond
the hype and hysteria about things like nuclear power. With
the exception of a small group of pathetic Luddites, no one
is ready to freeze in the dark. To sustain the increases in
energy demand dictated by a growing world economy, there is
no question that uranium will need to play a key role. Uranium,
after decades of being the unwanted stepchild of energy sources,
is now likely to offer better percentage returns to speculators
than oil, gas or any other energy alternative.
DOUG CASEY is the author of Crisis
Investing which spent 26 weeks as #1 on the New York Times
Best-Seller list. He is also editor and publisher of the International
Speculator, one of the nation's most established and highly
respected publications on gold, silver and other natural resource
investments.
SPECIAL URANIUM EDITION!
In the most recent edition of the International Speculator,
Doug Casey provides a comprehensive special report on uranium
and names the three uranium stocks poised to offer the highest
profits as uranium takes off. One stock has already moved
up by over 37% and is poised to go much, much higher. More
on the International Speculator...
***
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