Trading Uranium

You always hear about the cool new gold or oil play, but what if there was an even hotter commodity to get into? Maybe you’re looking for something a little more explosive? Something with a little more kick. Well how about the uranium market? That’s right, just like gold, you can even play uranium with mining equities. How exciting is that? Not to mention lucrative. Nuclear energy supplies almost 14% of the world’s electricity which may not sound like much. For comparison, the United States uses about 24% of the Earth’s energy. Another way to think about that is to consider that the entire planet produces enough nuclear energy to power about 58% of the United States. Take from that what you will, but I’ll explain how the market is expanding.

When it comes to energy density, uranium packs quite a punch. One 7-gram pellet of the metal can produce the same amount of energy as three and a half barrels of oil and about as much as a ton of coal. Uranium is also used in diagnosing and treating medical conditions. Therefore, a boost in the healthcare industry is likely to send demand in a good direction for miners and investors. Uranium is also used for heat shielding and depleted uranium is sometimes used to help balance the weight of aircraft. As these industries expand you may see the price of uranium expand with it.

The history of uranium might shed some radioactive light on how the market has formed today. Uranium originally hit stores as a decorative paint glaze before people realized that exposure to it could kill you. Throughout the second half of the 20th century Uranium was a sought-after commodity for its nefarious purpose in atomic weapons, but also for the increase in the use of nuclear energy as an alternative fuel source. Interestingly, there are several mines in the Grand Canyon, but Obama banned uranium mining for the one million acres of land near the canyon. This may be good for the inhabitants because uranium mining has some controversial side effects. Here’s a map of the uranium mines as of 2005.

world-uranium-mines-2005

Investments in uranium exploration and mining have jumped six-fold from 2004 to 2008 as this decade got a lot more comfortable with the fuel source. However, that’s not the only reason for this uptrend. This price reversal could be a change in the long-term price trend, as many have pointed out that prices can sometimes be a leading indicator of fundamentals. As always, it’s impossible to predict the future.

There are about 57 reactors under construction today across the world that are expected to be online in the next three years, most of these are concentrated in India and China. Emerging markets are expected to account for 86% of the growth in the number of nuclear plants, and China is expected to be the largest contributor at 54% of the global growth. This means more profit for miners as the commodity is needed to fuel these new reactors.

In 2011, just before the Fukashima disaster, uranium prices were in the range of $70 per pound. After the disaster, Japan shut down all nuclear power plants and Germany also forged plans to move away from nuclear power. This pushed demand way down and that caused supply to balloon in the following years. The spot price for nuclear fuel fell to its 10-year lows of around $25 a pound just five years later in 2016.

Let’s break down the supply side of the market down and understand it a little better. Today, Canada and Australia make up about 40% of the world’s uranium production, while the United States only comes in at about 3%. These numbers have shifted a bit since 2013, but here’s that picture.world-uranium-mining-production-2013 Cameco Corporation would be a good way to try and play the market, but they are experiencing a rough patch due to the falling uranium prices. Long-term contracts back the business, so it has somewhat of an economic moat for its profits. Amid these falling prices the company has cut its uranium mining to focus only on their best mines, and the company has reduced its costs of production by more than 20%. Uranium mines may appear expensive, but in reality, they generally only need 35 miners with a low overhead. These miners usually specialize in removing the uranium ore and about 25 other workers assist with the reclamation process to restore the land back to its natural state.

Another interesting fact about these mines is that although radon gas is usually present in them, tobacco smokers are more likely to develop cancer than uranium miners. The controversial health issues with these mines are that they pose risks to local water sources since the byproducts of uranium are still dangerous and are excavated along with the uranium. Companies that mine the metal are required by the Bureau of Land Management to take out reclamation bonds. These bonds are a type of collateral that ensures money will be put toward cleanup efforts after the mining process ends.

Those long-term construction projects that I mentioned earlier carry a degree of risk, because you never know what the future holds. It is unlikely however that the trend in uranium prices will falter. The United States Energy Information Administration projects that nuclear power production will increase more than 70% by 2040. President Donald Trump has recently stated that it would be a good idea for the United States to build back up its nuclear arsenal, and that may have caused the price for the metal to shoot up since the middle of 2016. The ETF URA may be something you might want to look into, here’s the TTM (Trailing Twelve Months).

ura-price-cart

So, if this investment idea is something you might be interested in, be prepared for the plan to take quite a while to give you those explosive returns.


Sources:


Brewer, Reuben Gregg. 2016. Uranium Stocks: What to Watch in 2017. December 28. http://www.fool.com/investing/2016/12/28/uranium-stocks-what-to-watch-in-2017.aspx.


Office of Surface Mining Reclamation and Enforcement. 2017. Reclamation Performance Bonds. January 20. https://www.osmre.gov/resources/bonds.shtm.


Spoon, Marianne. n.d. How Uranium Mining Works. Accessed November 18, 2017. http://science.howstuffworks.com/uranium-mining6.htm.


The Disciplined Investor . 2017. About Those Uranium Stocks… January 18. http://thedisciplinedinvestor.com/blog/2017/01/18/about-those-uranium-stocks/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+thedisciplinedinvestor%2FEBHR+%28The+Disciplined+Investor%29.


World Nuclear Association. 2016. Uranium Mining Overview. http://www.world-nuclear.org/information-library/nuclear-fuel-cycle/mining-of-uranium/uranium-mining-overview.aspx.

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