 Uranium:
The Other Yellow Metal
Doug Casey
The International Speculator
September 1, 2004
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.
August 31, 2004
Doug Casey
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.
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