Description

Uranium Participation Corporation  (U.CA)                                           March 17, 2013

Investment Thesis:       Buy uranium!     Ticker (U) Price is $5.40 Canadian dollars
A global shortage of uranium by 2014 is going to cause uranium spot prices to rise over 100% in the next 18 months. In the next year there is going to be a  dramatic  reduction in supply that represents 15% to 23% of the worldwide uranium market. 

In many commodity markets a mere shift in supply and demand by 2% can cause commodity prices to sky rocket or plummet. For uranium there is a high degree of confidence that the bullish scenario will take place over the next two years.

In order to benefit from this scenario, I am recommending purchase of Uranium Participation Corporation. This investment holding company invests nearly all its assets in physical uranium. The ticker symbol is “U” and  the security trades in Toronto. As uranium spot prices rise by 2014 the price of “U” should have nearly a 1 for 1 correlation with uranium spot prices.  Unfortunately, I could not insert a  chart on the VIC web-site depicting this close correlation.

A Quick History of Uranium Prices:

Nuclear power plants are the only source of demand for uranium with a minuscule amount being used for the construction of nuclear weapons.  Most nuclear power plants operate for over 20 years and must purchase uranium as a fuel source for the nuclear reactors.  There is no substitute fuel source for these nuclear reactors.

Uranium spot prices peaked at $136/pound in June 2007, and are at a depressed $42/pound in March 2013. (Source: Ux Consulting)

At the beginning of March 2011 uranium prices were $70/pound when supply and demand were in relative balance.

On March 11, 2011 Japan was the victim of an earthquake that caused the meltdown of 3 Fukushima nuclear reactors.   The fear among the Japanese public caused the government to shut down 50 nuclear reactors in the country, which represented 12% of the world’s nuclear plant capacity.

The threat of a long-term reduction in demand for uranium resulted in the spot price of uranium declining by (40%) over the next two years to $42/lb.   Numerous governments including Japan and Germany pledged to close down all their remaining nuclear power plants as soon as possible.

On December 16, 2012 the outlook for uranium prices improved overnight.

In Japan a pro nuclear power political party won the national elections.  The (LDP) Liberal Democratic Party under the leadership of Shinzo Abe won the elections by a landslide.  They believe that nuclear power is a safe source of electricity and support reactivating  all the Japanese reactors that are considered safe. Over the next 3 years there is the potential for all  50 reactors to be restarted.  This would result in Japan needing to purchase 19 million pounds of uranium a year to operate the plants.

In December 2013 the outlook for uranium prices will improve again even more dramatically.

In 1993 as part of a disarmament agreement to end the Cold War, Russia agreed to convert uranium from 20,000 highly enriched nuclear warheads into low enriched uranium fuel for the next 20 years. This agreement ends in 2013.  This Megatons to Megawatts Program  resulted in Russia  supplying 24 million pounds of uranium annually  to the USA which is equivalent to 15% of global uranium demand of 155 million pounds. The Russian government has clearly stated that when the 20 year agreement ends in 2013, they will no longer be exporting uranium.  As a result the global supply and demand for uranium by early 2014 will be radically altered. There will be a shortage of uranium that causes spot prices to rise materially.

In April 2013, the Russian government will be acquiring 100% of Uranium-One, a producer of 12 million pounds of uranium annually (7% of global supply) in Kazakhstan.  These mines in Kazakhstan are unique compared to other uranium mines in the world. They have no long term contractual obligations to sell uranium.  Thus the new Russian owners can decide to act like the OPEC cartel and refuse to sell the annual production of uranium until spot prices rise to much higher levels.

Below is a table that shows how the global supply and demand of uranium will change from 2012 to 2014. The table has been simplified.  You should see that annual demand for uranium from nuclear plants (155M) has exceeded annual production of uranium (132M) for years. A shortage was prevented by the annual supply of 24 million pounds of uranium from Russia as they decommissioned their nuclear arsenal.

                                                                                                    Percent

2012                          Supply                                               2014  Change

132 mil pounds   produced from mines                                   132       

24 mil lbs Russian supply from warhead conversion                  0          ZERO supplied

156 mil lbs total supply  of uranium by year                     132        (15%) decline in supply

2012                          Demand                                            2014  Change                  

155 million pounds consumed annually                                   155       

Subtract demand from supply to arrive at the surplus or shortage below:

2012                                                                                      2014

  1 million lb Surplus                                           Shortage (23) million pounds         

In the next 2 years there is going to be a 24 million pound change in the balance of supply and demand of uranium.  If you add the 12 million pounds of Russian controlled production from Kazakhstan, now 23% of the world’s supply will be taken off the market.  

There is no way that uranium production is going to rise to prevent this shortage.

Numerous uranium miners have stated that uranium prices need to be at $80/pound to justify the construction of a new mine. That is a 90% price premium to the $42/lb spot price today.

Russia is not interested in converting more warheads into nuclear fuel since they lose money in the process. It is estimated that it costs the Russians about $60/lb to convert a nuclear warhead into uranium for commercial use.

For now the global uranium surplus persists while Japan’s nuclear power industry is shut down. Nevertheless there is a strong likelihood that uranium prices will begin to rise in 2013 ahead of the shortage. Smart electric utilities see that uranium prices are going to rise and  will add to their uranium stockpiles while prices are low. China is planning to build 42 new nuclear reactors by 2020. They are already stockpiling uranium and could accelerate their purchases. Finally investors will be a source of new demand as they buy physical uranium ahead of the price increases. The uranium market is a small marketplace with only $6.5 Billion spent annually on uranium purchases (155 million pounds at $42/lb).

Summary:

Estimating the price of uranium in 2014 during a shortage clearly involves guesswork.  What we know is that at $42/pound many uranium mines are losing money and reducing production. In March 2011 uranium prices were at $70/pound before the current surplus was created by the shutdown of the Japanese nuclear power industry. Prices for uranium are going to rise far above $70/lb since the Russians are going to create a global shortage in 2014. Electric utilities have to use uranium to operate their nuclear reactors. They are going to bid against each other for the reduced supply of uranium that is available. Thus there appears to be plenty of upside for uranium prices.

The downside case relates to your time horizon.  There is a uranium surplus today.  Spot prices may fall further if electric utilities, China and investors do not buy in 2013 ahead of the dramatic reduction in supply that begins January 1, 2014.

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