The uranium spot price added another US$2 per lb. on Friday to reach US$39, marking a 40% gain in three months.
In those same three months, uranium equities are down more than 20%.
The gap grew because, while Fukushima continues to loom over the sector, uranium remains part logic, part emotion.
On the logic front, upward pressure is building.
Uranium is transacted in two markets – spot and contract – and a quiet contract market takes the legs out from under the spot. And contracts have been very quiet: in 2013 reported contract volumes totaled just 20 million lbs., compared to 191 Mlb. in 2012. With prices low and supplies available, utilities simply stepped away.
Contract volumes are already better this year, with 70 Mlbs. changing hands, and volumes will likely keep climbing as utilities look to seal in access to cheap uranium. Indeed, I keep hearing that nuclear utilities are in the market looking for supply.
Why now? Because the cure for low prices is low prices. Four years of declining prices have the uranium market at a bottom, which means (1) prices will go up from here and (2) supply reductions, implemented because many mines can't make money at today's prices, are hitting home.
For the first time in many years, Kazakhstani production dropped year-over-year in the third quarter. American in-situ producers have been cutting back on output. Some of the biggest mines in the world – Olympic Dam, Rossing, and Ranger – are producing less.
Adding to this, the Chinese just signed a long-term contract with Uzbekistan and a deal to buy 25% of the output from Paladin's Langer Heinrich mine. Both of those deals remove spot supply.
Less spot supply + increased contract activity = higher uranium prices.
That's the logic. Equally important is the emotion – and Friday brought a bit of emotionally important news.
In Japan, the local city assembly voted to restart two reactors at the Sendai nuclear power plant. These are the only two reactors in the country that have passed the Nuclear Regulatory Agency's stringent new safety standards. Restarts were still contingent on local approval – which was not guaranteed. But it happened.
It will still take months. Sendai reactors 1 and 2 have to pass more safety checks and get greenlighted by prefecture officials.
But they will restart, paving the way for other Japanese reactor restarts.
That really matters,
Japan's return to nuclear is the embodiment of most people's feelings toward nuclear energy: scary but necessary. Personally, I find coal mining and particulate-emitting coal-fired power scarier, but I realize I am in the minority.
What matters to broad public opinion is the realization that if Japan – an educated and advanced society that just endured a terrible nuclear accident – is returning to nuclear, then nuclear really is the best energy option on the table.
And it is.
Like hydro dams and coal-fired plants, nuclear generators produce constant power at a low and reliable price per joule. These base load generators provide our basic power needs, some thing that peak power generators like natural gas, wind, and solar cannot.
That is one characteristic that makes nuclear so needed. Another is environmental. Dr. Patrick Moore, co-founder of Greenpeace and author of Confessions of a Greenpeace Dropout: The Making of a Sensible Environmentalist (a fantastic book), describes nuclear energy as "our most important source of clean power" and "one of the safest technologies we have invented."
If we want to cut back on fossil fuel consumption – for whatever reason, be it political, environmental, economic, or geologic – and still safely produce enough power to supply the world's growing needs, nuclear energy is the only way to do so.
China gets it, which is why China has 27 nuclear plants under construction, with 60 more planned and another 120 proposed. That is a huge ramp up: the country only has 21 in operation right now.
China ain't alone. India is building 6, South Korea is building 5, Russia is working on 10. Each of those countries has another three of four times that many planned and proposed.
Around the world there are 71 reactors under construction, 170 planned, and 301 proposed. That compares with 436 reactors currently operating. Uranium demand will rise with the number of new reactors. Plus, when you turn on a new reactor you have to pack it with fuel, stuffing in three times its usual annual requirement.
In short: the world is going to need a lot of uranium, in the medium term and in the long term. Cameco, the world's biggest publicly traded uranium company, forecasts annual demand will increase by 40% over the next 10 years.
This is not a new prediction.
Before Fukushima, uranium analysts saw the ramp up of reactor builds and predicted years of strong uranium fundamentals. The disaster in Japan changed everything. Nations around the world delayed new builds and Japan turned its fleet off – just as several big uranium mines were nearing production.
As a result the world has been awash in uranium for several years. Last year spot demand totaled 172 Mlbs., compared to 207 Mlbs. of supply.
Now that overhang is drying up, as curtailments, contracts, and some stockpiling eat into spot supply – just as four years of low prices finally start to cure themselves.There is a long uranium rally ahead. It will happen in fits and starts. The first rally is here: the spot price is up 40% in three months. But opportunity still abounds because equities are way behind on the upswing.
So what to buy? The best near-term developers and producers, plus a few exceptional explorers.
I have a list. Some I have already purchased; others I will buy soon. Some I expect to sell in a few months, when the initial rally subsides. Others I will hold for the long term.
It has been a long wait, but uranium has returned. There's a bull market coming. In the coming Resource Maven: Turning Point Special Report on market bottom opportunities, I lay out my uranium portfolio – what I am buying, when I expect to sell, and why.
If you want to learn how to ride this resurgent sector, subscribe now.
To learn how to turn resource knowledge into investment success: subscribe to Resource Maven: The Turning Point.
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