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How U can profit from uranium

FEATURE: The world needs nuclear power and the post-quake uranium crash provides a buying opportunity.

The disaster at Japan's Fukushima nuclear plant sent the price of uranium (the source element for nuclear power) and shares in uranium miners crashing over concerns that governments would delay or suspend their nuclear programmes. Yet, despite the uproar, material delays to nuclear programmes are unlikely – for the simple reason that the world needs nuclear power.

According the World Energy Council (WEC), a government policy adviser: "Nuclear power is back on the agenda of many countries, essentially for three reasons: predictable and stable long-term generating costs, energy security, and its climatechange mitigation benefits."

None of this has changed following Fukushima. As WEC chairman Pierre Gadonneix said in a letter to members: "It is not a simple answer of just switching off the nuclear power supply... We recognise that all sources of energy come with a certain level of inherent risk. Be it coal mining, oil drilling, unconventional gas extraction, or dams, our efforts must now be combined to enhance safety and the protection of our environment."

Projections by the International Energy Agency (IEA), another policy advisory group, show electricity production from nuclear power climbing from 2,731 terawatt hours (tWh) in 2008 to 4,900 tWh in 2035. China alone accounts for 40 per cent of this growth, while many other regions, including the European Union, India, Russia, South Korea and the US, are actively investing in nuclear technology or have policies that support nuclear power.

The acceptance that nuclear is unavoidable is reflected in the uranium price. The price of uranium (U3O8) topped $71 per pound just before the Fukushima incident, but then collapsed to $48, according to John Wong, portfolio manager at New City Investment Managers. Although the spot price has since recovered to $59 a pound, Mr Wong points out that the spot market in uranium is tiny and that most uranium is traded on long-term contracts, for which the price has barely moved from its preaccident level of around $72 per pound.

Other nuclear options

There are several other ways to play the possible resurgence of nuclear power other than buying uranium miners. One option is an ETF Securities exchange traded fund that tracks the WNA World Nuclear Index and has the imaginative ticker NUKE.

The World Nuclear Index contains 65 companies around the world involved with nuclear energy, including utilities, fuel suppliers and technology groups. The ETF trades on the London Stock Exchange but is priced in dollars. The annual management fee is 0.65 per cent. Most big players in nuclear technology are US-based, but in the UK, Amec has a degree of exposure to nuclear energy. British Energy, which owns the UK's nuclear stations, is now part of France's EDF.

It could yet rise much higher. According to the World Nuclear Association, mined uranium supply in the west has lagged demand since the 1980s. Decommissioned nuclear warheads have filled the shortfall so far, but it's uncertain whether they can continue to do so.

Global supply looked tight even before factoring in expected growth in Chinese demand. The staterun China Daily reported on 5 April a statement by Beijing's chief climate negotiator, Xie Zhenhua, that China will adjust its nuclear programme to increase safety in the wake of Fukushima, but that "overall goals will stay unchanged".

These goals are considerable. The same source recently quoted Zhang Guobao, former director of the Chinese National Energy Administration, as stating that China will approve another 10 nuclear power projects during the 12th five-year plan (2011-2015). China is already believed to have more than 25 nuclear plants under construction, with more due to start construction soon. It aims to generate 5 per cent of its power (currently only 2 per cent) from nuclear by 2020.

This growth in new stations will exacerbate supply tightness, since new nuclear plants require three times their ongoing requirement of uranium when initially firing up.

And the stockpiling has already begun ahead of this expansion. China imported 39m pounds of uranium last year, up some threefold from 2009, according to research by Macquarie Bank. This buying has "removed unprecedented amounts of future supply", according to Macquarie analysts. They calculate a resulting deficit of 17 per cent in 2010, with supply to US and European utilities uncertain beyond 2012.

With the deal to decommission nuclear warheads coming to an end, few new mines on the horizon (and delays to existing projects, such as Cigar Lake), and some analysts believing that 'peak uranium' was passed as far back as 1980, the uranium price could be set to soar again.

This is positive for uranium miners and also provides investors with one of the best buying opportunities since the global financial crisis. Despite the widespread consensus that nuclear programmes are likely to be delayed in the short term while safety standards are tightened, they won’t suffer material setbacks, and shares in uranium miners around the world remain significantly below pre-quake levels.

There are some funds that offer exposure to the nuclear industry, but our favourite way to play the story is Kalahari Minerals. Its shares topped 300p just before the accident and plummeted to 209p days later. Yet a recent feasibility report confirms that the Husab uranium project, in which Kalahari holds a 43 per cent interest, has the potential to develop into one of the world's three largest uranium mines. Kalahari's shares remain a buy at 243p.