Uranium Supply in Question

As everyone gushes about America’s newfound abundance of oil and natural gas, another energy dilemma has slipped our collective minds.

I mentioned it as a possibility several months ago.

Now, with more information coming to light daily, it’s looking more and more like a uranium supply crunch is going to be a reality.

Consider this: In 2010, the world needed about 65,000 tonnes of uranium to power its 433 operating reactors. But globally, only 53,663 tonnes were mined in 2010.

So where’d the remaining 11,337 tonnes of uranium come from?

A tiny bit of it came from commercial reprocessing in France.

But the bulk of it — 10,600 tonnes — came from weapons repurposing via an agreement between the United States and Russia. The warheads you were supposed to hide under your desk from are now powering the same cities they were once meant to destroy.

The Russians have already announced they are withdrawing from the program, called Megatons to Megawatts, at the end of 2013.

When that happens, the world will instantly lose over 10,000 tonnes of uranium supply per year… and the amount mined won’t be enough to cover the amount needed.

In other words, there’s a high probability the world will face a uranium supply shortfall by 2014.

And given that we’re less than three weeks away from 2012, the time to start considering this investment scenario is now.

So What’s the Scenario?

There are 433 working reactors already in existence, 62 under construction, 156 planned, and 343 proposed. “Planned” means they’ll be operable in 8-10 years; “proposed” means operation within 15 years. (Click here for a full list.)

And even with Germany planning to decommission its nine remaining reactors by 2022, there will still be net 93 new reactors by the end of this decade.

China alone — with 26 reactors under construction — will offset the German loss nearly three times over.

Tim Gitzel, CEO of Cameco (NYSE: CCJ), the largest uranium producer in the world, took to the airwaves this week to help explain the looming threat to uranium supply, saying on Bloomberg TV:

“The game these days, the growth game at least, is over in Asia. And that’s a change for everyone. China has not blinked an eye. They have today 14 reactors in operation, 26 under construction, and then another 20 in addition to that, planned by 2020. That’s growth we haven’t seen, oh boy, since the 1970s.”

It isn’t hard to see the growing supply gap, which will only be worsened after we stop repurposing warheads…

Ways to Play

As is the case with oil, uranium majors are keen on buying up easy access to supply.

Just a few weeks ago, Rio Tinto (NYSE: RIO) successfully bid $654 million to take over Hathor Exploration (TSX: HAT) and its 57.94 million pounds of uranium oxide reserves in the Athabasca region. Cameco unsuccessfully bid for the same acquisition.

Here’s how Hathor’s stock responded to the buyout:

But there are plenty more acquisition targets and producing projects available.

When it comes to uranium miners, companies are typically categorized one of five ways:

1. Exploration

2. Pre-feasibility

3. Feasibility

4. Development

5. Production

As you might guess, there are many more explorers than producers.

I list for you here those in the production and development stages, as well as their resources and reserves:

It’s worth noting that Paladin has already been a target of interest for Cameco.

It’s also worth noting that there are dozens of companies in more nascent stages of the uranium mine life cycle and, depending on where they are and the political and regulatory regime in place, these could be buyout targets as well.

Talvivaara Mining (LSE: TALV), for example, is a major nickel producer in Finland. But they also produce uranium in good amounts simply as a byproduct of their day-to-day operations.

So Cameco decided to invest $60 million to add a uranium extraction facility to Talvivaara’s mine. Talvivaara will repay the $60 million with uranium, and then Cameco will buy any remaining uranium at market prices. The project is expected to yield 770,000 pounds of uranium annually.

I seriously believe uranium is in for staunch appreciation over the next few years. And I’m getting my ducks in a row.

Call it like you see it,

Nick Hodge
Editor, Energy and Capital