Discernable Trends: Uranium Heats Up

Posted by Eric Fry: Agora Editorial Director

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Discernable Trends in Uranium Despite Market Volatility


We aren’t talking about Rice Krispies, dear investor; we’re talking about the sound effects of global macroeconomic trends. During the last few days, Ireland’s credit-worthiness snapped, after which the floor underneath the sovereign bond markets seemed to crackle. And lastly, North Korea’s deadly target practice on the South Korean island of Yeonpyeong caused a “Boom!” heard ’round the world.

Not surprisingly, the stock markets around the world are also crackling a bit, but not as much as one might expect. It’s true that the Dow tumbled 142 points yesterday and 25 points the day before that. But it’s also true that this two-day selloff arrived just after last Thursday’s 174-point rally and just before this morning’s 134-point advance. In other words, there’s a lot of volatility, but no discernible trend.

Nevertheless, a handful of discernible trends continue to unfold, notwithstanding the frightening headlines about explosive geopolitical tensions and implosive sovereign debt markets. The uranium price, for example, continues its dogged advance, even while most other commodities are succumbing to a “correctional phase.”


As such, one of the most fascinating headlines coming out of Asia this morning had nothing to do with the Koreas of North and South; it had to do with China’s voracious appetite for uranium.

As Bloomberg news reports, “Cameco Corp., the world’s second-largest uranium producer, agreed to supply the fuel to China Guangdong Nuclear Power Holding Co. through 2025 to meet rising demand in the world’s fastest-growing nuclear market. Cameco plans to sell 29 million pounds of uranium… That’s equivalent to about 13,000 metric tons.

“China and India are leading the biggest atomic expansion since the decade after the 1970s oil crisis to cut pollution and power economies,” Bloomberg continues. “Chinese uranium demand may rise to 20,000 tons annually by 2020, more than a third of the 50,572 tons mined globally last year, according to the World Nuclear Association…[Guangdong Nuclear], the country’s largest reactor operator after China National Nuclear Corp. is building about 17 gigawatts of reactors, and by 2020, expects to have more than 50 gigawatts in operation, according to Cameco.”

This long-term contract between Guangdong and Cameco should come as no great surprise to constant readers of The Daily Reckoning…or even to occasional readers of The Wall Street Journal. The November 9, 2010 edition of The Daily Reckoning, “Uranium – Our ‘Trade of the Decade’ Heats Up!” reiterated the (very) bullish case for this radioactive energy source.

On the same day, The Wall Street Journal ran the following headline: “Traders Go Nuclear on China Uranium Reports.” In the story that followed, the Journal noted, “Forecasts of stronger uranium demand in China have spurred bullish nuclear-sector options trading to its highest pitch all year… USEC (USU) options, for example, were seeing robust interest. Volume in the company’s bullish contracts hit its highest point in 14 months…”

Whether or not such short-term bets pay off, long-term bullish bets on uranium and uranium stocks are becoming more compelling by the moment. A global “uranium rush” is already underway, but very few investors seem to notice or care.

“According to the International Atomic Energy Agency, world demand for uranium was 135.8 million pounds in 2009,” observes Matt Badiali, our colleague over at the S&A Resource Report. “That will likely rise to 201.1 million pounds by 2020. To meet that demand, we’d need to almost double the amount of uranium mined worldwide in just 10 years.

“That’s a tall order,” Badiali continues. “So nuclear power companies and uranium miners alike are jostling for control of existing supply. The Russian state-owned nuclear group, Rosatom, recently bought 17% of Canadian uranium miner Uranium One. The deal gives Rosatom the right to purchase up to 20% of Uranium One’s global uranium production. In a similar move to grab future production, Korea Electric Power (KEPCO) agreed to buy 20% of junior uranium company Denison Mines’ production…

“Also, China National Nuclear Corporation, which oversees China’s nuclear industry, recently announced an agreement with French uranium miner AREVA to buy 440 million pounds of uranium over the next 10 years for $3.5 billion. That’s $79.55 per pound…a 34% premium to the current price of uranium.

“Nuclear power companies can afford to pay those kinds of premiums to lock in fuel supplies,” Badiali winds up, “because the cost of fuel makes up less than 4% of the cost to generate electricity. That means power companies are not all that ‘price sensitive.’ It won’t make much difference to them if they pay $60 a pound or $150.”

These dynamics should intrigue forward-looking investors. As the uranium land-grab continues – and an increasing percentage of the world’s uranium supply is “spoken for” – the uranium price should continue its upward trajectory.

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant’s Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant’s International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling.