Uranium prices might be at the end of a decade-long bear market according to famed hedge fund analyst, Michael Alkin.
Uranium has fallen by almost 80% over the last decade. Currently, the uranium spot price is around US$24 a pound. A stark contrast to the US$138 per pound in 2007.
According to Alkin, miners spend around US$25 to US$30 to produce uranium. When considering royalties, exploratory capital expenditure and other costs, the cost of production can reach US$50 to US$60 per pound. Quite clearly, those economics don’t work. If uranium prices don’t rise, there simply wont be any uranium producers.
And according to Alkin, these are just the types of conditions that could see uranium prices triple over the next few years.
1. Supply and Demand – At the peak of the last bull market, there were over 500 uranium miners. Today, there are only around 40 miners. As a result of the crushing decline in the price of uranium, mining and production became unprofitable. KazAtomprom (the largest uranium producing company in the world) has reduced production by 10%, which reduced world supply by 3%. This caused the price of uranium to go from US$20 to US$24. They are also expected to reduce production again this year.
(Source: Haver Analytics, RBC Economic Research, Michael Alkin)
2. Renewal of Long-Term Contracts – According to Alkin, uranium is mainly bought on long-term contracts. This means that many buyers of uranium have been paying prices that they agreed to around 10 years ago. Many buyers rushed to the market at the peak of the last bull market thinking that prices would continue to rise. This was not the case and many of them were stuck in contracts paying higher prices for uranium. Most of these contracts are all set to expire sometime within the next few years. This means that there will be another rush to secure a constant supply of uranium. This will drive the price up and as there is now limited supply the producers will be able to set the prices.
3. Favourable Political Environment – President Obama’s administration was responsible for the overturn of the laws preventing the Department of Energy (DOE) from selling uranium below the market price as well as not being able to sell over 10% of the annual fuel required by domestic power-plants in the US. In May 2014 the DOE began to sell 2,705 metric tons (approx. 6 million pounds) of uranium into the market. This was greater than 10% and at lower prices than the spot price at the time. This meant that uranium was now available cheaper than any miner could produce it for in the US. Placing downward pressure on to the price of uranium and flooding the market.
(Source: A New Bull Market is Dawning, The Stock Catalyst Report, Michael Alkin)
However, these changes in laws may yet again be overturned soon by the US Senate Bill 512. The bill intends to cap the amount of uranium the DOE can sell into the market, placing the new limit at 2100 metric tonnes (approx. 4.6 million pounds). Alkin suspects that Secretary of Energy, Rick Perry, who is a supporter of nuclear energy, may further halt the selling of uranium. Limiting the supply of uranium and allowing miners to gain control over the market again.
4. Increasing Demand – Alkin also explains that nuclear power-plants are being developed all across the world with 60 nuclear power stations currently under construction and expected to open in the next few years. Another 160 reactors are in the planning phase and over 300 more in the proposal phase. Alkin estimates that uranium demand could grow by over 48% by the end of 2030.
Look at the table below!
In addition, Alkin explains that The World Nuclear Association is developing the Harmony Project, an initiative to grow the use of nuclear power to 25% of global electricity production by 2050. If this program is successful, then demand for uranium would increase dramatically.
5. Japan – According to Alkin, a major factor contributing to a downturn in the price of uranium has mostly been caused by Nuclear Meltdowns. The 1970s crash in uranium prices was accompanied by the meltdown at Chernobyl and Three Mile Island. From the 70s through to 2001 the price of uranium bottomed out with a price decrease of 70% at US$8 per pound. From 2001 to 2007 the price soared and reached US$138 but the Global Financial Crisis (GFC) caused a sharp decline. However, shortly after, the price began to recover again as China began buying more uranium for its numerous reactors. The price made a brief recovery, reaching approximately US$70 per pound before 2011, when yet again another nuclear disaster happened, this time a Fukushima, Japan.
After the disaster, Japan took all its 54 nuclear power plants offline causing 13% of the world’s demand for uranium to disappear. This led to the price of uranium plummeting and officially ended the bull market.
However, recently Japan has given approval for 5 of the power-plants to restart and applications for 21 other reactors to restart are being reviewed by Japan’s Nuclear Regulation Authority. If Japan puts the stations back online in an already limited market it could cause an extremely significant increase in the price of uranium.
At UGC, we too have been seeing the same dynamics unfold in the uranium market as Michael Alkin. While we are not ALL IN at this stage, over the past 12 months we have been recommending clients gradually build a position in a small uranium company with a very large high-grade uranium deposit, with a number of other high-quality uranium companies on our watch list. Should we begin to see further evidence of price strength, we’ll be ready to add new positions quickly.
If you are looking to invest and would like to know which stocks we’re buying that have huge upside potential, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email firstname.lastname@example.org to learn about our Quality, Value, Trend (QVT) investment selection methodology.
The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs. When assessing any investment you should also consider that past performance is not a reliable indicator of future performance.
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Joel is the founder and CEO of UGC.
He is a licensed financial advisor with 15 years experience assisting clients grow, manage and protect their wealth.