In December 1951, an experimental nuclear reactor in Idaho managed to generate enough electricity to light four 200-watt light bulbs.

Nuclear power became a reality.

In the 50-plus years since that first test, nuclear power has grown into a key global source of electricity. Worldwide, there are about 438 commercial nuclear reactors in operation, supplying 16 percent of total global electricity demand. Nuclear power is even more important in the US, where 104 reactors produce about 20 percent of the nation's power.

And still more reliant on nuclear power are several European countries, including France, Germany, Britain and Sweden. In fact, France generates nearly 80 percent of its electricity using nuclear power.

Despite these successes nuclear power has been a controversial technology at times. Early promoters suggested that reactors would offer power "too cheap to meter." Apparently, large American utility companies agreed; several hundred plants were commissioned between 1950 and 1974.

But construction of plants proved expensive due to regulatory delays, failure to adopt a single standard design for plants and opposition from anti-nuclear groups. In the end, less than half of the plants commissioned were built. And high-profile nuclear accidents like Chernobyl in Russia and Three Mile Island in the US served to tarnish nuclear power's image still further.

The end result: No US utility has applied for a new nuclear plant construction permit since the 1979 Three Mile Island accident. And by the mid 1980s some were already calling nuclear power a failed experiment.

But nuclear power is far from dead. Fast-growing nations like China and India are planning to make nuclear power a centerpiece of their respective national electricity policies--these nations are already building new reactors and experimenting with advanced reactor designs.

And high natural gas prices coupled with the negative environmental impact of coal-fired plants has put the nuclear option back on the table in the US. Some major US utilities are expanding existing facilities and/or considering the construction of new plants.

The fact is that nuclear energy is a cheap and environmentally friendly way of producing energy. And nuclear plants can also reduce dependence on foreign supplies of oil and gas.

Present and Future

The world is rapidly recognizing the myriad advantages of nuclear energy. As a result, far from being a sunset industry, the nuclear industry is entering a period of global growth. This growth is putting a strain onthe world's available uranium production capacity.

In 2003 the world's 438 nuclear reactors consumed about 180 million pounds of natural uranium. But only a little more than 50 percent of this uranium was actually mined in 2003; total mining production in 2003 was just 92 million pounds.

That 88 million pound shortfall has been met from a number of different sources. Utilities themselves hold some inventories of uranium for use in their own plants; over the past few years these inventories have been drawn down on average by about 30 million to 40 million pounds per year. Another 20 million pounds or so came from de-commissioned Russian nuclear warheads. The final chunk likely came from inventories held by Usec (NYSE: USU)--the U.S. government gave Usec 70 million pounds of uranium when it went public in 1997.

But this situation is unsustainable even if uranium demand remains constant for the foreseeable future. Utilities' available inventories are already running low--some estimate that commercial inventories of uranium are less than 10 percent of what they were in the mid-1980s.

Meanwhile, Usec has been a major net seller of uranium since going public in 1997 so the company's stocks are also rapidly depleting.

That fact is that, even assuming uranium demand remains constant at about 180 million pounds annually, uranium mining activity must pick up to meet demand. According to Cameco, some prominent utility companies have already expressed interest in procuring additional supply to keep their existing nuclear plants running over the next few years. These utilities are signing longer-term supply agreements at much higher prices.

The spot market for uranium--the market for immediate delivery of yellowcake--only accounts for roughly 12 percent of total supply.

Most utilities sign longer-term supply agreements to ensure that there's plenty of uranium on hand to run their plants. Nevertheless, uranium spot prices recently touched nearly $30 per pound, up from less than $8 per pound in 2001. These spot prices indicate the pricing power uranium mining companies have been seeing over the past few years.

Current production is insufficient to meet demand even if consumption of uranium doesn't increase. The reality of the uranium markets is that consumption is likely to grow, not to remain stagnant.

The industrialized world will certainly see a jump in demand for electricity over the next 20 years--consumption is projected to jump about 42 percent between 2001 and 2025. But growth in the industrialized world pales in comparison to what's expected in the developing world.

Developing nations are projected to see electricity demand jump over 125 percent in the same period. In fact, by 2025 the developing world will consume nearly as much electricity as the industrialized world. This growth should come as little surprise given the rapid economic expansion currently underway in countries like China and India.

These developing countries know well that fossil fuels are not the best answer to this problem. China is already struggling to nail down supplies of oil, coal and natural gas--the country's massive effort to import these basic commodities is at least partly behind the aggressive jumps in pricing witnessed over the past two years.
If China relies solely on conventional fossil fuels for power, rapidly rising electricity prices would become a huge impediment to future growth.

Coal currently accounts for roughly 70 percent of China's electricity supply. But the nation has increasingly encountered trouble with pollution in its major cities. A World Health Organization (WHO) report detailed the world's 10 most polluted cities--seven of those 10 are located in China. And the WHO estimates that corrosive acid rain now falls on nearly a third of China's land area. The main culprit in all this pollution: coal-fired plants.

But nuclear power offers a way to avoid both high electricity prices and pollution. China and India are already rapidly embracing the technology with ambitious programs to expand nuclear generation capacity. In 2004, China had nine nuclear reactors with roughly 7,000 megawatts of generation capacity. By the end of 2005, the nation will start up two new reactors, adding about 2,500 megawatts to its nuclear generation capacity.

But that's just the beginning. Beijing has also announced plans to build as many as 40 new reactors between now and 2020 to bring its total generation capacity to roughly 40,000 megawatts. That's a quadrupling of the nation's current capacity, at a pace of two or more new reactors every year between now and 2020.

India, like China, is an aggressive developer of nuclear capacity. India currently has 14 reactors and plans to add another eight reactors between now and 2010, more than doubling current capacity. Taiwan and South Korea are also planning to add new reactors over the next few years.

Nuclear in the Developed World

There's also likely to be considerable growth in capacity in the developed world. The Japanese government has made it clear that the only way the nation can meet its environmental obligations under the Kyoto Protocol is to expand nuclear generation capacity. While there have been some construction delays, Japan plans to build 11 more reactors by 2010.

Europe is already more reliant than the US on nuclear power. France gets nearly 80 percent of its electricity from nuclear power and the French government is committed to continuing its nuclear program.
The ruling party in Germany, in contrast, has tended to be anti- nuclear and has committed to phasing out capacity over the next three decades.

But it's unclear how Germany will make up for the loss of its nuclear power (30 percent of electricity supply). Germany could, like many European countries, make up for its lost nuclear capacity by stepping up electricity imports from its neighbor--namely, nuclear-friendly France. This would hardly represent a phase-out of nuclear power.

The big wildcard for the developed world is, however, the US and its 104 nuclear reactors. The only firm plans for expanding nuclear energy in the US is for marginal capacity additions to existing plants and the re-starting of currently idled reactors. The EIA, for example, projects no new reactor construction in the US between now and 2025; the EIA is looking for annualized growth in nuclear electricity generation in the US of just 0.2 percent.

But this view may well prove conservative. The Department of Energy has initiated several programs to encourage the building of new nuclear power plants and President Bush has repeatedly mentioned the importance of nuclear energy to US energy supply. A more streamlined regulatory approval process has been developed.

Several utilities have already filed for early design approval. None of this means that we'll see major new plant construction in the US, but it suggests a strong possibility that new plants will be built in the US over the next 20 years.

How to Play It

Only a handful of companies have commercially recoverable reserves of uranium. Canada possesses the world's largest reserves of high-grade uranium; its richest reserves are found in Saskatchewan's Athabasca Basin.

Uranium prices are already on the rise with spot prices up 43 percent in 2004 alone. As you might expect, there has been an explosion in highly speculative uranium mining companies, mainly listed on the Canadian exchanges. Some of these smaller, speculative plays may well be worthwhile; I'll profile some in an upcoming issue. For now, however, I prefer to focus on well-established producing companies with known reserves.

Sitting on some of the largest reserves in the region, Cameco (NYSE:CCJ) controls about 65 percent of the world's total known reserves of natural uranium. Cameco produced 20.7 million pounds of uranium in 2004, more than 20 percent of the total quantity or uranium mined worldwide last year. For 2005, the company has targeted production of more than 21 million pounds as it expands capacity at its core mines in the Athabasca Basin.

Cameco has the potential to drastically expand production over the next five years. The company plans to continue ramping up production capacity at its Cigar Lake mine to a peak production level of nearly
19 million pounds annually. And Cameco is aggressively expanding into Kazakhstan, a country with large reserves of uranium.

Cameco's Inkai mine in Kazakhstan could be a huge asset in future years; the company plans to start production there by the end of 2005. All told, the management team projects total production growth of approximately 40 percent by the end of this decade. Already, Cameco has committed to doubling capital spending in 2005 against 2004 levels--all that investment should help fund these expansions.

According to Cameco's management, a few years ago utility companies were signing long-term uranium supply contracts at prices either in-line with or at a discount to spot prices. In other words, uranium mining companies were desperate to secure a market for their metal; that's why they were willing to sign contracts at discount prices.

But recently, the tables have turned. Cameco has been selling as much as half of its production under long-term supply agreements. These agreements are being struck at $4 to $5 premiums to the spot price of uranium. The reason is simple: Utility companies are willing to pay up to secure long-term supplies.

Cameco has suggested that 2008 will be a pivotal year. Up to 2008, it seems that most utilities have some inventories or longer-term supply arrangements to cover immediate uranium requirements. After 2008, however, these companies will be uncovered and will need to scramble to secure adequate supplies.

Cameco is enjoying strong pricing in both the spot market and for longer-term contracts. It's also one of only a few companies with the capacity to expand production meaningfully over the next five years.

My second play involving the uranium business is far smaller than Cameco and is poised to explode to the upside. This secret gem has partnered with a giant French government controlled company on several uranium exploration projects.

This is one of the few times in the history of US markets when average ordinary investors may reap a windfall approaching that of the old Robber Barons. Grab onto the uranium boom and ride the wave to untold wealth.

© 2006 Elliott H. Gue
Editorial Archive

KCI Communications, Inc.
1750 Old Meadow Road, Suite 301
McLean, VA 22101
703-394-4931 phone  703-905-8100 fax  email