N-Rich Your Portfolio

Can there be a more promising market than uranium? The price of yellowcake has tripled in the past three years and looks like topping $US40 a pound any week. Hedge funds are no doubt adding to the surge, but the fundamentals could hardly be better: a dozen countries are reviewing previous opposition to nuclear energy, and more are either planning first-time reactors or adding more. China is taking the lead with plans to build two reactors a year for 15 years.

There is also a broader energy crisis brewing. Supply of oil and gas is in many places restrained by lack of refining or delivery capacity, while a decade of inadequate oil discovery, painfully expensive drilling costs, sharp uplifts in royalties (eg, Libya and Bolivia) and potential supply interruptions (eg, Nigeria) are all adding to the general stress.

This makes energy security even more of an issue. European leaders were shocked when Russia turned off the gas tap to Ukraine for a few hours to give its energy minister a clearer idea of where he stood in price negotiations. As Britain’s self-sufficiency turns to rapidly rising dependence on Russian gas, it is no surprise that policy makers are suddenly growing more attached to the nuclear option. Add Europe’s awareness of the impact of global warming (evidenced by Greenland’s ice cap moving and Alpine glaciers retreating rapidly) and there seems to be only one solution: enriched uranium.

Australian miners and most explorers have responded with predictable vigour, none more so than Paladin Resources. Its share price has risen more than 20-fold in just three years and recently topped out at $3. ERA, the leader here and one of the uranium stocks any international fund must own, is up 100%. Summit’s Australian deposits have driven it up seven-fold, but it is still to get mining approval. The more junior, the more mixed the story gets.

Why these doubts when the story is so powerful? The answer seems to be that the nuclear industry is complex-to-baffling and all the harder to comprehend from Australia, where we have no nuclear industry, or at least merely a restricted version of its lower-value front end: the mining of uranium oxide.

In September last year, the World Nuclear Association’s report on supply and demand seemed satisfied that between existing and new mine supply and supply from these secondary sources, the uranium market would be roughly (perhaps very roughly) in balance until the Soviet stockpiles ran out or at least until the agreement came up for renegotiation in 2012. Russia may decide to hold back some of its supply for its own use.

This suggests price tension, even soaring prices in coming years, but at the technical level there is another twist. First, demand for uranium doesn’t rise in sync with rising power demand because reactors have been steadily becoming more efficient. Many first and second-generation light water reactors have been modified and use considerably less uranium per unit of energy produced than they did 30 or 40 years ago. If the uranium price rises to exceptionally high levels, there will be a strong incentive for all government's to accelerate the examination of all new uranium technologies.

Enrichment, too, is about to change. At the offices of JP Morgan in Sydney last Wednesday February 1 the management of Silex Systems issued a wide ranging update of its progress on new uranium technology; the stock jumped 17% the following day (It opened this week at $2.70). Sometime this quarter, Silex Systems will release news of commercial arrangements concerning the laser process it has been developing for the past decade, which promises to not only reduce the enrichment cost, but reduce the amount of uranium required per unit of power produced. One or more large US nuclear engineers will be selected as licensing and development partner. Although the final cost of power correlates little with the raw uranium price, a savings in enrichment will alter the market and perhaps mildly dampen demand.

This is not to say that the yellowcake market is about to slump; that’s unlikely as these transforming technologies will not arrive in a hurry, even assuming a political will to act while there is time. That will also seems muted as the recent Sydney conference of non-Kyoto signers showed. Nuclear seemed to barely rate a mention The way forward was declared to be coal but with carbon dioxide sequestration, an unproven technology but the favoured option discussed.

Richard Campbell is a broker with Bell Potter Securities, he and his associates have interests in Silex Systems.