Uranium plays

With the recent sell off in the uranium markets I thought it was a good opportunity to jot my thoughts and findings down. I found out a lot of interesting tidbits, notably that 1kg of U235 produces the same amount of energy as 17,000kg of coal. Therefore 75000 kg of uranium are required yearly for a 500MW power plant, compared to 1.27 billion kg of coal.
All players in the industry seem very tied to the market price of uranium which has seen some formidable highs and lows.

With this the problem exists that more uranium is used yearly than is mined on a comfortable basis. The remaining uranium is acquired from dismantling warheads and reprocessing the fuel to low enriched uranium (LEU). Big problem here is that the largest contributor Russia, in the Megatons to Megawatts (MTM) program, has its own plans once the program winds down in 2013, I use wheat as an example of the effect that RU can have on global markets.

Spot uranium prices are well off their highs in 2007 and remain stuck around 2005 prices. The current issues occurring in Japan have caused a nice 35% drop in prices for the Global X Uranium ETF (URA) since they peaked in price Feb 2nd. In my eyes the drop was a bit of a fear drop and a broad overreaction. Its tough as always to know if this is an appropriate entry point as prices are no where near the lowest of low points. The more I read though I become convinced that alternative energy is pointless to solving energy shortages and all other uses simply will not fly for either health or a multitude of other reasons. Furthermore there are new techniques on the horizon that will drop the price of processing uranium further increasing the cost efficiency.

On that topic I reviewed USEC, a uranium enrichment company spun off from the US governments nuclear efforts. They are the exclusive agent for MTM for the US and enrich uranium via their gaseous diffusion plant. They also supply transportation and storage systems for spent fuel and consulting services. What really attracts me to them is they are priced at a fraction of their book value and essentially trade as if they are going to die out very soon.

Truth be told they might. All of their success hinges on the acquisition of a $2B DOE loan to continue and enhance their American Centrifuge Plant. Basically its a method of enriching uranium using 95% less electricity. In the processing and enrichment of uranium the majority (>70%) of the costs is derived from electricity usage. Areva (French Uranium giant) is unrolling technology soon that is backed by the DOE. Strange that they back a French company so readily. This leads me to think that USEC's technology isn't quite advanced. Its a deep value play that may warrant further investigation upon a deeper drop. It seems to be a poor play on pure uranium though.

Cameco (CCJ) is an excellant uranium miner, by market share the biggest in the world. Unlike Rio Tinto they operate as a sole uranium miner versus numerous other minerals that Rio goes after. It is by no means a deep value, nor does it share any divergence from URA for the most part. In that respect, despite the great shareholder friendly management that exists I hesitate to add to CCJ, preferring URA as a great way to act as a leveraged play due to broad exposure to miners, processors, and end users. I may initiate a small position as a good long term play in URA. I enjoy the multi currency hedge it offers along with good long term perspectives. No position.

6/10/11: Found some articles by Reuters showing that Saudi Arabia and UAE plan to build a combined 20 nuclear plants by 2030. This could be a tremendous boost to total U consumption even though Germany has abandoned it. I see no way that energy needs can be met safely and adequately via renewable methods.