The next hot energy source by Darren Winters
The world is demanding more energy. With expected population growth to reach 8 billion by 2025, we will continue to put more of a strain on our natural resources. Currently, 28% of the world’s population use 77% of the world’s energy production. What is going to happen as emerging nations demand more? With the huge growth in countries such as China and India, there will not only be increased demand for electricity, but for cars and therefore oil too.
This demand is asking a lot of governments around the globe, who are looking for cleaner forms of energy production than traditional fossil fuels.
Some questions that need answering are; what are our electricity requirements? What forms of generation are available to us? Which combination of energy supply will provide our needs with maximum security and least harm to the population and environment?
In order to answer these questions, we need to first explore the fundamental backdrop to the vailable energy sources. We then need to look at the reasons why uranium could see increased demand that would propel it’s price five fold from where it currently stands. Added to that, we will show you companies that would stand to benefit from any underlying price increase in this controversial metal.
AVAILABLE ENERGY
Let us first make it clear; there is plenty of energy available to us, ranging from solar, wind and waves, hydro, and fossil fuels. It is estimated that we have enough coal to last more than one hundred years although it is obviously not environmentally friendly. So it is not a matter of the world not having enough resources for electricity production, but which resources pollute less and reduce global warming.
Fossil fuels have been an excellent form of energy and coal was the first to be utilised in order to increase our standard of living. The problem today is that a 1000 MWe coal fired station produces 7 million tonnes of carbon dioxide each year and 200,000 tonnes of sulphur dioxide which are a major source of atmospheric pollution. Other waste products from the burning of coal include 200,000 tonnes of fly ash which contains toxic metals including arsenic, cadmium, mercury plus carcinogens which can cause cancer.
This is an environmental nightmare when compared to nuclear power, according to the World Nuclear Association. Compare that to a nuclear powered station that re-processes 97% of it’s waste. The remaining 3% needs to be isolated for a long period although because of it’s small amount, it is easily manageable.
Solar power is not yet ready to be a viable clean alternative to coal although with nanotechnology, it’s use will certainly become more widespread in the future. At present, it is intermittant and inefficient. Solar power generation gets interupted by clouds and night. It is also presently inefficient in converting incoming radiation into electricity (only 20%). While sunlight may be free, the capital, energy and material costs of conversion, maintenance and storage are very high. The best purpose for solar power at the moment is in direct heating.
Another widely discussed alternative is hydroelectric power. Granted it is cheap for those areas that have plentiful water but building dams can have a negative impact in that they require the flooding of land upstream and populations have to be moved. Considering hydroelectric power accounts for nearly 20% of world electricity production, it is certainly a viable source in locations where it can be developed. The only problem now is that most of the world’s suitable sites have already been used.
As for other alternatives such as wind, tidal and geothermal electricity generation, although they are without a doubt useful sources, they are limited in their use for creating mass power.
DEMAND
The world’s demand for electricity is currently increasing at a rate of 2.6% per year. In the US we have recently witnessed the problems associated with excess demand on the grid, blackouts in both California and New York.
As countries like China continue to demand more electricity, this has to be met with power stations. They are presently building one new nuclear reactor every year and will continue to do so.
This increased demand by Asian economies is not just limited to electricity production. We have seen crude oil trade at $55 in recent months and these price rises have also been mirrored for gas, coal and lastly, uranium. Uranium has increased from around $7 per pound in 2000 to over $20 per pound today.
If you compare it’s price with it’s high in 1979 of $43, you can see that it is still far below those levels. In fact, if you account for inflation over time, in today’s money, that translates to over $100 per pound! Supply Cameco, the world’s largest uranium miner estimate that uranium demand should average 194 million pounds per year until 2012. According to the World Nuclear Association, supply is running at 135 million pounds per year. The difference is currently made up from surplus supplies like weapons conversion and old stockpiles.
Now there is no lack of supply in the world, but mining it out of the ground is another matter. There are many countries with large uranium reserves but they lack the resources to start mining. Even if they did, it takes about ten years to bring a mine online. These countries include Russia, Kazakhstan, Nigeria and Uzbekistan who also have a great deal of political instability. Just look at what the disruption in Russian oil supplies has done for the price of crude this year—the markets don’t like uncertainty.
A major factor influencing the future price of uranium is the inelasticity of demand relative to price. We currently only have one year’s worth of uranium stockpiles. As supply becomes tight, the utility companies tend to hoard uranium which then increases it’s price as there becomes such a small amount of supply.
Mines only produce a total of 79 million pounds of uranium each year. Considering demand is 194 million pounds each year, mines will need to significantly increase production in order to meet that demand. Like I have already said, some of that demand is met through weapon conversions, but that is only about 50 million pounds. Therefore, mines would need to increase production by around 65 million pounds every year. The only way that is going to happen is if prices rise significantly in order to make new mining projects worth while developing.
As a result of this supply/demand fundamental backdrop, one can assume that the price of uranium, like so many other energy sources, is going to rise significantly over the next several years. We may even see it trading at new all time highs.
The way to exploit this and gain leverage against it is to invest into the mining companies that have the major uranium mining rights around the world. Fortunately, there are only about eight major uranium miners who mostly work on deposits in Canada, Australia, Namibia and Niger.
MINING COMPANIES
The largest producing uranium companies include Cameco, ERA, WMC, Cogema, Rio Tinto and Anglogold. Cameco is like the Newmont Mining equivilant of the gold miners. It is the only pure uranium miner that fund managers can invest into because it has enough liquidity. The problem with Cameco is that it currently trades at around $95 a share on the New York Stock Exchange which makes it an expensive share to hold for the average investor.
However, there are plenty of alternatives that can give you exposure to this part of the mining sector. We covered one such company in last month’s edition of the newsletter. Anglo Pacific currently trades at around 92 pence a share on the LSE and owns shares in a small uranium miner. It’s share is fairly slow moving so is more of a longer term holding for any portfolio.
Anglogold, who also have exposure to uranium mines in South Africa, are traded on the NYSE and are currently fetching around $38 a share. We have covered this company in the past and from a technical perspective, it made a nice 50% retracement this year from it’s entire move up from 2001. It is now trending higher.
What I want to cover here though is companies that offer real leverage for long term speculators. These are the sort of companies that are very cheap, but offer the potential to make ten times your initial investment. Having said that, they should be considered high risk, and therefore speculative. However, for investors willing to put a small amount into them and hold for several years, they could do well.
One junior mining company that offers this type of potential leverage is Strathmore Minerals which is a Canadian miner listed on the Torronto Stock Exchange. This stock has increased by more than 100% since the summer and now trades at C$1.60 a share. It’s ticker simbol is STM.V. It has a strong management team with the recent appointment of Bob Quartermain who was previously with Silver Standard—a company we have also featured. This is certainly a speculative play and investors need to undertake full research on this, or any other stock we have featured. It’s website can be found at www.strathmoreminerals.com.
SUMMARY
There is certainly a very good fundamental argument for continued strength in the price of uranium over the coming years. This will benefit the mining companies that we have shown who from a market matrix point of view, should remain in a bull market for many years. To undertake more research, I would recommend going to the World Nuclear Association site at www.worldnuclear. org.
Regards Darren Winters
This demand is asking a lot of governments around the globe, who are looking for cleaner forms of energy production than traditional fossil fuels.
Some questions that need answering are; what are our electricity requirements? What forms of generation are available to us? Which combination of energy supply will provide our needs with maximum security and least harm to the population and environment?
In order to answer these questions, we need to first explore the fundamental backdrop to the vailable energy sources. We then need to look at the reasons why uranium could see increased demand that would propel it’s price five fold from where it currently stands. Added to that, we will show you companies that would stand to benefit from any underlying price increase in this controversial metal.
AVAILABLE ENERGY
Let us first make it clear; there is plenty of energy available to us, ranging from solar, wind and waves, hydro, and fossil fuels. It is estimated that we have enough coal to last more than one hundred years although it is obviously not environmentally friendly. So it is not a matter of the world not having enough resources for electricity production, but which resources pollute less and reduce global warming.
Fossil fuels have been an excellent form of energy and coal was the first to be utilised in order to increase our standard of living. The problem today is that a 1000 MWe coal fired station produces 7 million tonnes of carbon dioxide each year and 200,000 tonnes of sulphur dioxide which are a major source of atmospheric pollution. Other waste products from the burning of coal include 200,000 tonnes of fly ash which contains toxic metals including arsenic, cadmium, mercury plus carcinogens which can cause cancer.
This is an environmental nightmare when compared to nuclear power, according to the World Nuclear Association. Compare that to a nuclear powered station that re-processes 97% of it’s waste. The remaining 3% needs to be isolated for a long period although because of it’s small amount, it is easily manageable.
Solar power is not yet ready to be a viable clean alternative to coal although with nanotechnology, it’s use will certainly become more widespread in the future. At present, it is intermittant and inefficient. Solar power generation gets interupted by clouds and night. It is also presently inefficient in converting incoming radiation into electricity (only 20%). While sunlight may be free, the capital, energy and material costs of conversion, maintenance and storage are very high. The best purpose for solar power at the moment is in direct heating.
Another widely discussed alternative is hydroelectric power. Granted it is cheap for those areas that have plentiful water but building dams can have a negative impact in that they require the flooding of land upstream and populations have to be moved. Considering hydroelectric power accounts for nearly 20% of world electricity production, it is certainly a viable source in locations where it can be developed. The only problem now is that most of the world’s suitable sites have already been used.
As for other alternatives such as wind, tidal and geothermal electricity generation, although they are without a doubt useful sources, they are limited in their use for creating mass power.
DEMAND
The world’s demand for electricity is currently increasing at a rate of 2.6% per year. In the US we have recently witnessed the problems associated with excess demand on the grid, blackouts in both California and New York.
As countries like China continue to demand more electricity, this has to be met with power stations. They are presently building one new nuclear reactor every year and will continue to do so.
This increased demand by Asian economies is not just limited to electricity production. We have seen crude oil trade at $55 in recent months and these price rises have also been mirrored for gas, coal and lastly, uranium. Uranium has increased from around $7 per pound in 2000 to over $20 per pound today.
If you compare it’s price with it’s high in 1979 of $43, you can see that it is still far below those levels. In fact, if you account for inflation over time, in today’s money, that translates to over $100 per pound! Supply Cameco, the world’s largest uranium miner estimate that uranium demand should average 194 million pounds per year until 2012. According to the World Nuclear Association, supply is running at 135 million pounds per year. The difference is currently made up from surplus supplies like weapons conversion and old stockpiles.
Now there is no lack of supply in the world, but mining it out of the ground is another matter. There are many countries with large uranium reserves but they lack the resources to start mining. Even if they did, it takes about ten years to bring a mine online. These countries include Russia, Kazakhstan, Nigeria and Uzbekistan who also have a great deal of political instability. Just look at what the disruption in Russian oil supplies has done for the price of crude this year—the markets don’t like uncertainty.
A major factor influencing the future price of uranium is the inelasticity of demand relative to price. We currently only have one year’s worth of uranium stockpiles. As supply becomes tight, the utility companies tend to hoard uranium which then increases it’s price as there becomes such a small amount of supply.
Mines only produce a total of 79 million pounds of uranium each year. Considering demand is 194 million pounds each year, mines will need to significantly increase production in order to meet that demand. Like I have already said, some of that demand is met through weapon conversions, but that is only about 50 million pounds. Therefore, mines would need to increase production by around 65 million pounds every year. The only way that is going to happen is if prices rise significantly in order to make new mining projects worth while developing.
As a result of this supply/demand fundamental backdrop, one can assume that the price of uranium, like so many other energy sources, is going to rise significantly over the next several years. We may even see it trading at new all time highs.
The way to exploit this and gain leverage against it is to invest into the mining companies that have the major uranium mining rights around the world. Fortunately, there are only about eight major uranium miners who mostly work on deposits in Canada, Australia, Namibia and Niger.
MINING COMPANIES
The largest producing uranium companies include Cameco, ERA, WMC, Cogema, Rio Tinto and Anglogold. Cameco is like the Newmont Mining equivilant of the gold miners. It is the only pure uranium miner that fund managers can invest into because it has enough liquidity. The problem with Cameco is that it currently trades at around $95 a share on the New York Stock Exchange which makes it an expensive share to hold for the average investor.
However, there are plenty of alternatives that can give you exposure to this part of the mining sector. We covered one such company in last month’s edition of the newsletter. Anglo Pacific currently trades at around 92 pence a share on the LSE and owns shares in a small uranium miner. It’s share is fairly slow moving so is more of a longer term holding for any portfolio.
Anglogold, who also have exposure to uranium mines in South Africa, are traded on the NYSE and are currently fetching around $38 a share. We have covered this company in the past and from a technical perspective, it made a nice 50% retracement this year from it’s entire move up from 2001. It is now trending higher.
What I want to cover here though is companies that offer real leverage for long term speculators. These are the sort of companies that are very cheap, but offer the potential to make ten times your initial investment. Having said that, they should be considered high risk, and therefore speculative. However, for investors willing to put a small amount into them and hold for several years, they could do well.
One junior mining company that offers this type of potential leverage is Strathmore Minerals which is a Canadian miner listed on the Torronto Stock Exchange. This stock has increased by more than 100% since the summer and now trades at C$1.60 a share. It’s ticker simbol is STM.V. It has a strong management team with the recent appointment of Bob Quartermain who was previously with Silver Standard—a company we have also featured. This is certainly a speculative play and investors need to undertake full research on this, or any other stock we have featured. It’s website can be found at www.strathmoreminerals.com.
SUMMARY
There is certainly a very good fundamental argument for continued strength in the price of uranium over the coming years. This will benefit the mining companies that we have shown who from a market matrix point of view, should remain in a bull market for many years. To undertake more research, I would recommend going to the World Nuclear Association site at www.worldnuclear. org.
Regards Darren Winters
posted by Darren Winters at 12:00 PM
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