09/23/2005 12:00 am EST
Keith Fitz-Gerald is new to my coverage for the Digest, but it has not taken long to impress me with the top-notch quality of his research. Here, he makes a long-term fundamental case for the future of nuclear power, and highlights some favorite uranium plays.
"Back in 2002, I predicted that oil would one day top $105 per barrel. We’re not there yet, but we’re a heckuva lot closer than we used to be. And even though I got laughed out of more than a few boardrooms at the time, my analysis clearly pointed to significantly higher energy prices then as it continues to today. I still think we’ll hit $105 a barrel in the not-too-distant future, even though it won’t be a straight shot up. In fact, don’t be surprised if we see a temporarypullback after the summer driving season ends. But higher energy prices are a monumental and irreversible trend that will continue for the next 50 years or longer. The reasons are quite simple: exploding worldwide demand and dwindling supply. End of story.
"It’s now time to capitalize on the worldwide need for more electricity and the source that will provide the bulk of it. When people think about electrical power, they typically think about oil, natural gas, or coal. Few actually think about nuclear power, and if they do, words like Three Mile Island, Chernobyl, and terrorism are not far behind. Most people aren’t aware that, despite those high-profile incidents, nuclear power has been the fastest-growing source of electricity for the last 40 years. Say what you want about nuclear power’s past, but its future is incredibly bright because it is the best solution to the world’s ever-increasing appetite for electricity.
It’s the world’s cheapest source of energy. When measured on a per-unit basis, nuclear power is the best value by far. Natural gas costs around $3.90 per million BTUs (British thermal units), while coal is good for about $1.25. Nuclear power costs less than a penny for the same amount.
It’s the world’s cleanest source of energy. Nuclear power is emission-free. According to the EIA, the 440 plants operating today eliminate over 2.3 billion tons of carbon dioxide production each year.
It’s the world’s safest source of energy. You'd have to live next to a nuclear plant for more than 2,000 years to get the same radiation exposure you receive from a single X-ray. And, there’s an entirely new class of reactors called pebble bed modulars that are considered virtually meltdown-proof.
"The Nuclear Energy Institute says that an additional 31 new plants are presently under construction in eight countries, with another 140 planned or proposed. Most of the demand comes from, you guessed it, Asia, with China once again leading the way. China alone has over 30 plants on the drawing board. Japan, Taiwan, and South Korea have new plants slated, too. Clearly, governments and private entities around the world are realizing the powerful economic and environmental advantages of ‘going nuclear’. The need for electricity is simply too great to ignore nuclear power. The whole industry is set for remarkable growth, and we want to capture some remarkable profits along with it.
"The best investment to capitalize on the new technology in nuclear reactors and China’s growing nuclear industry is none other thanHuaneng Power (HNP NYSE), which we already own in our portfolio. The company has pumped in more than $150 million of the $300 million required to bring a 200-megawatt PBMR unit online in China by the end of the decade. Given that the Chinese government has tasked Huaneng with power development, I expect them to be at the forefront of new high-tech reactors for years to come.
"Meanwhile, the best way to profit from the worldwide trend toward more nuclear power is by going right to the heart of the matter—in this case, uranium. In real terms, spot uranium prices have risen from a low of under $10 per pound in the early ’70s to current levels of just under $30 today. I think uranium could hit $100 or more within the next five years. Higher uranium prices may be even more certain than oil. That means we want to start looking for the right opportunities now.
"The two opportunities we want to focus on are a conservative uranium producer and a really aggressive exploration company with a unique strategy. Both fall in the Boomers & Zoomers category, not only because of their potential, but also because neither kicks off the dividends.Cameco (CCJ NYSE) is the world’s largest uranium producer, accounting for nearly 20% of the world’s production. This company has a lot of things going for it, including experienced management and a sound operational strategy.
"Cameco has over 550 million pounds of proven and profitable uranium reserves. That’s one of the largest concentrations of reserve ownership in what is a very fragmented industry. From 2003 to 2004, the company doubled its market share. They also bought back some 2.9 million shares. Revenue over the same period increased by 27%, and management continues to aggressively expand. CCJ and uranium prices have both run up recently, and the stock is too risky at current prices. Uranium prices are likely to pull back after their recent run, and CCJ would almost certainly come down with them.
"Strathmore Minerals (CA:STM Toronto) is a much more aggressive play, so only invest money you can afford to lose. It is a small Canadian resource exploration company that’s been quietly buying up previously discovered but unmined uranium resources since its inception in 1996. This gives it some of the best leverage to benefit from rising uranium prices. By buying uranium properties cheap when nobody else wanted them at the end of the last uranium boom, Strathmore’s cost of their uranium inventory can be kept low, even as the prices they can charge are rising. That means bigger profits.
"And should prices decline, they have a huge cushion and can remain profitable long after the big boys are forced to cease operations because of overhead costs. Strathmore’s stock is dirt cheap at the moment, but I like the company’s strong balance sheet and aggressive acquisition strategy designed to get proven reserves at bargain-basement prices.Buy Strathmore for no more than $1.30 CDN per share and limit your total exposure to 1% of your portfolio. That’s the best way to make your risk small and your potential returns big."