New Era for Uranium

12/16/2013 7:00 am EST

Focus: ENERGY

One in every ten light bulbs in the US gets its power from Russian fuel. It's been that way ever since 1993, when the "Megatons to Megawatts" program began, explains energy sector expert Peter Krauth in Money Morning.

Under this agreement, highly-enriched uranium, contained in ex-Soviet nuclear weapons, was converted into nuclear fuel. But, by the end of December, that deal will end and about 13% of the global uranium supply will simply dry up.

That's a serious challenge to replace. America's nuclear plants, all 104 of them, consume a whopping 43 million pounds of uranium every year.

There are 435 nuclear reactors in the world, with another 66 under construction. That's 15% more than are currently operating. By some estimates, 408 more will be added in the next couple of decades.

The outlook is simple. We're going to need to produce more uranium. The question is: Can this uranium be produced cost-effectively?

Through all of this, uranium prices—both spot and long-term—have been struggling since early 2011.

But here's what you need to know about the uranium price: although the spot price (currently $36/lb) is the one most often quoted, as much as 85% of all uranium is sold under long-term, multi-year contracts (currently averaging about $50/lb).

The other salient point is that, according to some experts, it actually costs $85/lb to produce. So, the average miner is losing about $50 on every pound of uranium sold at spot, and $35 for each pound sold on a long-term basis. How long do you figure that can last, really?

There's little doubt nuclear will remain a cornerstone of the world's future energy mix. And uranium producers won't keep losing money indefinitely. The price simply has to rise, and here's how we can benefit.

Uranium Participation Corp. (TSX:U) is a physically-backed uranium ETF. The fund's manager simply buys uranium oxide and uranium hexafluoride, with the purpose of selling those holdings in the future.

According to their most recent statement of investment, Uranium Participation Corp. holds about 5.75 million pounds of uranium oxide and about 4.85 million pounds of uranium hexafluoride.

While there's no leverage like that, which comes with uranium miners, Uranium Participation also carries little more than uranium price risk.

And right now, spot uranium is changing hands at a 60% discount to the cost to produce it—never mind turning a profit.

Current low prices are a disincentive way to build new supply, as well as to expand mine output. The "Megatons to Megawatts" program is over and about 13% of global supply, 24 million pounds of high-grade uranium, is about to be erased.

This situation cannot last. Uranium prices must rise—which makes Uranium Participation Corp. the best uranium play there is.

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