Uranium stocks could be a worthwhile addition to your resource portfolio—but you need to be aware of the risks.
Uranium stocks pose a unique challenge for investors who are a looking to diversify their natural resource holdings. Apart from supply and demand issues that affect the price of uranium, the metal’s use in nuclear power plants makes it a controversial energy source.
Anti-nuclear sentiment remains high following the March 2011 earthquake and tsunami that led to a release of radiation at the nuclear plant in Fukushima, Japan. This sentiment has curtailed plans for some new nuclear plants. U.S. regulators are moving toward a less stringent limit on radiation risk, which could eventually revive nuclear plant construction and uranium demand. But this nuclear revival, if it comes at all, will be a slow process.
Worldwide demand of uranium now totals approximately 180 million pounds a year, while primary world mine production is only about 100 million pounds. The annual shortfall of 80 million pounds has for many years been covered by several secondary sources. These include the excess inventories held by utilities, reprocessed uranium from used reactor fuel, processing of mine tailings, and uranium from the dismantling of nuclear weapons, particularly in Russia and elsewhere in the former Soviet Union.
These secondary supply sources are tightening. Meanwhile, longer-term demand for uranium is likely to grow, and global warming concerns may help shift public opinion in many countries in favor of nuclear power.
But at the same time, low prices for fossil fuels including oil, natural gas and coal, make nuclear power less cost competitive.
Increased nuclear power use in China has pushed up the country’s uranium imports to as much as three times 2009 levels. In addition, China recently raised its nuclear-power targets for the next decade by 60%, and shows no sign of moving away from those targets in the wake of the Fukushima disaster. In fact, China and India plan to build 93 new reactors by 2040.
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While these factors look promising, investing in uranium stocks does entail some unique risks.
Here are some of the factors you need to assess for any uranium stock you consider buying:
Cost of exploration and mining uranium
There is a long lead time from exploration and discovery to production. When we’re researching a uranium mining stock, we look for ones that operate in an area with geology that is similar to that of nearby producing mines. This includes the Athabasca Basin in Saskatchewan where Cameco (symbol CCO on Toronto) has large, high-grade reserves, low-cost operations, significant market share and many mines. Cameco is the world’s largest uranium producer.
Location of the uranium mine
The most politically stable countries for uranium production are Canada and the United States.
Several other countries have significant uranium resources, like Niger, Namibia, Ukraine, Uzbekistan and Mongolia. However, we generally stay away from mining companies that operate in insecure and politically unstable regions like these.
When looking at uranium stocks, we also avoid those in countries with little respect for property rights and the rule of law, such as Russia or Mongolia.
Mining is particularly vulnerable to political instability. You can’t move the mine to another country, and local citizens may sometimes get the impression that a foreign mining company is robbing them of their birthright, even though the foreign company’s capital and expertise would appear to be the best way to get any value out of the ground.
Environmental constraints of mining uranium
Uranium by its very nature is radioactive. This increases the environmental constraints that will come into play when mining this metal.
Strong fundamentals overall
We like to see strong fundamentals in the uranium mining stocks we recommend. We look for low debt, because debt can be a problem for any mining company. When we recommend uranium mining stocks, we want to see a positive cash flow, preferably even when uranium prices are low.
Even better, we like to see mining companies that have cash flow from an existing mine that is sufficient for, or at least contributes to, the cost of developing a second mine.
Lastly we look for uranium stocks that have an experienced management team. We like to see teams that have a history of mine development and have financed similar projects in the past.
To lower your risk, we continue to recommend that uranium stocks make up only a limited portion of your portfolio’s resource segment. The demand for uranium will increase but it will take a keen investment eye to find the most profitable uranium stocks to invest in.
Have uranium stocks been profitable for you? How much of your resource portfolio do they make up? Share your experience with us in the comments section.