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Uranium a hot commodity as nuclear demand grows

All this talk about electric cars means demand for electricity will increase. And where are we going to get it?

Uranium a hot commodity as nuclear demand grows

By Darcy Keith
Globe Investor Magazine online, May 19, 2009

Affordable and practical electric cars may not have zoomed into a showroom near you quite yet, but the shift in public and government opinion toward action on climate change has increased the odds you'll one day be plugging in instead of gassing up. A number of green startups, ranging from San Carlos, Calif.-based Tesla Motors Inc. to Toronto-based ZENN Motor Co., already have electric products vying for a foothold in the global auto market. Most of the major auto manufacturers, including General Motors Corp., Ford Motor Co. and Toyota Motor Corp., are also developing new-generation electric vehicles. Improving battery technology remains a key obstacle.

Investors could gamble on which electric car makers will find success, but there is another way for them to make money. Think about this: There's no sense building green automobiles if the electricity they use is generated by dirty power plants that burn coal and oil.

That puts nuclear power near the forefront of industries poised to prosper if electric cars move from science fiction into reality. Many would argue nuclear isn't truly green - the mining of the uranium it uses, for instance, emits greenhouse gases and others raise concern over the radioactive waste it creates - but it does offer a cleaner alternative than many other energy sources.

"As the emphasis shifts towards low-emissions vehicles, it's clearly going to drive a great opportunity for developers of low-carbon power generation," said Alex Klein, a director with Emerging Energy Research of Cambridge, Mass. "Nuclear, given its potential for scale, will be looked at as a key form of power generation to facilitate electric power vehicles."

There are 436 nuclear power plants with a combined capacity of 370 gigawatts in operation worldwide, with another 44 plants under construction in 14 countries, according to the European Nuclear Society. The International Atomic Energy Agency projects nuclear capacity could double by 2030.

It all adds up to more demand for uranium, and prices have been on an uptrend. As of May 8, the spot price was $49 (U.S.) a pound, up about nearly $10 over the past month, according to TradeTech, a Denver-based website that tracks price transactions.

Simon Tonkin, Toronto-based analyst with Thomas Weisel Partners LLC, is forecasting prices to rise to about $60 in coming months, spiking to $75 in 2010.

"We're seeing some real positive signs in the uranium market," said Mr. Tonkin. Among them: China is buying material in the spot market ahead of new nuclear reactors coming online, and Saskatoon-based Cameco Corp.'s CCO-T Cigar Lake deposit - one of the largest in the world - remains on hold due to water leakage issues.

Producers, meanwhile, won't be in a rush to develop new mines until prices reach the $70-to-$80 level, Mr. Tonkin says. "We see the uranium market remaining in deficit until at least 2013."

Peter Farmer, the departing head of Canadian uranium miner Denison Mines Corp., DML-T told shareholders on April 30 that prices should climb back to $60 or $70 over the next year.

Denison itself had been struggling to survive under a heavy debt load, but received a lifeline in April when it sold 20 per cent of the company to a South Korean utility. The stock has more than tripled since hitting 69 cents (Canadian) in December.

But it's Cameco that Mr. Tonkin terms as uranium's "jewel in the crown," thanks to its rich-grade ore deposits. The stock has nearly doubled since dipping to below $15 a share last October. Canaccord Adams recently upgraded its recommendation on the stock to "buy" from "hold," and raised its 12-month target price to $35 from $24.

There are a small handful of exchange-traded funds that track nuclear and uranium-related stocks: Market Vector Nuclear ETF, Barclays iShares Global Nuclear Energy and PowerShares Global Nuclear Energy. All three have been steadily climbing over the past two months.

For more direct exposure to the commodity, there's Uranium Participation Corp., U-T which invests in and holds physical uranium. It's currently trading near $8, and Mr. Tonkin has an overweight rating on it with a $10 target.

Uranium producers are vulnerable to all kinds of production difficulties, ranging from acid supply shortages to mine flooding. "Uranium Participation takes that risk out of the play and just invests in the commodity," notes Mr. Tonkin.

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