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By Chris Mayer
November 16, 2010
In the world of commodities, there are still a few bargains.
One of them is uranium. After doing nothing for most of the year, the price of uranium is up more than 30% since the summer. It’s still cheap for the simple reason that even the new higher price is not enough to make investing in new mines attractive.
That wouldn’t matter so much if there weren’t such strong demand for uranium coming from the build-out of new nuclear plants. China recently increased its nuclear power targets by over 60%, for instance.
As it is, the uranium industry has trouble meeting current demand. Total mined uranium is about 110 million pounds, which meets only 64% of the demand from utilities, according to John Stephenson’s Little Book of Commodity Investing. The gap so far has been made up with dwindling stockpiles of existing uranium supplies. Otherwise, new mines seem to stumble quite a bit. It’s not easy to bring new supply to the market. All of this just reinforces the idea that mining uranium is a tough business.
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And remember that the peak for uranium came in 2007, when it traded for $136 per pound. There aren’t too many commodities these days trading for 60% off their highs.
Stephenson visited this mine over the summer. He is a veteran of the commodity world, so it is instructive to hear him gush about McArthur River, which mines at depths of 550 yards below the surface.
It’s quite complex to describe, but I’ll try to deliver a simplified version. Uranium ore bodies are often found in porous rocks. Water can be a serious problem if there are underground streams present. This is the case at McArthur River. There is a company that freezes a section of the mine so it can get at the uranium without worrying about flooding. And this is one of the best mines in the world. You can only imagine what miners have to go through with lesser-quality deposits.
Stephenson also points out that nine companies make up 90% of the world’s uranium production. Australia and Canada alone produce about half of the world’s uranium. One hiccup at any of these big mines could have a big effect on prices.
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One other bargain commodity is U.S. natural gas, currently around $4. Natural gas is down 70% from its 2005 high and down 21% since December.
I’ve shown my Capital & Crisis readers how North American producers need $6-7 nat gas to make money. This analysis is similar to what we did for uranium. Likewise, it seems the natural gas price must rise or production must fall. I think demand for natural gas will rise long term — with a strong pull coming from overseas.
U.S. natural gas is so much cheaper than natural gas in Asia, by a factor of more than two. More and more of the world will become a net importer of natural gas, including China. If the U.S. exported only 10% of its nat gas, it would be the largest exporter of nat gas in the world.
The bottom line is that the U.S. has loads of cheap natural gas — and much of the rest of the world looks like it will burn more than it produces. Hence, over time, U.S. producers stand to make a lot of money if they can build out an export infrastructure. There is too much money at stake to think that won’t happen at some point.
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Another fascinating development is how the big oil companies are investing in natural gas. Chevron is the latest of the giant oil companies to bet big on natural gas. This week, it acquired Atlas Energy for $3.2 billion. Atlas is a leading producer of gas from the Marcellus Shale.
The oil giants are cash rich and they are using some of their financial muscle to pick up assets on the cheap with the idea that natural gas prices will rebound. Companies like Chevron and Exxon Mobil can also afford to take the long view. All things are cyclical, and while timing is uncertain, it seems inevitable that natural gas prices will rise.
It will be fun to see how these things play out. It will be enriching too, to those of us invested in the right places.
Sincerely,
Chris Mayer
P.S.: To find our more about these breakthrough commodity plays, visit the Capital & Crisis website.
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