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Global Outlook

This Commodity Is Going Up, Or The Lights Are Going Out

July 1, 2014, Tuesday, 15:44 GMT | 10:44 EST | 20:14 IST | 22:44 SGT
Contributed by eResearch

There is one commodity that is more powerful than all of the others combined. The reaction from this energy source is powerful enough to produce a mushroom cloud forty miles high. Channeling this energy into a weapon could wipe out a billion people within a week. And the entire world would literally be “frozen over” if a mere one percent of these energy weapons were detonated in major global cities.

Of course, I am talking about uranium.

But, in spite of these horrors, when properly harnessed, it is the cleanest, most impressive energy source we have ever created - and will most likely ever experience in our lifetimes. It is the most powerful force man has ever seen. It is the height of human ingenuity and, right now, we desperately need it to keep the lights on around the globe.

For example:

- 1 in 5 households and businesses in the U.S.A. are electrically powered by it.

- It accounts for 18% of U.S. energy.

- One fuel pellet provides more energy than a ton of coal, 149 gallons of oil, and 17,000 cubic feet of natural gas.

Right now, this behemoth is the single most beat up sector out there. Spot prices for uranium have slipped below $30 a pound — the lowest levels since 2005. As shown on the chart below, here is how it looks since the peak in 2007:

I don't know of any other commodity that is even close to 10-year-lows.

And it has been forcing uranium miners to totally stop production, simply because they cannot make any money mining at these prices. Paladin Energy just announced that it was shuttering its huge mine in Malawi until prices more than double to between US$70 and US$75/lb.

The fact that the mine closure will take 3.3 million pounds of uranium off the market should, at least, help prices inch back up due to decreased supply. And Paladin is not alone.

Cameco, the biggest uranium producer in the world, is closing its massive “Millennium” uranium development project in Saskatchewan for the same reason. Prices are simply too low. That mine would have been one of the largest in the world, estimated to produce up to 7 million pounds annually. More supply off the market.

It has made plenty of investors scared of even touching this “radioactive” sector. But that is exactly when investors should start getting in. I do not know about you, but I am not too keen on buying stocks at alltime highs, where most of the S&P is sitting at right now.

Okay, so prices are low. Very, very low. But what catalysts will drive them higher, and how soon can we expect a turnaround? To find answers, we are going to take a look at two very important locations.

The China Connection

China is going to get a lot more of its power from nuclear energy in the coming years. Remember the pictures of athletes from the Beijing Olympics wearing masks because the pollution was so bad?

Yes, the pollution is that bad ... so bad, in fact, that scientists have recently compared it to a nuclear winter because the pea soup-like smog is actually slowing photosynthesis in plants. That could wreak long-term havoc on the food supply.

So, the Chinese are taking radical steps to improve the situation. One such step is building more efficient cars. They have already unveiled a plan to take over five million old vehicles off the road to make room for more environmentally sound ones. That will create immediate demand for around 1.5 million new cars this year.

But, more importantly, it will also force them to start firing up more nuclear power plants instead of the mountains of coal they have been burning for decades. Their goal is to double their nuclear capacity this year. Earlier this month, they activated their 19th nuclear reactor. You can see how important China is to global uranium demand with this chart:

Plain and simple, China will need uranium to power all of those reactors — lots of it. It is not a matter of if, but when.

The second issue is the Japanese appetite for uranium after the horrible tragedy at Fukushima.

Japan Gets Back on the Horse

In February, there was widespread belief that Japan would be firing up those reactors in short order. Prime Minister Shinzo Abe said as much in February in his Basic Energy Plan, which called for nuclear power to remain as a long-term electricity source. However, the public is still understandably shaken and not quite ready to jump back on the radioactive wagon. Japanese citizens are 2-1 against nuclear restarts. Just last month, a Japanese court blocked Kansai Electric Power Co. — Japan’s second largest utility — from restarting its nuclear plant. It certainly was a blow to the nuclear industry, but the battle is far from over.

The main issue is that — as terrible as Fukushima was — nuclear power provided close to 30% of Japan’s electricity before the crisis. Sooner or later they are going to have to come to terms with their nuclear program or risk the lights going off. In the world’s third-largest economy, that really is not an option.

They have tried to make up the difference with liquid natural gas imports. That has led the Japanese to import a record 87.49 million tons of LNG last year, costing them a whopping 27 trillion yen — almost triple the amount of the pre-Fukushima days. Prices have doubled during the same period. They simply cannot keep that up ... the reactors will be coming back online. When they do, it will be rocket fuel for uranium prices.

Rick Rule, the billionaire investor from Sprott Asset Management, has been beating this drum for a while now. Here is a transcript from his interview with Sprott Thoughts:

In the long term, I believe uranium is a ‘no-brainer. ’ Uranium miners spend 70 dollars per pound to produce the green metal, but it only sells for 35 dollars. They lose approximately 50 percent on every pound of uranium produced.

As a result, the industry is using up the capital it raised during the bull market from 2004 to 2011. Once they run out of capital, they will have to shut down their operations unless the price of uranium has risen to a profitable level. This will cause nuclear power plants to shut down — a tremendous drain on electrical production capacity.

Because so much energy can be produced from a small quantity of uranium relative to oil or gas, the cost of uranium represents a small portion of the costs of producing electricity from a nuclear power plant. Therefore, nuclear power generation will remain competitive as an energy source even if the cost of the metal were to double, which I believe is likely as utilities will pay what they must to ensure a supply.

So uranium could be setting itself up for another 1990s-style boom, when it went through the roof. When uranium booms, it booms big. During the 1990s, uranium traded for under $15 a pound.

- Beginning in the 2000s, it slowly began to rise and then skyrocketed.

- In January 2005, uranium traded for $20.50 a pound

- In the middle of 2007, it was up a whopping $135 a pound

Those are some scorching gains for those of us willing to bide our time on a depressed asset. But, how long do we wait until we see some kind of movement?

According to Uranium Investing News, we will have to wait until at least September before we see anything start to shake out:

Of the many factors keeping the uranium market weak, oversupply is a top contender. As Ray Goldie of Salman Partners explained, despite being in a deficit, “inventories are sufficient that the consumers of uranium who produce electricity are not concerned.”

Goldie went on to add that “[e]very year there is a mating season where the producers and the consumers of uranium get together to decide on contracts.Beginning in the 2000s, it slowly began to rise and then skyrocketed.

One is in April — that is past — and nothing happened this year because there is too much uranium to engage in much mating.”

The expectation is that when the second “mating season” comes around in the fall, the uranium deficit will have finally caught up to the market, and prices will reflect that accordingly. That once again reinforces uranium bulls ’ steadfast optimism in the face of today’s weak market. For his part, Goldie speculates that a turnaround will come “as early as September.”

So, we will have our ear to the ground until September, but our thesis remains the same: this is a historically significant time to get in on a market that is destined to rebound.

There are a few ways to play it. The safest way is to buy a Uranium ETF like the Global X Uranium ETF But, the only way you will see those boom year returns is by investing in a single mining company.

Let us revisit Paladin for an example. Just look at how they did in the last bull market:

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