The Must-Have Commodity for 2011

It's not oil. It's not copper. (Although the fundamentals for both of those do look good.)

In refined form, it is yellowish in color, but it's not gold either.

Ding-ding-ding! You guessed it: It's uranium.

An initial word of caution
First off, let's be clear that uranium, like any other commodity, it's subject to violent price swings, as both real and projected shifts take shape in the supply demand curve. In other words, you can make a mint or get your face ripped off.

Just ask anyone who bought uranium-related stocks in early 2003, only to watch the heavy metal's price leap twelvefold by mid-2007.

Conversely, those who boarded the uranium crazy train during May or June of 2007 -- when some "experts" were calling for prices above $200 per pound -- were no doubt soon choking on their stomachs as prices plummeted from the $130s to the $80s in four short months.

Still reading? Good. Because even though uranium prices have risen substantially since last summer, I believe opportunity yet exists for the savvy investor.

Supply, meet demand
Hardly rare, uranium is more abundant than gold or silver and roughly as common as tin and molybdenum. But that doesn't mean it's readily available either.

For one, more than half of world production comes from 10 mines in six countries, which means that political hitches and mining delays can, and do, produce supply shocks.

Also, starting a new mine, or even expanding an existing one, is no quick feat. Mining giant BHP (NYSE: BHP  ) , for example, is looking at 11 years of construction to expand its Olympic Dam operation (which, incidentally, contains the world's largest known uranium deposit).

Then there's the favorable demand picture, summed up below:

  • Against a worldwide total of 441 nuclear reactors currently in operation, 63 new reactors are under construction, with another 156 on order or planned.
  • Existing mines currently furnish only about 75% of consumed uranium, with the balance supplied by secondary sources such as decommissioned warheads. Such sources are finite in nature, and a major Russian supply program is slated to expire in 2013.
  • No surprise, China is a heavy at the uranium table. The country plans to increase its existing nuclear capacity roughly nine-fold by 2020, a target that a government official recently indicated may be conservative.
  • Finally, global electricity consumption is projected to nearly double by 2030, yet nuclear power plants supplied only 14% of 2009's worldwide electricity production. Translation: There's ample room for nuclear energy production to grow.

Gaining exposure
So far, there's no exchange-traded fund or note linked to uranium futures. But even if there was, I'm not sure I'd recommend it, as such products can be savaged at the hands of the negative roll yield beast. That the leaves the uranium producers as the most direct play on rising demand.

On that note, Canada-based Cameco (NYSE: CCJ  ) is the undisputed titan of the industry -- and probably the most conservative play, too. With producing mines in Canada and the U.S. and exploration properties in Australia (the mother lode of global uranium deposits), Cameco is responsible for roughly 16% of the world's mined uranium production.

Impressively, the company turned in its most profitable year ever in 2009, even as uranium prices were bottoming in the low $40s. No doubt that was due in part to its practice of combining fixed- and market-based components in its long-term sales contracts, along with floor-price protection. Such astute financial management should help the company reach its goal of doubling uranium production by 2018.

Of course, aggressive investors might hanker for greater upside than is likely offered by Cameco. In that case, I refer you to Uranium One, traded on the Toronto Stock Exchange and on the Pink Sheets in the U.S. With assets in the U.S., Kazakhstan, and Australia, Uranium One is well on its way to transforming itself from a top-ten uranium producer into a top-five heavyweight.

Plus, the company boasts the lowest cash costs in the business. And 80% of its pricing is market-related, versus the 60% level that Cameco usually targets.

But there are two key risks. One, growth has come at a price, namely, taking on a majority shareholder in the form of ARMZ, the Russian company that in part emerged out of the restructuring of Russia's nuclear industry. Can Uranium One can remain shareholder-friendly given such an ownership structure? Two, although Uranium One has been profitable at the EBITDA line in recent years, it's posted some nasty net income losses. If that situation doesn't turn around, a slumping share price could be the next big event.

Other options
For those who are interested in the higher-risk plays, in addition to Uranium One, I'd take a close look at Denison Mines (AMEX: DNN  ) and Uranium Resources (Nasdaq: URRE  ) among other intermediate and junior players.

For those who crave a cup of chamomile rather than a shot of espresso with their yellowcake, there are a couple of paths you can take. One is to diversify, such as investing in shares of diversified mining giants Rio Tinto (NYSE: RIO  ) or BHP, both of which count mined uranium among their revenue sources. Or, one could diversify within the uranium industry by buying an ETF such as PowerShares Global Nuclear Energy or Market Vectors Uranium & Nuclear Energy ETF.

A second strategy involves researching the companies that design, manufacture, and service nuclear reactors. Two places to start are Shaw Group (NYSE: SHAW  ) and Babcock & Wilcox (NYSE: BWC  )

A final note of caution
As I said at the start, uranium prices can be volatile. An unexpected jump in production or delays in new reactor start-up can have an outsized effect on uranium prices -- and the prices of the stocks hitched to the heavy metal's fate.

Moreover, not everyone shares my bullishness: Motley Fool Pro advisor Jeff Fischer sold off his Cameco position about $9 ago on valuation concerns (the stock currently trades at nearly 27 times 2011 estimated earnings).

Ultimately, though, I believe that if you prudently add to uranium-related shares on major price drops, and wisely sell a little on the big run-ups, you can do well in 2011 and beyond.

Fool contributor Mike Pienciak owns shares of Uranium One, but he holds no financial interest in any other company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a glow-in-the-dark disclosure policy.


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