Is Uranium Poised for an Upswing?

The Energy Information Administration, or EIA, recently highlighted the pending expiration of the so-called "Megatons to Megawatts" program. This program converts missile-grade Russian uranium into fuel for nuclear reactors and supplies about a third of the United States' uranium needs. When that program's sun sets at the end of the year, miners like Cameco (NYSE: CCJ  ) and Rio Tinto (NYSE: RIO  ) could see an increase in demand.

Already short on supply
Offsetting the drop in supply is a new government agreement that is set to ramp up by 2015, though it will only replace about half of the lost supply. As a result, there will be a shortfall of notable proportions. According to pure-play uranium miner Cameco, however, the world is already using more uranium than it produces. It estimates that demand will outstrip supply by about 8% in 2013.

So the expiration of the "Megatons to Megawatts" program looks set to add to an already bad situation. To make matters worse, or better if you're an uranium supplier, Cameco expects the world's reactor fleet to expand by over 20% by 2022, inclusive of plant closures. This means that the high-profile shift away from nuclear power in Japan and Germany won't impact that number. Sixty-seven of those new reactors are already under construction.

Oh, Canada!
Cameco is the largest pure-play uranium miner, with the bulk of its operations located in Canada. That said, it also owns mines in the United States, Kazakhstan, and Australia. The company is working to increase its production from around 22 million pounds last year to 36 million pounds by 2018, an 18% increase. That alone should support top and bottom line growth.

If supply shortfalls lead to an uptick in uranium prices, the benefit will be amplified. The company also has a number of mines that it describes as "bullpen projects." These aren't fully operational and provide notable production growth opportunities should demand increase more quickly than expected.

Diversified miners
Interestingly, one of those bullpen mines was bought from diversified mining giant BHP Billiton (NYSE: BHP  ) in 2012 for $430 million. Despite the potentially bright future for uranium mining, the industry's pullback following Japan's nuclear disaster led BHP to get out of the space. This was likely because of a renewed focus on profitability in the face of a broad mining industry slowdown. Moreover, its uranium operations were small compared to other business lines like iron ore, oil and gas, and coal. Regardless, BHP's portfolio rejiggering has effectively removed it from the uranium industry and provided Cameco a chance to grow its business.

Another notable uranium miner is mining giant Rio Tinto, which increased its uranium production by nearly 25% in the first of the year. The business is still relatively small compared to Rio's broader portfolio, and lives within its Energy business—a division that only accounts for 10% of sales. In fact, while increased uranium demand will definitely be good for the company, Rio is more likely to benefit from increased demand for things like copper and steel from the building of nuclear power plants.

A sign of a turn?
Uranium One (NASDAQOTH: SXRZF  ) , another pure uranium play that predominantly operates out of Kazakhstan, is scheduled to be taken private later this month. The company projects that Kazakhstan will account for 70% of the world's production growth over the next decade, making it a prime target for such a move. Although the company is tiny compared to Rio and Cameco, Uranium One being bought out is a sign that the uranium industry's growth prospects are potentially being overlooked because of negative headlines.

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