Now Where's the Uranium Going to Come From?

According to the U.S. Department of Energy, over the last twenty years 10% of U.S. electric power was generated using uranium from Russian nuclear warheads. It just announced that the last shipment under the Megatons to Megawatts Program has been shipped, but it didn't even hint at how the country is going to find a replacement for the lost fuel—that's good news for Cameco (NYSE: CCJ  ) and Rio Tinto (NYSE: RIO  ) .

The end of an era
While U.S. Energy Secretary Ernest Moniz called the completion of the Megatons to Megawatts program "a major victory both for the United States and Russia," the truth is that the big victory took place 20 years ago when the agreement was originally struck. The completion of the agreement just means the United States has to find a way to replace the uranium it used to buy from Russia.

That's no small issue. That uranium generated "roughly half of all commercial nuclear energy produced domestically during that time." Although Russia, through intermediaries, will continue to be a source, the flow of the fuel into U.S. ports is set to fall dramatically in the near term and will only ramp up enough to provide for about half of the lost supply by 2015.

There to fill the void
While this may be bad news for utility companies, it's good news for uranium miners like Cameco and Rio Tinto. Both companies, however, have suffered through the current period of uranium price weakness despite solid long-term demand prospects. For example, Cameco projects that the global nuclear power fleet will expand by more than 20% by 2022. And about a fifth of the resulting demand increase will have to be filled by new mines. Note that those estimates include expected plant closures.

To meet this future demand, Cameco is working to expand its uranium production from 22 million pounds a year to 36 million over the next five years or so. It's also building up its pipeline, recently buying a mine from BHP Billiton (NYSE: BHP  ) . That purchase netted BHP $430 million as it works to focus on mining a smaller set of natural resources.

That makes the 2012 deal something of a win-win. Cameco got to bolster its uranium reserves and BHP was able to raise cash that's helped to fund expansion efforts at a time when the broader mining industry is struggling. In fact, BHP has been cutting costs to keep profits up, making even relatively small deals like this one important to the company's future.

A less direct way to play
Cameco is a pure play uranium miner and BHP is largely out of the uranium business. If you are looking for a diversified uranium play, that pretty much leaves BHP's competitor Rio Tinto. Rio shoves uranium mining into its energy business, which accounts for around 10% of sales. So uranium is ultimately a relatively small contributor to the top and bottom lines.

And Rio's uranium production fell off notably in the third quarter after a big jump in the first half. The company is expecting to produce around 9 million pounds of the fuel this year. That's less than half of what Cameco produces. Clearly, Rio is more likely to benefit from demand for new power plants (via its iron ore, metallurgical steel, and copper mining) than from uranium demand.

What didn't get said
In the end, what the Department of Energy didn't say was far more important than what it did say. With a material drop in supply set to take place in 2014, uranium pricing and sales could see an uptick. That will be good news for public companies like Cameco and diversified Rio Tinto. Pure-play Cameco, however, has the most to gain if the uranium market picks up.  

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