To understand today's jump in uranium stocks like Denison Mines (AMEX: DNN) and Uranium Energy (AMEX: UEC), we need to take a look at a piece of the supply chain that's invisible when it functions properly, but has a habit of breaking down on occasion.
After being mined and milled, uranium concentrate exists in the chemical form U3O8, also known as yellowcake. Impurities are next stripped out at a refinery, which produces UO3. This intermediate product is then converted to usable fuel.
There are only four conversion facilities in the Western world. One, Cameco's (NYSE: CCJ) Port Hope complex in Canada, was temporarily shuttered a few years ago after ground contamination was discovered. This isn't the first facility to experience such problems.
Honeywell (NYSE: HON) owns the only U.S. conversion plant, located in Metropolis, Ill. (the self-proclaimed "hometown of Superman"). The Metropolis facility shut down for around six months back in 2003-2004, which caused a tightening in the fuel supply and drove up uranium prices.
Well, it's deja vu all over again, as the Metropolis facility faces new challenges today. Both equipment failures and a labor dispute are weighing on production. Union workers have been locked out since June 28.
One of the uranium price benchmarking firms reported a 4.8% jump in the spot price on Friday, and traders are reacting to that move today. It's not clear to me that we're looking at a particularly severe disruption in the global supply chain, nor that uranium prices are poised to go through the roof. (Though it's possible that speculators could have a significant impact on the spot price in this very illiquid market.) File this in the "one to keep an eye on" category for now.
