A key difference between a developed nation like the United States and developing ones like China and India is energy infrastructure. We have near-universal reliable power, they don't. Building power plants will be big business in those nations, which will keep demand for energy products high. But the nuclear power market is different than most, it's on the cusp of a supply transition that should materially shift the playing field in the direction of uranium suppliers.
Demand is good
According to Grant Isaac, CFO of uranium miner Cameco (NYSE:CCJ), two billion of the world's seven billion people don't have access to reliable power. By 2050, there will be nine billion people, with the growth coming mostly from the developing nations that don't have adequate power supplies today.
No wonder Cameco thinks there's a big market for nuclear power in the future. That demand is obvious today: India and China are expected to have 70 new reactors running by 2022, up from just 37 today. And of those 70 reactors, nearly 40 are already under construction. Overall, Grant is expecting uranium demand to increase from around 170 million pounds today to 220 million pounds by 2022.
But that's just the demand side of the equation, the supply side could make the uranium market even more desirable.
But here's where it gets really exciting
According to Cameco's Grant, "Since 1985, consumption of uranium has exceeded the primary production of uranium and the gap has been filled by secondary supplies." Those secondary supplies have come from over mining at the onset of the nuclear power industry leading to large stockpiles and from the agreement between the United States and Russia that turned Russian nuclear warheads into nuclear fuel.
The U.S./Russia deal ended in 2013 and the excess uranium inventory is dwindling. In other words, the uranium market "is transitioning from what has historically been a supply driven industry to what is a demand-driven industry." Look out uranium users, the days of cheap uranium could be coming to a close.
That makes BHP Billiton's (NYSE:BHP) decision to sell uranium assets to Cameco look like it could have been ill timed. Granted the company's other divisions are larger and more important to performance, and with low commodity prices across the board keeping costs down has been vital. But BHP may have given up on nuclear at the wrong time. That would be odd for this usually long-term focused miner and, perhaps, shows how serious it is about refocusing its business around key assets.
But BHP's loss is Cameco's gain. The largest pure play uranium miner has yet another asset in its coffers waiting to be developed as demand increases. However, if betting the house on uranium isn't your desire, consider Rio Tinto (NYSE:RIO). This diversified miner continues to dig for uranium within its energy segment, which is just about 10% of its business.
That hasn't been going too well of late, however, with problems at uranium processing plants at the two mines it runs. Although one of the two facilities restarted in early January, the other remains "suspended pending completion of a full investigation and regulatory approval to recommence."
That's not good news, but it shows why you might want to own a diversified miner. Rio's bottom line was solidly in the black in the first half of 2013 despite broad commodity price weakness. And with record production of iron ore, bauxite, and thermal coal in 2013, the full year should be in the plus column as well. The uranium mining issues are thankfully not detrimental to the business, something that wouldn't be true at uranium-focused Cameco.
Time to jump in?
So, as demand continues to increase and the oversupply situation abates, now might be a good time for you to jump on board the uranium train. Cameco is the best option for aggressive investors seeking a pure play. More conservative types, however, may want to check out Rio Tinto, noting that it has some uranium issues of its own to solve before it's back up to full production.
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