Fueled by growing Chinese demand for energy and natural resources, mineable uranium investing is a profitable opportunity for investors. In fact, Horacio Marquez, Senior Analyst at the Oxford Club, sent me a newsletter that highlights the uranium crisis as the next big commodities surge, urging investors should act now.
In his newsletter, Mr. Marquez provides factual information along with various studies such as press releases and quotes to delineate the timeline of uranium in the past and going into the future.
History Behind the Uranium Crisis
The Uranium shortage began in 1985, the year when Uranium consumption leveled off, and supply equaled demand. Large production of uranium had ended post cold war as nuclear arms production was suspended.
But in 1993, the United States signed an agreement with Russia to feed U.S. nuclear reactors from old, dismantled nuclear warheads. (Source: The Oxford Club)
Uranium prices plummeted, causing companies to suspend further drilling explorations. The demand fell.
According to the The Uranium Market Outlook,
Uranium hit lows because of 30 years of underinvestment, stringent regulations, and overall lack of exploration for uranium deposits. (Source: The Uranium Market Outlook)
The market was tapped out until the recent clean energy demands for China have led to the resurgence of the once battered uranium market.
There is a great opportunity in uranium investing; it's a classic case of supply and demand working to balance each other out. In the end, uranium stocks will carry great momentum from soaring world prices, yet mining costs will remain relatively the same.
Uranium is mined to create nuclear power at existing nuclear power plants. The demand for uranium greatly exceeds the supply available, especially because it can take 8 years to get mines “online.” We consume more uranium than we mine, making this metal more scarce every day.
Key Uranium Newsletter Highlights
- Uranium prices have soared in the past 24 months to over $41 per pound, a 400% increase from its 1993 price of $10.10.
- Ounce of ounce, uranium is more valuable than oil, nearly 137 times, and is 1,711 times more valuable than coal, another widely used mineral for energy.
- 40% of the world's mineable uranium exists in Australia, accounting for twice as much as its nearest competitor, Kazakhstan.
- The Future of Nuclear Power states, “China requires the equivalent of 200 nuclear plants to meet its rapidly expanding and growing energy needs.”
- China's growing demand is so great that it will need the same amount of uranium Australia produces each year on an annual basis to fuel its needs.
There are numerous reasons to capitalize on China's growing energy demand while stocks are still reasonable buys. Of course, we're seeking out China's direct nuclear power supplier as a possible investment opportunity.
First, we must fully understand the relationship between commodity prices and commodity stocks.
Understanding The Effect of Commodity Prices on Commodity stocks
Commodity stocks move in relation to their overlying index prices, as the “law of leverage” applies directly to commodities because of margins.
As commodity prices rise, margins increase since the company is taking in more profit without having to raise its cost of production. In 2006, major oil and gas companies recorded their biggest profit gains in history because higher prices improved operating margins.
Commodity Stock Picks
Oxford Club's newsletter alluded to a company that has 3 important characteristics:
1. Spent $7.2 billion to secure the world's largest uranium deposit.
2. Maintains the direct shipping line to Beijing harbor.
3. Plans to outsource fuel to China through an exclusive trade agreement.
Although the newsletter never revealed the company's name, I researched the world's largest uranium deposit and came across BHP Billiton Limited (BHP). They operate in diversified industrial metals and minerals, and run core businesses of petroleum, aluminum, base metals, carbon steel metal, diamonds, and energy coal.
BHP Billiton (BHP) Company Report
BHP Billiton Limited is a diversified resources group. The Company has seven business units, or Customer Sector Groups: Petroleum, which explores for, produces, processes and markets hydrocarbons, including oil, gas and liquefied natural gas; Aluminium, which explores for and mines bauxite, and processes and markets aluminium and alumina; Base Metals, which explores for, mines, processes and markets copper, silver, zinc, lead, uranium and copper by-products, including gold and molybdenum; Carbon Steel Materials, which explores for, mines, processes and markets metallurgical coal, iron ore and manganese used in the production of carbon steel; Diamonds and Specialty Products, which explores for and mines diamonds and titanium minerals; Energy Coal, which explores for, mines, processes and markets energy coal for use in electricity generation, and Stainless Steel Materials, which explores for, mines, processes and markets nickel, which is used in the production of stainless steel. (Source: MSN Money)
BHP Billton has a market cap of over $120 billion, a large-cap industrial play for investors wishing to ride the Chinese energy wave.
BHP Positive Stock Signals
1. BHP maintains competitive advantage over other uranium mines due to recent Australian deposits contract.
2. Long-term shareholder value is created through consistent EPS increases. EPS has gone up since 2001.
3. BHP shares tripled in price and built long-term value for shareholders.
4. Price-to-earnings ratio is 11 times its earnings, provides shareholder value with 50% ROE, has a 37% debt to equity ratio.
5. Low institutional ownership, standing at less than 3%.
BHP Negative Stock Signals
1. Accounts Payable has increased yearly since 2003.
2. Current Liabilities exceeds Current assets, meaning BHP's working capital is in the red.
BHP stock is worth a look, especially if you're looking to tap into China's growing demand for uranium fueled nuclear energy.
Future Outlook on Uranium Demand After Chinese Infrastructure Boom
The future is clean alternative energy whether big business likes it or not. While claims have supported ethanol is the future of clean energy, uranium has constantly increased in value and demand across the world and specifically China, where one-third of the earth's population resides.
The uranium bubble may burst once uranium stocks soar and eventually outsell the market, but there's definitely a future for uranium, one that brings cleaner air and large profits.