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The impending uranium boom

In 2007, the uranium spot price reached a high of US$140/pound, today prices have fallen to US$35/pound. It is accepted that new projects require a spot price of US$80/pound to proceed from exploration to production.

The price spike resulted in an influx of small explorers and a growth in production plans for existing producers. This temporary change in supply, coupled with the fear created by the Fukushima incident, resulted in a oversupply in uranium. This oversupply is expected to reverse in 2014 with demand being driven by a record number of nuclear reactors being commissioned, particularly in China, which sees no other viable option but to increase its reliance on uranium to meet growing energy requirements.

Uranium is a highly efficient, clean and economically viable energy alternative to coal. For example, coal produces 1,000 grams of carbon dioxide per kilowatt-hour of electricity, versus uranium which produces no more than 21 grams for the equivalent amount of electricity. With 40% of the worlds carbon emmissions being produced through the generation of energy, the demand for uranium should increase as the climate change battle evolves.

There are a number of ways to gain exposure to the potential rally in uranium prices through listed Australian explorers and developers.

The major players are BHP Billiton (ASX: BHP), Paladin Energy (ASX: PDN) and Energy Resources Australia (ASX: ERA). For a pure play on uranium I would look at Paladin Energy. Paldin has extensive uranium resources and reserves and when the uranium price moves above US$80/pound, it will be receiving substantial operating cash flows, which can then be used to pay down debt and provide robust returns to shareholders.

There are a number of smaller players, which include Toro Energy (ASX: TOE), Energy and Minerals Australia (ASX: EMA) and Wild Horse Energy (ASX: WHE), to name a few. All these smaller players are expected to rally strongly upon a recovery in the uranium price, however only those likely to proceed to production will be worthwhile longer term investments. For this reason I would look at either Toro Energy for the fact that it’s well advanced with gaining necessary approvals to mine their tenements or Energy and Minerals Australia for its impressive management team for a small-cap explorer.

Do be prepared to go through multiple capital raisings to keep these companies afloat until cash flow can be generated through production as the uranium price goes higher. The less risk-tolerant investor should watch on the sidelines and look to invest when the uranium spot prices provide solid evidence that demand for uranium has once again exceeded its supply.

Foolish takeaway

Australia is estimated to have 31% of the world’s total uranium resources, making it the world’s largest producer. If the Australian government supports the domestic uranium industry and the price does recover as expected, then Australia is best placed to ride what could be a very long and strong uranium bull market.

 

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Motley Fool contributor Tim Roberts does not own shares in any of the companies mentioned.

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