The prolonged drop in uranium prices to around 40 US dollars per pound has contrarian investors salivating. They argue that the price for the radioactive fuel will rebound to around $80 per pound. If this scenario does play out, pure-play uranium company Paladin Energy Ltd (ASX: PDN) is sure to see its share price recover (it's down almost 90% in the last five years). Investors who want exposure to the uranium price without exposure to a speculative company can invest in mega-miners Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP), who are likely to be able to afford the considerable development and clean-up costs of uranium mines.
But punters willing to risk it all to make massive returns have a vast array of hopeful resource companies with exposure to uranium prices, including (but not limited to) Deep Yellow Limited (ASX: DYL), Energy Resources of Australia (ASX: ERA), Toro Energy Limited (ASX: TOE), Rum Jungle Resources Ltd (ASX: RUM), and Summit Resources Ltd (Australia) (ASX: SMM). If the uranium price doubles, these companies (as a group) will see their share prices soar. Indeed, Perth Now reports that: "Uranium industry legend Alan Eggers says mining companies should prepare for a rebound in uranium prices by 2014 when there will be a massive global demand for nuclear power." Sounds like a sure thing! Here I am, worrying about long-term business prospects while the savvy traders are loading up on uranium stocks.
However, the uranium play makes one big assumption: that demand for uranium is growing or remaining constant. Fortunately, that is not necessarily the case. For example, Germany is closing down its nuclear reactors, with giant utility E.On recently reported to be interested in closing down reactors ahead of schedule. There was a catastrophic nuclear accident at Fukushima, Japan a few years ago, and that has lead the Japanese to cool some of their enthusiasm for nuclear power.
Will the demise of coal save uranium investors? Dick Warburton made the case (in a 2011 article for the conservative Quadrant magazine) that: "The only current viable alternative to burning fossil fuels is to go nuclear." However he also wrote that: "Energy demand is "pretty inelastic" because people will not choose other goods or services to substitute for energy that keeps them warm or cool, cooks their food and provides transportation."
This could not be further from the truth, of course. Not only is energy demand very elastic (it is constantly changing) the general trend is that demand is dropping as power use becomes more efficient (think insulation) and negative load is added to the grid (think rooftop solar). However, while energy demand peaks are reducing, there is significant seasonal variation, as well as significant variation within each day. In no way is electricity demand inelastic – although nuclear power generation certainly is! Even coal powered plants can power up and down more easily, and they're far better for the environment (CO2 is nowhere near as dangerous as radioactive waste – and uranium mines are far more toxic to workers and nearby towns than coal mines are.)
Is nuclear power driven by good economics?
The graph below depicts the cost of power generated from a variety of power plants that have been recently built or (in the case of the nuclear plant) will be built in the future. As you can see, nuclear is the costly option. It would be far cheaper and more flexible to build renewable energy generation in most markets, as long as there is adequate natural gas back-up capacity (which there often is). I believe nuclear plants will continue to be built (from time to time) because some governments want to maintain nuclear expertise in order to remain capable of producing nuclear weapons. However, it certainly cannot be said that nuclear power is the frontrunner to replace coal.
Foolish takeaway
So how can you make money from speculative uranium stocks? Simple: by selling the shares at a profit if the uranium price goes up. However, except for BHP and Rio, none of the companies mentioned in this article are profitable, and buying shares is a risky gamble. I doubt that current shareholders in those companies intend to hold their shares until they receive a dividend. In fact, most investors in these companies are waiting for a "greater fool" to come along and buy them out for a higher price. Long-term value investors would never invest in such a risky proposition: there are plenty of profitable and less risky resource companies available on the ASX.
