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Energy Insights:94: Look Out... $500 Uranium Is On the Way

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94: Look Out... $500 Uranium Is On the Way



Keith Kohl2007-04-10
By Keith Kohl

Baltimore, MD--Uranium's meteoric rise has only just begun. Today the other yellow metal not only breached the $100 per pound mark--it smashed it! The spot price for uranium soared to $113 per pound. But is it time to break out the champagne?

Let's take a quick look at just how uranium broke wide open before we delve into its bright future.

In 1985, uranium demand was being met by supply. The Cold War was winding down, and so uranium production was scaled back. Eight years later, the U.S. signed a deal with Russia to fuel U.S. nuclear reactors using old Soviet warheads. This decreased the demand for uranium production and caused prices to plunge.

When prices fell, mining companies halted nearly all uranium production. No sense in mining uranium if there's no profit, right? So drilling was halted and exploration stopped. Uranium bottomed out at $7.10 per pound on December 25, 2000.

But demand for the stuff has skyrocketed over the past seven years, and because miners practically stopped production, supply hasn't been able to catch up yet. You see, the problem with mining uranium is that it can take up to a decade to bring a new mine into production.

Then another blow to production occurred when Cameco's Cigar Lake mine flooded. The uranium price shot through the roof.

Don't expect a quick fix at Cigar Lake, either. This massive uranium mine was supposed to start production again next year, but Cameco has said it will take at least another two years before production can begin.

Let's look at what this raging uranium bull has done and exactly where it's going.

Uranium prices in 2007 started at $71 per pound and increased to $113 per pound today. That means the spot price has jumped 59% in just four months!




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Remember I mentioned before that uranium bottomed out at $7.10 per pound in 2000?

With the latest gain, that's a 1,491.5% increase in just seven years!

But I want to emphasize this--uranium's spot price today is only a fraction of what it will be in the next ten years.

I think uranium will easily break $500 per pound in a couple of years--maybe even sooner!

And if you consider the factors involved, a spot price at $2,000 per pound really isn't out of the question.

Maybe I should explain myself for a minute before I'm burned at the stake by skeptics.

Future Considerations

Every economy textbook explains the concept of supply and demand in the first chapter. And uranium demand simply cannot be met at current production rates.

Since uranium is utilized in the creation of nuclear fuel (let's at least hope it's fuel, in Iran's case), the spread of nuclear reactors will directly raise the uranium price.

According to data from the World Nuclear Association, 158 nuclear reactors were proposed around the world in 2007--with 28 currently being built and 64 expected to begin construction this year. This is on top of the 435 reactor already operating.

These nuclear facilities will require over 135 million pounds of uranium.

And . . . we won't come close to producing that much! The world only produced a little over 100 million pounds of uranium in last year. Supply will consistently fail to meet demand for several years.

Chinese demand has been a driving force behind uranium's price rise since 2000. China's desire for cleaner energy has led that nation down the nuclear path. Right now, China produces 3% of its electricity from nuclear power.

The goal, however, is to produce 100% of its electricity through nuclear power-requiring a huge amount of uranium.

The World Nuclear Association notes that there are ten nuclear reactors operating in China . . . with 50 more proposed so far in 2007. Some experts put the number of proposed and planned Chinese nuclear reactors at more than 100!

And here's the dirty little secret why uranium prices could be stable at $2,000 per pound . . .

The cost of uranium is only a minuscule part of a power plant's spending. Analysts have reported that nuclear power plants can cost more than $2 billion! That's just the cost of construction, which doesn't include the billions spent on maintenance throughout the plant's lifetime. Spending $2,000 per pound of uranium to keep your plant running is minimal to investors.

It may take a while for nuclear energy to grow enough to allow that exorbitant price, but uranium at $500 per pound in the next five years is very possible.

Let's face it, getting into uranium is a no-brainer.

How you get into it, though, makes a world of a difference. Personally, I like the smaller mining companies with the right people behind the wheel and an attractive list of properties.

Take Aldershot Resources (TSX-V: ALZ), for example. These guys have several prospective properties in both Canada and Australia. Remember that Canada holds 19% of the world's uranium reserves and Australia about 24%. Yet this small company is trading at $0.38.

Even if there is a slight pullback in uranium this year, you can still expect to profit dramatically over the long haul. I would suggest getting in now while you still can.

Until next time,

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Keith Kohl

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