Investing in the new nuclear age
The drive for clean energy and more electricity means more nuclear power, says this U.S. advisory, and a buy on one big Canadian stock.
“Nuclear” is a loaded word.
Put it in front of “weapons” and you raise the spectre of the long east-west arms race, a source of anxiety that has not disappeared as the world keeps a nervous eye on North Korea and Iran.
Put it in front of “power plant” and some can’t help but think of Chernobyl and Three Mile Island and the dangers of a meltdown.
But until wind and sun can generate much more power than they do today, nuclear power will not just be with us. It will grow.
And while Canada derives more power from hydroelectricity than most nations, it is at the forefront of the growth of nuclear power.
For the full story, we turn to a leading U.S. advisory, Personal Finance. The authors are the advisory’s editor, Mr. Elliott Gue, and Mr. Roger Conrad, who is also one of America’s foremost experts on Canadian investments.
The plot hinges on two intertwined ideas — less carbon and more electricity. Along the way, we can find a major Canadian stock being added to this advisory’s Growth Portfolio.
The bigger solution
“Whether you believe climate change is the greatest threat facing the world today or little more than a giant hoax, one thing is certain,” the authors begin rather provocatively. “Governments around the world are passing laws aimed at limiting emissions of carbon dioxide.”
New regulations to that effect are already having an impact on the choice of energy supplies and your investments, they add.
But that’s only half of the equation. The other is the demand for electricity. In the U.S. it will grow by almost 50 per cent between now and 2020. Around the world, demand could triple.
How do you meet this rather tall challenge without spending exorbitant amounts of money? Alternative energy will be one solution. Nuclear energy is the other, and right now, the bigger solution.
Supplies running down
Today 80 per cent of the world’s electricity comes from three sources — coal, natural gas and nuclear power. Only one of these is carbon-free. Nuclear power already accounts for 50 per cent of the worlds’ emissions-free power, and 70 per cent of it in the U.S.
Nuclear power has another big advantage. It is cheap. Most of the cost is the up-front expense of building the plant. The cost of the uranium needed to fuel it is not that high.
In short, unlike with natural gas and coal, the cost of operating the plant doesn’t go up and down with commodity prices.
So guess who’s building nuclear power plants in the years ahead? Well, China and India for starters, and those are big starters.
Two years ago, the world used over 180 million pounds of uranium, while global mines produced just 115 million pounds. Supplies are running down and new ones are needed.
To build new mines, the price of uranium needs to be at around $70 (the spot price is hovering around $50). So we turn to existing mines, starting with two in Saskatchewan.
Far from the prairies
The world’s largest uranium producer is Cameco Corp. (TSX-CC); NYSE-CCJ). No less than a fifth of the world’s production comes from this Canadian giant.
Its McArthur Lake mine has an exceptionally high ore grade of 20 per cent uranium oxide. Thus Cameco’s costs of extraction are among the lowest in the world. Half of the company’s production comes from this mine, and it can produce at the current rate for at least 19 years.
Another Saskatchewan property, the 50-per cent owned Cigar Lake, has an even higher grade of uranium ore. It will begin production in 2011.
There is a third mine, far from the prairies, in Kazakhstan. It’s already under production and should be up to full speed early next year.
With all of this high-grade uranium ore ready to hit the market, this advisory has added Cameco to its Growth Portfolio. They recommend it as a buy under US$30. In New York, it trades at $27, in Toronto, at $30.54.
A tantalizing acquisition
Australia’s Paladin Resources (TSX/ASX-PDN) brought the first new uranium mine into production in decades. It’s in Namibia, and should be producing a fat 6 million pounds a year by the end of 2010.
Paladin also has a producing mine in Malawi and projects underway in Australia.
“And there’s a kicker,” add the authors. “Paladin’s mines in Africa and reserves in Australia are a tantalizing acquisition for any company looking to secure long-term access to uranium supplies.”
One source we follow (although not this advisory) specifically names Paladin as a potential takeover target for Cameco. Personal Finance recommends the stock at less than C$5. It opened at $4.51 on the TSX.
There are two other nuclear power stocks in the advisory’s Growth Portfolio. France’s AREVA (OTC:ARVCF; France:CEI) does everything from exploration and mining to the building of nuclear reactors and disposal of nuclear waste. It’s not cheap at US$619, but it’s recommended up to $650.
Shaw Group (NYSE-SGR) is a design, engineering and construction firm. Its largest business is the construction and maintenance of power plants and it has a 20 per cent stake in Westinghouse, the world’s second largest designer of nuclear reactors. The advisory made it a buy under US$30, but the shares have already risen to $30.62.
The word nuclear may mean different things to different people, but to this advisory it clearly means clean power, cheap energy and high-grade profits.
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