“The Nuclear Problem You’re Not Hearing About”

Uranium shortage teaser from Scarcity & Real Wealth

By Travis Johnson, Stock Gumshoe, March 17, 2011

Today’s teaser ad comes in from Nathan Slaughter, who’s trying to entice us to subscribe to his Scarcity & Real Wealth newsletter, a new offering from the StreetAuthority folks that’s focused, as you can probably guess, on investing in mining, energy and commodities.

And though the ad has been running for about two weeks as best I can tell, they started sending it out again this morning with this little intro from the publisher:

” As we wish Japan the best and pray that it avoids the worst with its terrifying nuclear situation…

“… we’ve got another serious nuclear incident headed our way that nobody is talking about.

“This one is coming out of Russia and it’s set to affect 31 million Americans.”

The ad itself hasn’t changed to reflect the abruptly changed (at least temporarily) world of nuclear energy, but since they’re still sending it out today and still pushing their investment theme, I guess we can assume that Slaughter still likes the picks he teased — which would mean, as we’ll see in a minute, that he thinks the uranium market is not going to fall off a cliff. Or, depending on what you call a cliff, that it won’t fall off another cliff.

And if that’s so, then perhaps the big price cut that all uranium and nuclear stocks got following news of the crisis in Japan is an overreaction, and maybe a big buying opportunity. I can’t tell you what will happen to global nuclear energy plans, or even what will happen in Japan this afternoon, though I can keep my fingers crossed (tough when typing, let me tell you) and identify the investment that they’re teasing in this ad.

The basic premise of the ad is that uranium demand has long outpaced mine supply, and that the source that has made up the difference and kept uranium prices artificially low for a long time — decommissioned Soviet warheads — is going to disappear with the expiration of the 20-year US/Russian agreement (commonly called Megatons to Megawatts or HEU-LEU, converting High-Enriched Uranium for weapons to Low-Enriched Uranium for energy) on that matter in 2013. Or, if you want the more florid version from Slaughter:

“Russian Nuclear Catastrophe to Hit the U.S. in 2013
“31 Million U.S. Citizens Will Be Affected

“Few people realize it, but in 2013, just 22 months from now, an event will take place in Russia that could devastate U.S. energy supplies.

“On that day, a 20-year nuclear warhead agreement between the United States and Russia will expire.

“Unless preventive steps are taken, 10% of America’s electric energy supply will dry up.”

So yes, the 31 million is just a match for the “10% of America” that relies on Russian-derived fuel for nuclear reactors (about half of US uranium comes from the Russian program now, and about 20% of US energy production is from nuclear plants, so the 10% at least has a basis in fact).

And the investment thesis, as you can imagine, is that once this uranium agreement expires this cheap and easy supply will be gone — and existing production can’t grow fast enough to meet the increased demand from current and planned reactors.

You do have to assume that there won’t be a huge wave of nuclear reactor shutdowns, or a scrapping of much of the planned base of new reactors, particularly in China and India, where you’ll find the largest numbers of new projects on the books or under construction. But if you do stay with that assumption, then supply will fail to meet demand over the next few years … which is, of course, the very basis for most speculation in commodities or any other sector.

As Slaughter puts it:

“What does this mean for investors? Once this uranium supply is disrupted, the price of uranium mining stocks could go through the roof. I’m talking about gains in the hundreds of percent.

“Uranium Supplies Are Running Out

“The spot price of uranium has already surged 71% since last September, marching from $40 per pound to almost $70.”

And he goes on to tell us that supply will fail to meet demand starting in 2012, with a dramatic deficit building in the years to follow. So miners should get rich, right? Here’s more from the ad:

“According to Morgan Stanley, 147 new nuclear reactors will come online worldwide over the next 10 years. But all those new reactors can’t deliver a single kilowatt without uranium.

“And they need a lot: an additional 80 million pounds per year. To meet demand, mines will need to double uranium output by 2020. That’s not going to happen, except at much higher prices.

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“With most metals, you could just dig more up. But not uranium. New discoveries just aren’t happening. Greg Hall, a 30-year industry veteran and director of one of Australia’s top uranium explorers, recently said that he expects fewer than five significant new finds over the next decade. And it will take at least eight years to get them up and running.”

So we’re told that new demand coming online from China and India over the next decade, along with the loss of the Megatons to Megawatts supply from Russia, will cause a price war. It’s probably worth noting that Uranium has seen extraordinarily volatile pricing over the last few decades anyway, in part because it’s not really a liquid or transparent market — prices have gotten as high as $138 a pound in recent years during the uranium mania of 2007, and as low as about $7 a pound in the 1990s when weapon demand collapsed and no one was building new reactors (and not surprisingly, when prices were low we went for a decade or two without anyone really looking to find or build a new uranium mine, either). There isn’t really a fair “spot price” like we see for commodities that trade on the futures markets, but there is an industry consultant that publishes a price that most folks seem to rely on — you can see that here from UXC, note that although prices did spike to about $70 at the end of February the reactor crisis has dropped them down to at least $60 … and that’s still 50% above where uranium traded a year ago. The point is: the possible range for uranium pricing is huge, even without a disaster like we’re seeing in Japan.

And the investment case from Slaughter is that we might see uranium prices climb well over the old highs, past $100 to $200 or even $1,000 a pound — and since nuclear power plants hav