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    Playing Chess With Uranium

    Certain commodities, including gold, silver, oil, copper, steel and even corn and wheat, get a fair amount of play week in and week out. But generally, you don’t hear much regular talk about uranium. And this commodity is undergoing some big changes that investors should be paying attention to right now.

    Uranium has one real commercial use these days; it’s the fuel for nuclear reactors.

    The Japanese tsunami that destroyed the Fukushima reactors in Northern Japan effectively killed the global nuclear industry and has stunted the growth of uranium miners in the process.

    Japan, which was highly dependent upon nuclear power, has powered down its reactors and has been re-evaluating its nuclear energy policy since the accident. Germany has vowed to end its nuclear development and nuclear power purchases. The United States’ nuclear industry has had a couple of significant hurdles to overcome.

    First, even before Fukishima, when oil prices were high and going higher, many large utilities were considering building new generation nukes to meet tightening emission standards that were affecting their coal plants and to find more efficient ways to generate the growing power needs of an increasingly electrified nation.

    The problem was that because of past experiences with U.S. nukes (Three Mile Island and Diablo Canyon, for example) regulations make building new nukes extremely expensive. The Federal government wasn’t interested in considering nukes “green energy” and didn’t want to finance or subsidize new nuclear plants. And the power companies couldn’t justify the hefty price tags for building the new, safer nuclear plants on their own.

    Second, nuclear power has an uneasy reputation with individuals and government officials. Storing the waste, concern over operational safety and other issues tend to make siting and development acrimonious at best. People may curse dirty coal, but few praise clean nukes.

    Yet this attitude is much different in other countries where uranium is abundant and energy is needed on a massive scale — now and in the future.

    China has not backed off its efforts to build new nuclear plants, India is also expanding its nukes and Russia has no qualms with nuclear energy. Even Japan, which was getting more than 20 percent of the nation’s power from its nukes, is considering putting some of its nukes back on line or upgrading plants to the new generation of reactors.

    What’s more, nuclear energy has become a lot safer than it used to be. Two, three or four decades ago, when the last generation of nukes were put on line, there were a number of different types of reactors and different types of power plants housing them and there were just as many contractors and siting criteria. Each plant had to be scrutinized from concept to construction. It was an outrageously costly and time-consuming process, which isn’t good for business or consumers.

    Now, there are only a few different reactors that are used and just a few companies that build them. The new facilities are more reliable, and they are certainly safer than the ones that suffered catastrophic failure in Fukushima. (The Fukushima facilities were built almost 40 years ago.)

    That means these countries are able to build reactors at a much faster pace than they were built in the past. Granted it still takes years to get one up and running but they’re coming.

    That’s where the uranium story gets interesting. Just like any industry, when there is a long bear market, the weak players can stick it out only so long until they either start to buckle or someone buys them out at a bargain.

    That’s what is starting to happen now. Mergers and acquisitions (M&A) activity is ramping up among uranium miners.

    The Russians and the Chinese have been using their natural resources. They’re starting to realize that this is a good time to start buying properties around the world, including in the United States. Africa is another prime location for uranium operations. Controlling uranium means controlling prices.

    Recently, Uranium One Inc. (SXRZF), a Canada-based miner with operations in the United States, Canada, Australia, Kazakhstan and Tanzania, was purchased by its largest shareholder, JSC Atomredmetzoloto, which just happens to be a wholly owned subsidiary of Rosatom, the Russian State Corporation for Nuclear Energy. Get the picture? Russians are acquiring North American uranium mines.

    And big mining companies are also starting to snap up smaller players in anticipation of growing demand from Asia.

    As the global chess match for uranium resources gets under way, it’s a good idea to start to add to a strategic position or two in this commodity. There’s potential demand from known growth factors. And if Europe, the United States or other emerging economies decide to develop nuclear energy, that will simply tighten supply even more and the stocks will move even higher.

    At this point, the best way to position yourself in this sector is to buy big miners like U.S.-based producer Cameco Corp. (CCJ), Australia-based Paladin Energy Ltd. (PALAF) and Canada-based Denison Mines Corp. (DNN). Another more diversified choice is U.K.-based Rio Tinto PLC (RIO). All have operations beyond their home countries, but I thought it valuable to understand the global nature of this business.

    The most diversified play and the most commodity-based would be the exchange-traded fund Global X Uranium (URA). Or if you’re interested in making a play on the nuclear industry, try Market Vectors Nuclear Energy (NLR).

    You don’t have to run out and do this tomorrow. But the signs indicate uranium is going to get back on its feet in coming months, and prices are so cheap that there’s far less downside risk than there is upside potential.

    — GS Early

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