For investors looking at the nuclear energy sector through the rearview mirror, the view is not pretty.
In March 2011, a giant tsunami crashed into the Japanese Fukushima nuclear facility and created a major nuclear disaster. Predictably both the price of uranium and the share prices of uranium producers collapsed following Fukushima.
But I predict that the uranium industry could be looking at huge upside over the next several years. In fact, by my calculations the price of uranium must go up 250% to meet current and future demand.
For evidence, one only has to look at two of the world's biggest consumers of uranium…
The United States currently consumes 50 million pounds of uranium each year but only produces 4 million pounds.
China consumes 19 million pounds per year and also only produces 4 million pounds.
In the coming years, China is going to be aggressively fighting for a larger amount of the available global uranium supply -- as the country's consumption is forecasted to grow to 73 million pounds per year by 2030.
To put it in perspective, China is going to need to find sources of uranium by 2030 that are equal to the amount of uranium that the US currently obtains from foreign sources. That in itself is a huge boost in demand.
In addition, there are currently 70 nuclear reactors under construction around the globe. The World Nuclear Association believes that these reactors alone will require an additional 33 million pounds of uranium to run on an annual basis.
And the long-term plan for the number of reactors around the world is even larger. Again according to the World Nuclear Association, there are another 310 nuclear reactors currently proposed.
That massive increase in demand for uranium is going to significantly outstrip the current global production capacity. And global producers aren't going to be willing to meet demand, unless the price of uranium goes up significantly.
According to JP Morgan, the average uranium price needed to make a new conventional uranium project profitable is $83/lb. That's 250% higher than the spot price for uranium today.
Put simply, in a world of $33 uranium prices, current producers don't make a huge amount of money. But in a world of $83 (and higher) uranium prices, these same companies are going to gush free cash flow.
That is fantastic news for lower cost uranium producers like Uranium Energy Corporation (NYSE: UEC).
In 2013, Uranium Energy produced uranium from its Texas based mine for a cash cost of $22/lb -- well below the $33 current spot price. So even at this depressed price, Uranium Energy is able to grind out profitable production. That gives the company staying power in a tough environment.
But it is when uranium prices rebound that this company is set to really flourish.
The chart below shows how much more per pound of uranium produced the company makes if uranium prices make their way up to the marginal cost of new supply which is $83/lb.
As you can see, at the current uranium spot price of $33/lb Uranium Energy Corporation makes $11/lb. At $43/lb that cash profit nearly doubles to $21/lb.
This represents huge leverage to the rising cost of uranium that I'm predicting. If the price of uranium eventually reaches the marginal cost of new supply at $83, Uranium Energy Corporation’s cash profit per pound will have gone up six times.
Profits drive share prices, so what this means for investors is that if the price of uranium goes from $33 to $83, Uranium Energy could also make six times as much money for shareholders.
To be clear, this is a delayed gratification opportunity. In the near term if uranium prices don’t increase (which is quite possible) shares of Uranium Energy Corporation aren’t likely to do much.
But once the longer term supply and demand forces start to push uranium prices higher, I predict things will get a lot more interesting for companies like Uranium Energy.
Risks to Consider: Uranium Energy Corporation is a commodity producer. If you make the correct call on the commodity being produced you can make a lot of money, but the future is uncertain and events like Fukushima do happen when you least expect it. If something happens to depress the price of uranium for the long term, it would not be good for Uranium Energy Corporation.
Action to Take --> If you are long term bullish on uranium prices you should buy shares of Uranium Energy Corporation, which offers a tremendous amount of leverage to rising uranium prices.
