Canadian Flood Isn't Gonna Sink the Uranium Bulls

Problems at Cigar Lake are bad for Cameco but bullish for the metal and other miners.
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Editor's Note: The following is a guest column by Sean Brodrick, an editor at Weiss Research. The views expressed in this article are his own. TheStreet.com accepts unsolicited manuscripts but will respond only to those it considers publishing. If you would like to submit a column for consideration, please email comment@thestreet.com.

The uranium industry was rocked this week by news that

Cameco

(CCJ) - Get Report

, the world's biggest uranium producer, suffered a disastrous flood at its Cigar Lake mine.

Cigar Lake was supposed to go into production in 2008 and produce as much as 18 million pounds of uranium a year; 18 million pounds -- that's more than a tenth of last year's total global demand of 171 million pounds. In 2008, uranium demand was already expected to exceed supply by 25 million pounds. With Cigar Lake out of commission, that gap will be 32 million pounds -- an increase of 30%.

"Losing Cigar Lake in the uranium world is like the oil market having to deal with the loss of Saudi Arabia," says Kevin Brambrough of Sprott Asset Management.

I agree. So as an investor, what should you do now?

Don't buy Cameco. What looked like an undervalued company last week now looks like an underwater disaster. While Cameco hopes to bring Cigar Lake back on line by 2009, there could be other problems ready to surface. For now, stay away. It looks cheap, but it could get cheaper.

Buy other near-term producers.

The flooding of the Cigar Lake mine is a boon to uranium prices and uranium stocks, especially stocks of companies that are already producing or will bring mines on line in the next couple years. For companies such as

BHP Billiton

(BHP) - Get Report

, the big bull market is just starting.

Uranium has been on a rocket ride -- up over 270% in the past two years alone. Have you missed the boat? Heck no! I believe we're at the beginning of a mega-boom, one that will be fueled by white-hot demand for uranium in China, India, Russia and many other energy-dependent countries.

On a historical basis, uranium is still quite cheap. In 1978, uranium topped out at $43.40 per pound. Adjusted for inflation, that's around $145 per pound in today's dollars.

Recently, uranium traded at $56 per pound. It could more than double in price and still not surpass its old highs on an inflation-adjusted basis. I believe uranium will hit

at least

$70 per pound by the end of 2007 -- a 32% rise from present prices. And that could be a conservative estimate.

Outside of Cameco, there are longer-term forces driving uranium prices, including:

A Supply/Demand Squeeze: The flooding of Cigar Lake puts an even bigger squeeze on an already-tight supply picture. Production from world uranium mines now supplies only 62% of power utilities' requirements. About a third of annual demand for uranium is met by Russia's highly enriched uranium weapons de-commissioning -- a program that is going to end in seven years. Utilities and other users are scrambling now to fill future demand.

Global Warming: An operating nuclear power plant produces zero greenhouse gases. Compare that to your average coal plant, which can spew 3.7 million tons of carbon dioxide (a greenhouse gas) into the air every year, along with hundreds of tons of heavy-metal laden ash.

Economics: Despite the rising price of uranium, nuclear power is getting cheaper, thank to standardization in power plant construction. The cost of uranium is a much smaller part of the cost of a nuclear power plant than the cost of natural gas is of a natural gas-fired power plant. And while natural gas prices have dropped in the short-term, their long-term trend should be much higher.

Building Boom: There are 28 new plants under construction. Asia is especially hot for nuclear power, with 18 being built and another 77 are planned or proposed.

China, India and other countries realize they can't meet their growing energy needs through fossil fuels alone and are embarking on very ambitious nuclear programs. China is adding two nuclear power plants per year until 2020, effectively planning to double the percentage of electricity it gets from nuclear power.

Even Russia, the "Saudi Arabia of natural gas," realizes that gas won't last forever ... or even much longer.

That's why Russian President Vladimir Putin has targeted nuclear power's share of Russia's energy use to increase to 25% by 2030 vs. 15% currently. To get from here to there, Russia needs to add 40 gigawatts (40,000 megawatts) of nuclear energy each and every year -- building at least 42 new nuclear reactors and perhaps as many as 58.

But don't worry about hundreds of new Chernobyls. The current generation of nuclear power plants is also much safer than the old models -- with mechanisms that automatically shut the reactor down in the event of a problem.

Build Your Own Atomic Portfolio

BHP Billiton is an Australian miner of all types of metals, and one of its properties is the Olympic Dam mine. That's one of the biggest uranium deposits -- 40% of the world's known resources. And aggressive drilling recently upgraded the ore body by more than 11%, adding 188,000 metric tonnes of uranium.

BHP's uranium production from Olympic Dam is being delivered under contracts that are good at least until 2008 -- contracts that still price uranium in the mid-teens (U.S. dollars). With each month that passes, however, old uranium contracts are coming up for renewal. And that's when uranium producers will really start to reap the rewards of price increases that have already occurred.

BHP is a fine company and should reap plenty of profits in the bull market for all metals, not just uranium. Indeed, it currently gets more revenue from copper at Olympic Dam than it does uranium.

An even better choice might be

Energy Resources of Australia

, which operates Australia's Ranger Mine and supplies about 12% of the world's uranium production. Its stock, which trades on the Australian Stock Exchange and the Pink Sheets here under the symbol EGRAF, has been on fire lately, but I believe it could go much higher.

There are many fine small-cap uranium stocks trading on Canadian exchanges. For a list of Canadian uranium stocks by market cap,

click here. Just remember, the general rule is, the smaller a stock, the more risky it can be.

You could also buy a mutual fund or ETF that holds uranium. There are few of those, though, and none are listed primarily on U.S. exchanges (yet). I believe there will eventually be a U.S.-based uranium ETF, and it will be a major driver in the markets.

As of today, my choice is

Uranium Participation Corp.

, a Canadian fund that buys physical uranium. It's very similar to the way that the

streetTRACKS Gold

(GLD) - Get Report

gives investors a stake in gold.

The Uranium Participation Corp. trades on the Toronto Exchange under ticker symbol U. In the U.S., the symbol is URPTF on the Pink Sheets.

Do your due diligence, and you can find some great companies. The big uranium bull market has a long way to go, and the sooner you start, the bigger your profit potential.

Sean Brodrick, an editor at Weiss Research, has no positions in stocks mentioned. Brodrick has over 25 years' experience as a journalist and stock analyst. He is the editor of Red-Hot Canadian Small-Caps and Red-Hot Asian Tigers, and a contributor to

MoneyandMarkets.com . You can read his latest thoughts at his blog, RedHotresources.blogspot.com. He is also the author of the recent report "The Golden Age of Uranium"