I came across a very interesting piece of research about 10 years ago.
And the findings of that research have always stuck with me.
It was a report all about the potential for explosive growth in the price of uranium. And in turn, the share prices of uranium miners.
I remember it got me pretty excited at the time. As it turned out the timing was wrong back then. One word: Fukushima.
But maybe this opportunity is back on the table now?
You see, yesterday, a seemingly innocuous deal between Paladin and a tiny ASX-listed company brought the memories of that research flooding back.
And reminded me that there could be big opportunities for uranium looming on the horizon.
Let me explain why…
The energy market could be poised to explode
It was 2009…
I was on the hunt for exponential investing opportunities to trade into.
My research brought me to the ‘Red Book’ — a joint publication from the Nuclear Energy Agency and the International Atomic Agency.
It was — and still is — the most authoritative source for data on resources, production and demand.
Anyway, in the Red Book I came across a unique feature of uranium that could have a dramatic effect on the uranium price.
Check out the ‘hockey stick’ shaped cost curve shown below…
Source: Red Book/BHP
[Click to open new window]
This chart shows how after a certain amount of uranium demand, the cost of producing more uranium shoots up rapidly.
Like the shape of hockey stick.
So, why does that matter?
China and India have big plans for nuclear energy
Well, the thing about nuclear power plants is that uranium costs are only small part of the ongoing costs.
The main cost is actually in building the thing in the first place.
But the cost of uranium fuel only makes up around 14% of the ongoing running costs of your average nuclear power plant.
That’s far lower than fossil fuels, which make up the bulk of ongoing costs at traditional power plants. Which means they are more sensitive to changes in commodity prices like coal and gas.
And that matters because it means nuclear plant operators (the main buyers of uranium) are relatively comfortable with higher uranium prices — a lot higher, in fact.
So, the decision to build a nuclear plant can factor in uranium prices far above current levels pretty easily.
In 2009, consulting geologist Dave Forest laid out the natural opportunity from this fact:
‘Suppose demand [is at] 95% of potential world supply…This level of production can be supported at a price of $30 per pound. Now suppose a few new uranium buyers enter the market. Global demand rises only slightly. Perhaps by a few million pounds yearly, or 1-2% of overall demand. But now we need to bring on the final 5% of global mine supply to deliver these extra pounds. And the final 5% of mines are high-cost compared to the rest of the world. In order for these mines to operate, we need prices to rise to $50 per pound. A 65% increase from our previous $30 price. And this increase needs to happen very quickly.
‘[A price spike can be] caused by a single, aggressive buyer looking for a few hundred thousand extra pounds of supply.’
In other words, you could get an exponential increase in uranium prices thanks to just a small increase in demand.
At the time, I remember thinking that if this happened, then ASX-listed companies like Deep Yellow Ltd [ASX:DYL] and Paladin Energy Ltd [ASX:PDN] could soar.
But then in 2011, we had the Fukushima nuclear disaster in Japan and that was that for the uranium miner opportunity.
More recently though, chatter about the benefits of nuclear power are back on the agenda.
China and India have big plans to invest in nuclear energy.
Even here in Australia, a recent poll found that support for nuclear power was rising. 44% were for it versus 40% against. Up from 28% and 60% in 2015.
With the supply of ready uranium probably more depressed than ever thanks to decades of low prices, it could be time to start building a uranium miner watch list once again.
And it’s why I found yesterday’s price spike in Hylea Metals Ltd [ASX:HCO] very interesting…
The deal of a lifetime
Yesterday, Paladin announced that they were selling their Kayelekera uranium mine in Malawi to Hylea Metals for the grand price of $10 million.
Part of that is $4.8 million worth of shares in Hylea issued to Paladin over four years. The rest is in cash.
Hylea Metals shares soared from a closing price of 1.3 cents on Friday to a high of nine cents yesterday, closing at around 5.6 cents.
In comparison, Paladin shares dropped 6%.
You can tell who the market thinks got the better end of the deal…
And considering Paladin has spent $200 million on this mine — which is currently in care and maintenance due to low uranium prices — you can see why Hylea shareholders went wild.
Just think: Hylea was a tiny $5 million market cap speccy before today. Now it’s the owner of a fully-fledged uranium mine ready to pump out uranium, should prices rise enough!
The deal still leaves Paladin with its Langer Heinrich uranium mine as its primary asset.
It also gives them a shareholding in Hylea, a 3.5% royalty (capped at $5 million per year), the return of a $10 million bond payment and the remaining $5 million in cash.
Lastly, it saves Paladin the care and maintenance costs of around $5 million per year. Costs Hylea will now have to bear.
It’s clearly Hylea shareholders who are celebrating the hardest today.
But if the hockey stick theory is still correct, both companies could be worth keeping a very close eye on.
At a deeper level, it’s clear to me there are huge opportunities in energy right now. It’s an industry in flux.
Attitudes are changing, economics are changing and technology is changing. That spells opportunity for you.
The energy market could be the biggest investing story to unfold over the next few years…
Editor, Money Morning
PS: It’s down over 90% in 10 years…but is uranium about to surge 2,000% (again)? One man thinks so. Download his FREE report now.