When in 1950, Navajo shepherd and medicine man Paddy Martinez discovered what he thought was gold at Haystack Mountain in New Mexico, little did he know that he’d actually instigated a uranium boom that would go on to last for 30 years. Now, after years of being associated more with the haunting spectre of Cold War and the tragedy of Chernobyl, uranium is again being touted as a reliable commodity in which to put your money. In October, a report published by Morgan Stanley analysts Peter Richardson and Joel Crane predicted that the price of uranium would rise to around $60/lb in 2011.

Brad George, COO of Forte Energy, went so far as to describe uranium as being ‘next year’s gold’. So, what is the driving force behind this rise?

From January to October, 2010 prices of the commodity were stable at an average of $43.78/lb, mainly due to the world’s largest uranium producer, Kazakhstan, ramping up its output to meet growing demand from China’s new civil nuclear construction programme.

The price was further stabilised by an excess of high-enriched uranium from decommissioned Russian warheads, which under the ‘Megatons to Megawatts’ programme, was being turned into low-enriched uranium and used as nuclear fuel in US plants.

Despite this abundance, however, future supply security is far from certain.

The world’s 437 nuclear reactor use roughly 67,000 metric tons of uranium each year, a level of demand that mines are nowhere close to meeting.

The difference has, up to now, been made up by stockpiles and excess uranium from warheads, but with the former running out and the latter being severely curtailed by the 2013 termination of Megatons to Megawatts programme, a major supply shortfall could be on the cards.

On top of this, as governments look to wean themselves off hydrocarbons and meet stringent Kyoto Protocol targets, nuclear power, for all its uncertainties, is emerging as the cleanest and most cost-effective alternative.

According to analysts at Morgan Stanley, China alone plans to bring 500 new nuclear power stations into service by 2040, and countries such as India and South Korea also have ambitious build programmes in the offing.

Factor in possible supply disruption due to civil unrest in uraniumproducing Niger and we could, according to Edward Sterck of BMO Capital, see ‘a boost to the price of uranium, particularly if nervous utilities are moved to increase inventories.’

Investment opportunities
If you do choose to invest in uranium, there are a number of ways to go about it. What was a relatively closed market has liberalised greatly in the past few years, although the number of companies involved is still relatively few.

The New York Mercantile Exchange opened its first-ever uranium futures contract in 2007 and now there are a number on the market, trading under the UX ticker symbol. As the performance of uranium is not closely correlated with that of other commodities, it could offer great diversification potential.

Alternatively, there is the possibility of investing in specialist mining firms such as Kalahari Minerals, which has seen astounding growth during 2010, or a number of others listed mainly on the Canadian and Australian exchanges.

Nuclear engineering companies like AREVA and utilities such as Centrica, which owns a large share of British Energy, could see a boost from significant new projects in the UK and the November launch of New York-listed Global X Uranium, an exchange-traded fund (ETF) that tracks uranium producers, infrastructure companies and utilities, is another possibly less precarious way to ride the wave.

For all the potential of uranium and the impressive rise of its spot price, it is by no means a one-way bet. Prices through 2010 are still some way behind 2008 pre-recession highs and some analysts, such as Sterck, believe that the number of mines under development will boost world production sufficiently to suppress a stratospheric rise in prices for at least a year and a half.

In addition, much is dependent on whether China follows through fully with its reported expansion plans, with a recent report by UxC Consulting suggesting that it might not.

Although gold will continue to occupy the thoughts of investors for now, uranium could prove a promising alternative.