Energy Solutions Versus Political Sound-Bites
Morning business shows often debate the path to energy independence. Everyone agrees we need a plan fast, and that there's no silver-bullet solution.
One guest may support drill-drill-drill more oil, another is for switching to natural gas, or for expanding so-called clean-coal. But looking to shale, fracking or better filters are not game changers.
Dirty solutions equal more pollution! And then soon enough, it runs out again.
Solar and various other renewables also get lots of press and should help some day, but the technology is not there yet to do more than scratch the surface of the problem. Even in combination, none of the above come close to doing the trick.
We usually think of energy independence as a supply problem. The lineups and empty gas pumps in the 1970's were real supply problems. Today we remain complacent because we haven't seen anything like this - yet!
All this really means for us right now is higher energy prices. But when someone else controls your supply of energy, and the price of it, they effectively control the growth prospects of your whole economy in a real way.
We need to stop thinking of energy just in terms of new sources of oil and other fossil fuels. Burning dirty fuels don't cut it anymore, and renewables won't help meaningfully for at least a few decades.
An energy solution starts with a clear definition. Energy independence should simply mean a safe, abundant, cost effective, and environmentally friendly, long-term energy supply.
What I'm talking about is "EROEI" or Energy Return On Energy Invested.
Oil industry backed experts, politicians and economists continue to claim there will always be enough oil and other non-renewable fuels because of free market mechanisms. Simply put, prices will go higher causing demand destruction until there is supply/demand equilibrium... problem solved.
As ridiculous as all this sounds, it's just as bad to close your eyes on a hope and a prayer that future lower-cost extraction technologies will save the day. That's a big, dangerous bet!
Even if you could afford to keep paying higher and higher prices, economists can't answer the problem of when it costs more than a barrel of oil for every barrel of oil you get out of the ground. In other words you are using more energy than what you are getting back. At that point the oil just sits there.
The facts are that going into the 20th century, and for the first few decades, oil used to return the equivalent of around 300 barrels for every barrel invested. As the richest oil reserves started drying up, the EROEI steadily dropped to a 30 to 1 return. Then lower, and lower... you get the idea.
Today the general consensus puts the EROEI for most tar sands and oil shale projects in the single digits, many as low as 1.5 to 1. Keep in mind that even if there were gazillions of barrels of oil equivalents available, if the EROEI falls to a 1 to 1 ratio, these projects don't get developed or get shut in.
EROEI cost effectiveness trumps availability and is key to real energy independence!
Why Don't We Hear More Positive News About Nuclear Power?
Did you know that the world has been generating electricity from nuclear power plants for over 50-years? That's an impressive track record!
But other than mentions in our newsletter, when is the last time you heard anything in the news about nuclear power? It seems like nuclear power is forgotten.
Over the past two decades since the end of the Cold War and after accidents at Chernobyl, and more recently at Fukushima Japan, it seems like nuclear power has been swept aside. Why? I can't recall anyone ignoring oil, or calling an end to the use of it, after the BP Gulf of Mexico oil spill in 2010.
However, times are a changing! Nuclear power has come a long way since the US power grid started receiving electricity from the first nuclear reactor in the 1950s.
Today, people living in countries that use nuclear reactors to produce electricity represent two-thirds of the world’s population.
In fact, the World Nuclear Association says there are 433 nuclear reactors generating electricity globally. On top of this are 63 reactors under construction, 160 planned, and 329 proposed.
The WNA at world-nuclear.org also shows that nuclear power safely produces 15% of the world's electricity. More than 15 countries get 25% or more of their electricity from nuclear reactors.
Nuclear Power Is The Only Cost Effective Solution
So how are countries heavily dependent on nuclear power doing versus others? Here’s a real eye opener to consider.
France's population is 61 million and gets almost 80% of its electrical power from nuclear reactors. Did you know that France is also the world's largest net exporter of electricity?
On the other hand, next door is Italy, also with 61 million people, but has absolutely no nuclear power. Surprise, surprise... Italy is the world's largest importer of electricity (probably from France!)
It only makes sense why more and more countries worldwide are planning to add nuclear power to meet their future energy needs.
Take a look at this WNA graph of Global Clean-Energy Need & Supply for the 21st century.
World energy usage will conservatively more than double over the next 25 years. The graph above clearly shows that when Hydroelectric, New Renewables, Fossil Fuels, and Nuclear Power are stacked on top of each other, there is still a huge Clean-Energy Gap.
This energy supply gap has to be filled somehow! Fossil fuel production is stressed and reserves continue to decline, while renewables like solar and wind have many limitations and high costs.
Nuclear power is not just the only way to close today’s energy supply gap; it is also the most cost effective way to fill our growing energy needs of tomorrow. This means Nuclear power usage could skyrocket in just a few years!
This also means huge demand for U3O8 uranium; the rare metal that fuels nuclear power reactors.
More Nuclear Reactors Means More Uranium
Uranium is a silvery white metal capable of producing tremendous amounts of energy. Here’s how it works.
The uranium 235 isotope is put into a reactor and bombarded by neutrons. These collisions break up the uranium 235 atoms, releasing massive amounts of energy. In other words, fission of a little bit of metal is how all nuclear reactors create energy.
While uranium is more abundant in the earth’s crust than even tin, only concentrated amounts are economical to mine. The WNA reports that 64% of the world’s uranium comes from just three countries: Kazakhstan 36%, Canada 17% and Australia 11%.
Uranium mining is also more regulated than most other types of mining. Uranium is radioactive and miners need to be protected from harmful radiation. This is why it is so costly, complicated, and takes so long to get uranium mines licensed.
With demand ready to soar, and all these hoops to jump through for any new mines to open, you might think uranium must be an expensive commodity! It’s actually very cheap!
In 2007, with record high oil prices and a stronger economy, uranium peaked at $137 a pound. Today U3O8 is trading for only $52 per pound and hasn’t changed much in months.
Why Is Such A Strategic Metal So Cheap?
Uranium is trading at 2006 prices!
To compare, oil is now at $90 while uranium sits at $52. Even on a pound for pound basis uranium holds much more energy than oil.
And oil causes massive pollution. I’m not talking about oil-related accidents… just when it’s used as intended!
To make matters worse, the world’s population steadily keeps growing, while more of us move to the city. Energy demand will only go higher and higher.
Nuclear power is the only realistic solution, and uranium is extremely important to our future energy needs.
The Entire World Rides The Next Nuclear Power Wave
There are 552 nuclear reactors now under construction, planned or proposed. In total, that’s more than double the 433 reactors now operating worldwide.
Several major countries are now aggressively developing nuclear power. Why? Because it’s the most efficient way to create commercial amounts of energy.
Here’s the simple proof that might shock you!
A typical U.S. power plant for a city of one million people needs this much fuel per day:
- 9,000 Tons of Coal; or
- 40,000 Barrels of Oil; or
- Less than 7 Pounds of Uranium (Nuclear Power)
Put another way, the average U.S. residential use of electricity for an entire year is equivalent to consuming:
- 5.5 Tons of Coal; or
- 800 Gallons of Oil; or
- 110,000 Cubic Feet of Natural Gas; or
- Less than 1 Ounce of Uranium!
How much storage are we talking about? We would only need one football field around four feet high to hold all the nuclear waste we ever produced.
Our recent newsletters described the NRC’s construction approval this year of two new nuclear power reactors in Georgia. The U.S. government doesn’t just get all of this, they are loaning $8 billion to build the first new nuclear reactors in the U.S. since 1978.
This all means that nuclear power is here to stay! We can deny it all we want, but its importance to filling the energy supply gap will just keep growing. And with this, the future of uranium has never looked better!
Remember that uranium is rare as there aren’t that many economical uranium deposits. Uranium mining is complicated, costly, highly regulated, time consuming and can be dangerous.
However, uranium’s extremely low-cost and high energy-efficiency as a fuel compared to oil and coal can’t be ignored. It’s the only way that growing economies can bridge the energy supply gap.
Russia, India, South Korea and China are just a few countries that plan to or are already building nuclear power plants. These new reactors will create hundreds of thousands of pounds of extra uranium demand each year.
Some experts predict there will be a 250 million pound shortfall within a decade. If so, there just won’t be enough to go around and this spells much higher uranium prices!
Uranium Miners - The Real Nuclear Powered Stocks
Nuclear power companies are utilities. To them, higher uranium prices just mean higher operating costs. Uranium itself is radioactive and highly regulated, so it can’t be held like gold bullion. To participate in a boom in uranium prices, you need to look at uranium miners.
Uranium mining stocks were flying high last year until the earthquake and tsunami hit Fukushima Japan. Here’s how much some of the largest uranium producers have come down in price since then: (NYSE: CCJ)(TSX: CCO) Cameco Corp. –53%, (TSX: UUU) Uranium One –63% and (NYSE: RIO) Rio Tinto –40%.
These are all multi-billion dollar companies but we tend to focus more on small-cap stocks with a higher growth profile. Let’s take a look at one of our Featured Stocks (AMEX: URZ)(TSX: URZ)(FF: U9E) Uranerz Energy Corp.
URZ is particularly interesting because it is both a high-growth exploration story and because it will soon be entering the production stage. I’ll break this down for you.
Uranerz is focused on developing its over 90,000 acres in Wyoming’s Powder River Basin, a prolific uranium-mining district. Several major miners are already producing uranium there, and URZ holds one of the largest land packages. The largest uranium mine in the U.S. is in the Powder River basin, operated by Cameco, the world’s largest public uranium company.
The beauty of the Powder River Basin is that you don’t have to go underground to get the uranium. A mining process called (ISR) In Situ Recovery allows you to drill into the ore, inject a leaching solution that dissolves the uranium, and then suck it all out.
The uranium from this pumped solution bonds to ionized resin. The uranium is stripped and then processed into U3O8 yellowcake, the fuel used in nuclear reactors.
ISR mining has several advantages over other types of mining. Capital costs are low, as you don’t need the heavy machinery associated with underground mines. The simplicity of the ISR process also means low operating costs. Even labour costs are minimal.
ISR is not only the safest and cheapest way to mine uranium, it’s also environmentally friendly. The solution pumped underground is essentially baking soda, carbon dioxide and oxygen.
Uranerz’ management has a record of licensing, designing, constructing and operating several commercial ISR projects. URZ has its NRC Source Material license and the Wyoming State Permit to Mine. Last August construction started at their Nichols Ranch Project, URZ’ first mine targeted to open this year.
Uranerz’ goal is to ramp up uranium production to 1.3 million pounds per year. At $52 a pound, that puts revenue at around $68 million a year. Believers include (NYSE: EXC) Excelon Corp. and another major U.S. utility; both signed long-term sales contracts with URZ.
This production is based on only a small portion of Uranerz’ properties. Don’t forget that I also mentioned URZ as an exploration play. The vast majority of their properties have yet to be drilled, which could extend mine life and expand the magnitude of the whole play.
Here’s some more potential leverage of URZ’ revenues. Uranerz expects to produce uranium for around $35 per pound. That’s around $17 lower than the current spot price. If uranium bumps up just 33%, from $52 to $69, URZ could double its gross profit margins.
Imagine what happens to URZ’ revenues if uranium goes back to 2007 prices, as high as $137 a pound. That’s almost three times today’s price. Now let’s look at URZ’ share price when uranium peaked back then.
URZ traded at over $7 per share in 2007. It was around $5.50 a month before Fukushima last year. But URZ is currently $1.40, down 80% from 2007’s high or 75% from 2011’s high.
Why? Back in 2007 Uranerz was mainly just drilling. Later they developed a mineable resource and commenced the licensing process. But the company didn’t have all of their permits approved to construct a mine until last summer.
Uranerz Energy should now be only months away from opening its first uranium mine! Achieving producer status is when institutional investors usually take note. URZ should be flying higher now! Instead, URZ was beaten down with the rest of the uranium market.
I blame the recent sell-off in uranium stocks on any number of short-term events, from Fukushima, to a soft gold market, to Greece etc. However, as shown, the near and long-term prospects for nuclear power and uranium have never been brighter.
As a contrarian trader and value investor, the uranium market spells opportunity to me. Visit Uranerz.com and put URZ on your radar screen!
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