Invest in uranium? Not yet

Construction of the reactor hasn't gone smoothly. Areva (ARVCF, news, msgs) and Siemens (SI, news, msgs), the French and German companies building the reactor, have had to reforge legs of the reactor and pieces of the pressure vessel. Substandard concrete has been ripped out and replaced. It's turned out to be harder to manufacture the structural steel plates for the reactor than expected.

How much demand for uranium?

As a result, the Olkiluoto 3 reactor, originally scheduled to start producing power in May 2009, is now projected to come on line a year and a half late, in December 2010. It's also going to be significantly more expensive to build than the $4.1 billion originally budgeted.

The extra time is crippling to projections for higher uranium prices, the bears have argued.

The case for higher uranium prices isn't nearly as straightforward as the bulls would have it. Higher prices for uranium will bring more uranium exploration, more uranium mining and more uranium supply. The effect of this new supply means that higher uranium prices depend on timing. If the addition of new supply lags the addition of new demand from new reactors, then the price of uranium will climb. If, however, the new supply comes on line before the new reactors do, then the price will tumble.

Cameco, a Canadian company that produces 20% of the world's uranium, projects a net increase of 77 nuclear reactors globally from 2006 to 2016 -- a much more conservative total than many bullish investors use. In the company's opinion, that will result in an increase in uranium demand of about 2% to 3% a year.

Plenty of uranium

In the long term, the world has plenty of uranium to meet that added demand -- and then some.

The world has about 4.7 million metric tons of identified uranium resources, according to International Atomic Energy Agency. In addition, there are another 10 million metric tons of more speculative resources and 22 million metric tons of unconventional resources. This entire total, 600 years of supply, can be profitably mined when uranium prices are at June's spot price of $130 a pound.

The international agency projects that production will increase by 60% from 2005 to 2010 if prices hold near $130 a pound. That's roughly a 10%-a-year increase in supply.

Of course, the bears say, if demand is rising at 3% a year and supply at 10% a year, the price of uranium won't stay at $130 a pound and some of that supply won't come on line. So far, it looks like the bears are right, as uranium prices have fallen in the past two months to about $105 per pound.

Peaks and valleys in uranium prices

The bullish argument for substantially higher prices from the peak at $136 a pound, the bears argue, works only if there's a temporary lack of uranium supply caused by a lag in getting new mines into production.

If you agree with the bearish argument, however, you get a very different scenario for uranium prices. To a bear, $136 marks a peak, and we're looking at a descent from here back to a sustainable price closer to $45 a pound by 2008.

Now mind you $45 a pound doesn't sound so bad, since uranium sold for $7 a pound not all that long ago. That is, until you realize that just about every analyst on or off Wall Street has a "buy" out on uranium stocks based on a continued climb in uranium prices. A new peak is priced into the current prices of these shares.

So, for example, RBC Capital Markets projects uranium prices will rise on scarce supply and robust demand to an average $120 a pound in 2007, up from $48 in 2006, and then climb to $145 in 2008 before beginning a gradual decline (as more supply comes on line) to $130 in 2009, $115 in 2010 and $100 in 2011.

Canaccord Adams sets the peak higher, at $166 in 2008, but says the drop will be steeper, too, to $81.25 in 2011.

I won't take the bulls' bet

I can find only a very few analysts who profess to anything like the bearish argument. On the other end of the spectrum, Desjardins Securities, another Canadian investment house that I'd put in the bearish camp, sees the recent decline in uranium prices continuing until prices fall to $45 a pound in 2008. Do I have to say that Desjardins finds uranium-sector big boy Cameco fully priced at current levels?

If you buy at today's prices, then, you're betting that everything the bulls are hoping for will go right and that the bears are wrong in all their doubts.

Sorry, bulls, but that's a bet I won't take. There's enough real trouble at Finland's Olkiluoto 3 reactor to put the bullish timetable for reactor startups in deep trouble.

Deeper problems

The delays at that reactor weren't caused by the bungling of some rogue bad contractor. They're symptomatic of problems in the nuclear renaissance story.

First, it's clear that the 15 years since anyone built a nuclear reactor in Europe have seen a major erosion of the engineering skills needed to build a reactor. Areva may have kept its hand in by servicing the huge fleet of operating reactors in its home country of France, but when it came to building a reactor from scratch, the company wound up working with inexperienced subcontractors in Finland because there just weren't any around with experience. And Finland is a country with four operating reactors.

Continued: A widespread problem

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