Nuclear fuel for your portfolio

By TheStreet.com

Often, the bullish case for an investment is very simple to construct and understand. This is certainly true of uranium.

The supply-and-demand equation for oil is swinging out of balance toward demand. U.S. per-capita consumption of oil is 25 barrels a year. In China and India, it is closer to one barrel a year and rising rapidly.

Other growing countries with large populations that are likely to have substantial upticks in energy consumption include Vietnam, Turkey and Pakistan.

This creates the need to find new sources of energy and to revisit an old one: nuclear energy, which starts with uranium.

A number of countries in East and South Asia are expanding nuclear energy production. There are roughly 100 nuclear power reactors in the region, 20 under construction and 40 more on the drawing boards, according to the Uranium Information Centre of Australia.

This should be a big driver for uranium prices.

There are many ways to play uranium, ranging from mega-cap diversified miners to narrower, easy-to-follow names to some very speculative plays. There is even a closed-end fund in Canada that buys and stockpiles uranium.

Big mining companies

The mega-cap miners include BHP Billiton (BHP, news, msgs), Rio Tinto (RTP, news, msgs) and Anglo American (AAUK, news, msgs). All three are generally safer than a pure play and are likely to capture most of the trend in the commodities sector, but uranium mining is only a small business line for all three. I expect that even a heroic move in uranium would only have a slight impact on these giants.

Cameco (CCJ, news, msgs) and USEC (USU, news, msgs) are pure plays that are close to home and easy to follow. They have very different ways of obtaining uranium, and this shows in their returns. Cameco mines and refines uranium; USEC gets roughly half of its uranium from dismantled Russian warheads. Cameco has more of a chance to benefit from a move up in spot prices of uranium than USEC, and as uranium moved higher in price in the recent commodity boom, Cameco soundly outperformed USEC.

There are several reasons why USEC has lagged, including lower earnings estimates and the fact that its business is tougher to understand than Cameco's.

Going speculative

A new speculative play in uranium is Nufcor International, which was listed a month ago on London's AIM small-cap market under the ticker symbol NU. Nufcor is the sole marketing agent for all the uranium mined in South Africa, and it offers uranium trading and risk-management services backed by the uranium assets of AngloGold Ashanti and FirstRand Limited.

Uranium Participation (URPTF, news, msgs) is a Canadian closed-end fund established in 2005 to buy and stockpile uranium on the bet that prices will rise significantly. It trades on the Toronto Stock Exchange under the ticker symbol U and on the pink sheets in the U.S. under URPTF. As of July 31, its uranium holdings had a market value of roughly $240 million. Its Web site is worth a visit. The fund is up more than 50% over the last 12 months, matching the performance of industry leader Cameco.

The fund reports its net asset value once a month, and it is important to note that it trades at a substantial premium to its NAV. This is not necessarily a reason to avoid the fund, but the premium adds the potential for volatility above and beyond the fluctuation in the spot price of uranium.

If you believe that oil demand is growing faster than supply, then nuclear energy probably makes sense as an alternative. This is the bull case for uranium.

By Roger Nusbaum. At the time of publication, Nusbaum was long Cameco and Anglo American, and long Anglo American in client accounts, although positions may change at any time. Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.