How To Play Rising Uranium Demand

March 23, 2010

 

Uranium Vs. Nuclear Energy Companies

Just as with oil and gas companies, uranium's performance can vary quite a bit from the performance of the companies involved in its production, although there remains a high correlation between fuel and producer:

 

Uranium Chart

 

Over the past year, the two widely tracked indexes of nuclear stocks, the S&P Global Nuclear Energy Index and the WNA Nuclear Energy Index, have consistently beaten the implied price of uranium (from MF Global).

It's really no surprise that the price of uranium is up only 8.4 percent year-over-year, as few new reactors came online during the economic downturn. But what's interesting is that the companies involved in the nuclear industry survived the slowdown so well: The WNA Nuclear Energy Index is up 45.8 percent, while the S&P Global Nuclear Energy Index is up 35.8 percent.

 

Playing Nuclear Power

So how can investors approach the nuclear power space?

For starters, you could always go with narrowly focused fuel providers such as Uranium One Inc. (TSE: UUU) to gain your nuclear exposure (pardon the pun). But with their volatility and high leverage in the space, pure-play miners aren't for everyone.

Another method is to avoid miners themselves and focus instead on companies involved in fuel processing. GBI Research recently predicted that the market for nuclear fuel processing would double in worth from $20.8 billion in 2009 to $42 billion by 2020, driven mainly by growth in the Asia-Pacific region.

But perhaps the easiest method is to forgo the stock picking and check out one of the three ETFs tracking the market: the iShares S&P Global Nuclear Energy Index Fund (NYSE Arca: NUCL), the PowerShares Global Nuclear Energy Portfolio ETF (NYSE Arca: PKN) and the Market Vectors Nuclear Energy ETF (NYSE Arca: NLR):

 

Nuclear Comparison Chart

 

Of the three funds, PKN is the clear winner, rising 37.0 percent over the past year (not too surprising, considering its benchmark is the aforementioned outperformer, the WNA Nuclear Energy Index). NUCL, which tracks the S&P Global Nuclear Energy Index, and PKN, which follows the DAXglobal Nuclear Energy Index, follow each other more closely; the two funds have risen a more modest 26.6 percent and 24.5 percent, respectively.

NLR, however, is far and away the largest of the three funds, at $177 million in assets; despite its success, PKN has only managed to attract $30 million since its 2008 launch. NUCL is the smallest, at just $16.8 million assets.

Of course, it's important to point out that the S&P 500 has beaten all of the nuclear indexes over the past year (up 51 percent). So if you're looking for something to beat the broader stock market, keep looking.

 

FYI: On Thursday, the International Energy Agency (IEA) and the OECD Nuclear Energy Agency (NEA) will hold a press conference for their latest joint report called "Projected Costs of Generating electricity - 2010 Edition." This report will present data on the cost of generating electricity using a wide range of input fuels, from traditional coal and gas to nuclear, as well as alternative green technologies such as wind, solar and biomass. The last paper on this subject by IEA was published in 2005, so it should hold some interesting updated info on the viability of nuclear.

 

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