It's time to go for the nuclear option.
Nuclear power was once a dirty word, but lately the industry has enjoyed a renaissance.
Astonishingly, it is now heralded as planet friendly, because it produces relatively tiny amounts of carbon emissions, and the industry proudly positions itself in the frontline of the battle against global warming.
This has split green campaigners but convinced the Government that nuclear can help the UK meet its climate change obligations while maintaining energy security of supply.
In November, Energy and Climate Change Secretary Ed Miliband gave the green light for a new generation of 10 power stations, backed by speedier planning guidelines that will allow applications to be rushed through within 12 months. Whether the money will be forthcoming is a different matter.
Press the button
Nuclear is back, and not just in the UK. Many developing countries are turning to nuclear as a way of securing their energy needs, notably China. Globally, there are 52 reactors under construction, a further 135 in the pipeline, and 295 proposals under consideration, according to the World Nuclear Association.
One way investors can benefit is to invest in uranium stocks. Brewin Dolphin (LSE: BRW) has just issued an information sheet explaining how to play the uranium market, and presents a reasonably bullish case, but with a few bearish warnings.
Nuclear cycle
At times I've been tempted to dive into narrow commodity sectors, notably copper and agriculture, but so far I've resisted temptation.
Most commodities are cyclical, and although it is impossible to time the market, when investing in commodities you should judge your entry carefully. Otherwise you risk ploughing in at the top of the cycle and reaping a fat harvest of loss.
When commodity prices are high, mining companies have a great incentive to dig or drill for the stuff. The subsequent surge in supply undermines the price, and when it falls projects are mothballed, supply shrinks, and the cycle begins again.
Someone once described investing in commodities to me as a zero sum game, you win for a while, and then you lose, and then you win… but overall you earn a big fat zero.
This makes commodities attractive to speculators, but less attractive to those of a Foolish disposition.
What goes around
So where does uranium stand in the cycle? It enjoyed a mighty price spike a couple of years ago, rising from $40 per pound in May 2006 to a peak of $138 in the summer of 2007. But the recession led to a dwindling demand for electricity, and the price rapidly depleted to below $50.
Brewin Dolphin argues that $35-$40/lb offers a solid long-term floor to the uranium market. Once the price falls below $40 it becomes economic to add more uranium ore to the enrichment process, and demand holds firm.
The price has continued to fall in recent weeks, down from $49/lb one month ago to its current spot price of around $44, pretty close to the supposed floor.
Falling prices have made mining projects uneconomic, and BHP Billiton (LSE: BLT), Areva, Ur-Energy and others have all recently delayed projects, which could constrain supply at exactly the time that companies such as the UK and China are demanding more of the stuff. So it seems a reasonable point in the cycle to enter.
Uranium enrichment
Canada, Australia and Kazakhstan are the biggest uranium producers, with Kazakhstan doubling the amount of the world's uranium it produces to 20% in just five years. Some experts talk about "peak uranium", but the generally accepted figure is that there is enough uranium for the next 85 years, on current consumption levels. Reprocessing and recycling could extend this into centuries, far beyond my investment timeframe.
With the developing world hungry for energy, the case for nuclear looks strong. Any disruption in supply, much of which is in politically unstable areas, could quickly force the price back up.
Uranium depletion
But as ever, there are risks. A large part of recent demand for uranium has been met by decommissioned Russian nuclear weapons, and there are still plenty of those lying around. The US is also planning to sell down its large stockpile of uranium, which may also have depressed the price in recent months. Events in rival energy markets may also hit demand for nuclear, such as new methods of extracting natural gas cheaply from shale.
Another drawback is that markets have already priced in a recovery in the uranium price to around $60, according to Macquarie bank. Plus there all the usual risks associated with mining and exploration, such as failed projects and volatile share prices.
How do you invest
I'm going to stick to the larger players in the market here. Rio Tinto (LSE: RIO) produces 18% of the 43,930 tonnes of uranium produced annually, making it the largest producer, followed by Cameco (15%), Areva (14%), KazAtomProm (12%) and ARMZ and BHP Billiton (8% each).
KazAtomProm and ARMZ are both government owned, while BHP Billiton and Rio Tinto earn a small proportion of their earnings from uranium and nuclear, and are more of a play on mining generally.
Brewin Dolphin says the French-owned nuclear power plant constructor and fuel refiner Areva is a play on the whole nuclear value chain, as is £8bn Canadian uranium producer Cameco.
In November, Cameco reported third quarter earnings of $172 million, up $37 million on the same quarter last year, and president Jerry Grandey said the long-term demand for clean energy generation offers positive long-term fundamentals for the business. Still, I reckon you should do your research carefully.
Plenty of people still don't like nuclear, but it is more proven method of reducing greenhouse gases than clean coal or renewables. Investing in uranium could add a bit of fission to your portfolio, but it may be a volatile path to enrichment.
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