By Jim Letourneau, Big Picture Speculator

CALGARY (KWR) In 1979, Reactor 2 at the Three Mile Island nuclear power plant suffered a partial meltdown. Public opinion galvanized against nuclear power aided by a series of popular No Nukes concerts and The China Syndrome, a movie portraying the nuclear industry putting profits before safety. Uranium prices peaked at $40/lb. In 1980 prices began to plummet and since 1984 they have not been above US$20/lb.

Nuclear energy has seen its prospects brighten considerably since then. Looming energy shortages force governments to make hard choices. Growing concerns about greenhouse gases from burning fossil fuels have led some environmentalists to advocate using nuclear power. That’s right, some environmentalists are now in favor of nuclear power. They prefer “carbon free” electricity with no air pollutants to the burning of fossil fuels.

The majority of uranium production is used in nuclear power generation. There are currently 438 nuclear power reactors in 31 countries providing over 16% of the world’s electricity. In several Asian and European countries the percentage of electricity generated from nuclear power exceeds 35%. Many existing nuclear power plants have increased capacity and China intends to quadruple its nuclear power generation by 2020.

While energy demand is forecast to remain strong, and oil prices remain over $40 a barrel, the current uranium price of $19.65 is less than it was in 1984. During this extended low price environment, marginal uranium producers were forced to cease production; properties were abandoned and claims lapsed. Today production is concentrated in a handful of major companies including Cogema, Cameco, Rio Tinto and Energy Resources of Australia. Uranium is now in short supply and an unforeseen mine shutdown or disruption in an enrichment facility could cause a major crisis for the nuclear industry.

Uranium consumption has surpassed annual production for the last 15 years while uranium prices languished. New uranium supplies are unlikely to be developed at prices below $20/lb. Investors need to be convinced that prices will remain high for the long term before investing in new projects.

Approximately 50% of global uranium production comes from Canada and Australia. With prices on the rise, a handful of junior exploration firms in these countries are restaking old claims and dusting off shelved projects. Companies with promising properties are seeing significant share price appreciation. This should help with the financing of capital-intensive exploration projects. However, the supply demand imbalance is unlikely to be corrected in the short term. It takes at least 10 years to turn a discovery into a producing mine. Permitting restrictions and bans on uranium mining in some jurisdictions are likely to increase the time it takes for new supplies to come on stream. The long time lag between shortage and increased production is why commodity bull markets usually last between 10 and 15 years. With analysts predicting uranium prices as high as $100/lb before the end of the decade, it appears likely that uranium prices are destined to move significantly higher before new supplies appear.