Uranium is an investment phenomenon. Take a look at the chart below of uranium "spot" price for a breathtaking view of a wild bull market.

In any wild bull market, wild stories get created to justify ever-increasing prices. These are typically "sound-bite" stories that can mobilize hot money from the investment public. I had followed the uranium market as a technical trader and did not pay too much attention to the fundamentals as long as the trend was up. Recent developments such as Cameco's Cigar Lake mine flood ratcheted up the hype surrounding uranium to a frightening level. So I decided it was time to do an in-depth fundamental analysis of the uranium market to separate the facts from the hype. This will not be a "bull or bear" analysis but a cool-headed examination of both the opportunities and risks in the uranium market.

Because of its length, this article will be published in 2 parts.

Uranium Sources

Uranium has the chemical symbol U and is the heaviest of the 92 naturally occurring chemical elements. Natural uranium is slightly radioactive with an average half-life of 4.2 billion years. Half-life is the time it takes for half a sample to decay radioactively into another chemical element. The longer the half-life of the element the less radioactive the element is. Radioactivity is a normal part of the environment and is present everywhere. There is a small amount of slightly radioactive potassium-40 in your body with a half-life of 1.5 billion years. These low levels of radioactivity are not particularly dangerous but uranium is toxic if ingested. The decay of uranium, thorium, potassium and other radioactive materials in the Earth's core is responsible for its interior heat and creates the energy behind continental drift, volcanoes, and earthquakes.

Uranium comes in several forms called "isotopes". These isotopes are different in the number of neutrons in the nucleus of the uranium atom. There are two isotopes contained in natural uranium designated U-238 and U-235. Over 99% of natural uranium is U-238 and about 0.7% is U-235. The half-life of U-235 is 700 million years, which makes it significantly more radioactive than U-238. U-235 is "fissile" which means that it can sustain a nuclear chain reaction. This makes U-235 valuable as nuclear fuel, and also as an atomic weapon. The common U-238 isotope is also referred to as "depleted" uranium.

Refined uranium is typically in the form of an oxide called U3O8 or "yellowcake". After refinement, uranium goes through a process called "enrichment" where the concentration of U-235 is increased for use as nuclear fuel. Enrichment is an extremely difficult process that requires separation by weight of two isotopes that differ in weight by only about 1%. Uranium enriched to a concentration of 3-20% U-235 is called "low-enriched uranium" or LEU. Uranium enriched above 20% is called "high-enriched uranium" or HEU. Uranium enriched above 85% is weapons-grade. Enrichment is usually performed via either centrifuge or gas diffusion processes. The depleted U-238 uranium is typically stockpiled as waste.

Uranium is not a particularly rare element; it is more plentiful than antimony, tin, cadmium, mercury, or silver and is about as abundant as arsenic or molybdenum. However, concentrated uranium deposits that lend to profitable mining are not common. Uranium is distributed worldwide and 21 countries export uranium ore, with Canada, Australia and Niger being the three largest exporters and the United States, Congo, South Africa, Gabon, Russia and China also having significant deposits.

Primary Sources

Primary production of uranium is obtainted by extraction from ores or other natural source. There are a number of mineral ores that contain uranium. The most common is uranite, also known as pitchblende. The largest known deposits of uranium ores are located in Australia with almost 40% of global reserves. The largest single deposit is located at the Olympic Dam in South Australia. The largest uranium mining company is the Canadian Cameco (CCJ-NYSE).

Uranium is mined via a number of methods including open-pit, underground, or in-situ. Each has advantages and disadvantages. Uranium mining is dangerous. Extreme measures must be taken to protect workers from toxic uranium ore dust and, more importantly, radon gas that is always present as a decay product of uranium.

Uranium is present in minute quantities almost everywhere. There are a number of alternative sources of uranium that could be exploited at the right price. For example, uranium is dissolved in seawater at a concentration of about 3mg per cubic meter. This concentration, although low, is a potentially gigantic resource and could theoretically provide for limitless supply if the technical hurdles could be overcome. A Japanese study estimated cost of seawater extraction at about US$120/lb, not too far from current prices. The US Dept. of Energy also studied seawater extraction end estimated that the Earth's oceans contain some 2 billion tons of recoverable uranium. This is enough to support 6000 years of 300GW generation using modern reactors. There are several test seawater extraction projects already in operation.

A hidden source of uranium is in the fly ash residue from coal burning furnaces. This fly ash is collected in scrubbers from smokestacks and disposed in storage pits. The concentration of uranium in typical fly ash ranges from 30-100 parts per million (PPM) but has been measured as high as 1500ppm. These huge fly ash dumps contain a large uranium resource. Such a low concentration would be unprofitable in a typical hard rock mine, but the soft fly ash could be extracted competitively at the right price.

Secondary Sources

Secondary sources of uranium are from stockpiles or recycled from previous use.

Traditional nuclear power plants are quite inefficient at "burning" their uranium fuel load and much of the U-235 fissile material is discarded as waste. This fuel is recoverable in a procedure called "reprocessing". Many countries already perform reprocessing on their spent fuel to both increase efficiency and reduce waste. The US has elected to store spent reactor fuel as waste since the 1970s. US nuclear waste storage is a highly contentious issue that could be solved by a political decision to recycle rather than discard spent fuel.

Uranium is stockpiled globally as a both a strategic metal and as a fuel. There are a number of different estimates of total global supply but the true extent is unknown. Some studies suggest that total above-ground supplies are in the range of 100 million lbs. At first glance, stockpiles seem low considering that global consumption of uranium is currently around 180 million pounds. But these stockpiles represent a mix of natural, LEU, and HEU. One pound of 20% HEU is equivalent to some 27 pounds of natural uranium as measured by the critical U-235 content. Russia is estimated to have over 1 million lbs. of HEU in its strategic military stockpile. Assuming that Russian military HEU is enriched to near bomb-grade, then this stockpile represents the equivalent to 50-80 million lbs. of natural uranium. Any rigorous analysis of uranium stockpiles must take into account enrichment grades.

Global stockpiles of "depleted" uranium are estimated at 2.6 billion pounds. Although depleted uranium has had most of its U-235 removed, there still remains residual U-235 content of around 0.2% that can be recovered through re-enrichment. Russia has been doing this for years using its excess enrichment capability. This is a huge resource that becomes economic when market prices for uranium are high.

The current global arsenal of nuclear weapons is another potential uranium secondary source. Million of pounds of HEU are incorporated into nuclear weapons worldwide. In the 1990s, Russia dismantled a large part of their arsenal and sold much of the uranium as nuclear fuel which glutted the market. As these weapons age, the bomb materials become contaminated with decay products so they will need to have their uranium cores reprocessed. If global nuclear tensions subside, much of this uranium may end up in the fuel cycle for nuclear reactors.

Uses of Uranium

Prior to the nuclear age, uranium had very limited usefulness. When mixed with silica, it makes a beautiful yellow or greenish glass which has been long treasured by glassblowers and collectors. Uranium is also used in some pottery dyes. The metal has some unique properties that make it useful in armor-piercing artillery shells. Many armored tanks use a uranium alloy to protect it from heavy artillery fire.

Uranium has its most important use in nuclear power and weapons. The rare isotope U-235 has the ability to fission, which is the process of a uranium atom splitting in two and releasing two neutrons that can cause more atoms to split in a chain reaction. U-235 is the only naturally occurring substance with that property. Fission releases an awesome amount of energy. One pound of U-235 releases as much energy 700 tons of coal. The vast majority of uranium production goes to fuel nuclear power plants. This makes uranium essentially a single-use resource.

Nuclear Reactors

Light Water Reactors

There are a number of designs for nuclear reactors in operation today. The vast majority are called "light water" reactors that use LEU uranium (typically 3% U-235) to sustain a continuous chain reaction. Water in the reactor core is used as a coolant and as a "moderator" to control the neutron flux to maximize the efficiency of nuclear fission. The reactor generates heat which creates steam that runs a turbine for electrical generation.

Although U-235 is its major fuel, the uranium 238 atoms also contribute to the fission process by converting to plutonium 239 -- about one-half of which is consumed with the reactor. Light-water reactors are generally refueled every 12 to 18 months, at which time, about 25 percent of the fuel supply is replaced. Spent reactor fuel is not completely exhausted. It still contains about 1.8% of U-235 and a small percentage of fissile plutonium. Spent fuel rods can be recycled to recover the remaining fissile fuel but the US and other major countries have elected to dispose of them instead due to cost and political pressure. Therefore the light water fuel cycle is very inefficient, using only about 1% of the fuel potential and produces significant waste byproducts that have been difficult to dispose of.

Heavy Water Reactors

A more advanced design is called the "heavy water" or CANDU reactor design. This reactor utilizes heavy water as the neutron moderator instead of normal "light" water. The important feature of the CANDU reactor is the ability to use natural unenriched uranium as a reactor fuel. The CANDU design is dramatically more efficient that traditional light water reactors. The traditional light-water reactor burns very little of the "fertile" U-238. The common U-238 isotope can be a primary fuel under the right circumstances and therefore contains enormous untapped energy. The CANDU reactor can burn U-238 along with other alternative fuels including thorium, plutonium, and even spent fuel from light water reactors. The CANDU reactor design is inherently safer than light water reactors because the low enrichment level of the fuel makes an uncontrolled chain reaction almost impossible.

CANDU reactors are significantly more expensive to build and maintain however. This is primarily due to the large supply of extremely pure heavy water (D2O) required by the design. Refined designs have been built that use less heavy water and retain many of the advantages of fuel efficiency and flexibility.

Breeder Reactors

A third type of reactor is called a "Breeder reactor". This fast-neutron design uses its neutron generation capability to continuously create fuel from "fertile" material. These fertile materials include U-238 and thorium (three times more plentiful than uranium). The breeder reactor can create more fuel than it uses by transmuting the fertile material into a fissile material such as plutonium 239 and U-233 by irradiation with fast neutrons. Irradiated materials are periodically removed from the reactor and reprocessed into primary fuel. Breeder designs are difficult to build and have some operational hazards. The primary hazard is in the reprocessing of fertile fuels into highly radioactive and dangerous materials such as plutonium. The breeder reactor has the potential, however, to generate humanity's energy requirements for centuries using commonly available fuels.

New breeder reactor designs such as the Integral Fast Reactor (IFR) have been created that retain all fuels until completely burned down to low level waste. The IFR is the "holy grail" of nuclear reactor designs that operate at almost 99% fuel efficiency, require no reprocessing, and generate only small amounts of low-level radioactive waste. The IFR breeder reactor project in the US was cancelled in the 1990's due to political pressure.

All three basic reactor designs are currently in operation and do not represent "speculative" technology. Nuclear reactor science and technology are very mature. Refinements are coming faster in recent years due to increased research and the availability of newer engineered materials. Global warming and high fossil fuel prices are weakening the political opposition to nuclear power. Many environmentalists have now become pro-nuclear, viewing it as the lesser of evils. It is expected that the next generation of nuclear power plants will operate safer and more efficiently than ever.

Nuclear Power Plant Construction and Decommission

There are over 440 reactors operating in the world. They represent a variety of designs but most use the light water system which requires the standard 3% enriched uranium fuel.

Reactor construction had been almost nil during the period from 1980-200, but the recent steep rise in the cost of fossil fuels has re-ignited interest in nuclear power. The greatest construction and planning activity is in the developing world, most notably China, India, and Russia. The chart below shows the best information that I could obtain about power plants currently under construction and planned in the major nuclear countries.

A total of 28 reactors are in process of construction globally. Most of the new reactors are being built with advanced designs that are much more efficient and can utilize alternative fuels. It is difficult to project future uranium demand from these new reactors since they can be operated in a number of different modes with a variety of fuel configurations.

The most aggressive nuclear expansion is in China where there are at least 20 additional nuclear power plants proposed for construction in the next 20 years. These were not included in the above chart since they are in the proposal stage and are not yet approved or ordered. China has announced its intention to be completely nuclear independent in the future, using its own sources of fuel and its own processing facilities.

Many of the reactors currently operating in the world are nearing the end of their planned lifetimes. In the past, over 90 commercial reactors have been decommissioned. The US and Russia have the oldest operating reactors that are likely to be decommissioned in the near future. 6 reactors are in the process of being decommissioned in the US. Figures from other countries are difficult to obtain and are in constant change. Germany and Belgium are considering decommissioning their entire nuclear program. Projections of future uranium demand must take into account the reductions in consumption represented by reactor decommissioning.

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In Part 2 we will look at uranium from an economic and investment perspective.

Special thanks to Nuclear Materials Engineer Mark Hugo for his technical assistance on this article.