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Friday, September 20, 2013 - 14:30

10% of U.S. Energy Supply Will Disappear In 3 Months -- And Send This Commodity Soaring

Friday, September 20, 2013 2:30 PM

In the late 1700s, miners in Bohemia (now the Czech Republic) discovered a curious new mineral. They named it pechblende by combining the German word pech, which means "pitch" or "bad luck," with the word blende, which means "mineral."

The first scientist to analyze "pitchblende" was a German chemist named Martin Klaproth. By isolating oxides within the mineral, he realized that he had in fact discovered a new element.

Although it was standard at the time for scientists to name such discoveries after themselves, he chose instead to name this new element after the most recently discovered planet at the time -- Uranus.

That is why today, the element we use to power nuclear reactors is known as uranium.

Only a few months from now, a source of uranium that the U.S. has relied upon for 20 years will dry up. Russia will end a 20-year treaty with the United States currently responsible for 10% of our electricity supply.

Since 1993, under a program known as Megatons to Megawatts, 472 megatons of highly enriched Russian uranium have been used to generate electricity in the U.S. This is the equivalent of over 18,000 nuclear warheads.

Nuclear energy currently provides about 20% of the U.S.' energy needs. And once this enormous foreign supply dries up, the 103 U.S. nuclear reactors currently in operation will need to find a new source to keep up with demand.

Commodity investors in particular pay close attention to supply and demand cycles.

In StreetAuthority analyst Dave Forest's latest issue of Junior Resource Advisor, he shared six rules of commodity investing he learned from Warren Buffett. This was Buffett's No. 1 quote:

"We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen ... We have usually made our best purchases when apprehensions about some macro event were at a peak."

The current market for uranium is a perfect example of the kind of opportunity Buffett is talking about.

Without question, the price of uranium is in the dumps. At $34.65 per pound, uranium is selling for its lowest valuations in over five years.

Uranium Oxide Price

As you might expect, pure-play uranium miners like Cameco (NYSE: CCJ) have seen a similar slump in share prices. The chart below tracks Cameco shares over the past three years:

But here's the thing: Cameco, a relatively small mining company with a market cap of $7.8 billion, is currently sitting on 65% of the worldwide supply of uranium.

Although the company doesn't grab a lot of headlines, Cameco is the world's largest publicly traded uranium miner. And it's planning to get even bigger.

The company mined 22 million pounds of uranium in 2012. By 2018 it plans to mine 36 million pounds. And the bulk of this production won't need to be achieved by risking capital with new acquisitions or exploration, but simply by ramping up production at mines that are currently producing.

The company already owns several of the highest-grade uranium deposits in the world. For example, the company's McArthur River mine in Saskatchewan holds ore grade concentrations 100 times higher than the industry average. This "flagship" mine currently accounts for 62% of annual production.

High-grade sources require less refining and translate to lower production costs. And this means higher profits.

In fact, Cameco's return on equity was 7 times higher than its competitors' over the past 12 months. Its return on assets was 10 times higher than the industry average over the same period.

The company managed to keep its operating margin above 10% during the last year -- no small feat considering the dismal state of uranium prices.

The one concern in terms of Cameco's near-term profitability is tied into long-term contracts it holds with utility companies. The prices established in these contracts rely on factors other than the current spot price, and in some cases could force the company to sell its product for less than it could charge on the open market.

This was the case earlier in the decade when Cameco was stuck with long-term utility contracts signed before the post-2003 surge in uranium prices.

Still, many of these lower-cost contracts are set to expire. Should uranium prices rise as expected, the company won't need to lock in lower prices in long-term contracts, and with its low operating margins and world-class assets, profits should soar.

The company currently pays a modest dividend of 2%. This dividend is somewhat precarious, as it's backed by a relatively high payout ratio of 90%.

Risks to Consider: The Fukushima disaster of 2011 is still fresh in the minds of many investors and politicians. The tragedy prompted the Japanese government to put its nuclear power program on hold for the time being. Should another disaster of this magnitude occur, it could negatively impact the willingness of governments around the world to invest in nuclear energy.

Action to Take --> It takes guts to invest in commodities when public sentiment is negative. But that's also when the real profits are made. As the saying goes, "Fortune favors the brave." For speculative investors willing to stomach the risks, Cameco represents a historical opportunity to invest in a beaten down commodity. The end of "Megatons to Megawatts" is only three months away. Should uranium prices spike as a result, shares of Cameco could easily double to $40 a share over the next year.

P.S. Commodity markets are notoriously volatile -- but Dave Forest, Chief Market Strategist of StreetAuthority's Junior Resource Advisor, has found one simple yet incredibly effective trick for ferreting out the best junior resource companies to invest in. To learn more about a trick that cuts through the "unpredictable risk" factors and cherry-picks the truly solid companies in the sector, click here.

Chad Tracy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.