French nuclear energy giant Areva SA (PINK: ARVCF) will pay 50% more for uranium mined in Niger, while investing more than $1.49 billion in the country’s as yet untapped Imouraren deposit – possibly the second largest in the world – according to an agreement signed this week, Bloomberg reported.

The price Areva pays for Niger-excavated uranium was changed to reflect uranium’s recent surge in value and projected long-term prices. Niger’s government hopes the nearly $1.5 billion investment – combined with an existing operation with China Nuclear International Uranium Corp. at its Teguida mine – will make Niger the world’s second largest uranium producer by 2011.   

Currently Africa’s biggest uranium producer, Niger will also be allowed under the new agreement to sell 1,800 metric tons of uranium to the world market over the next two years, Reuters reported.

All totaled, Niger’s revenue from uranium mining will rise 14-fold to $227 million (100 billion CFA francs), Bloomberg News reported, citing a televised speech by Ali Badjo Gamatie, special adviser to the president on mineral matters.

It’s "a big push forward," Gamatie said, speaking from Niamey, the state capital. "It has been very rewarding for Niger to change the terms of the last agreement."

For Areva though, the new terms might be a reality check the company can ill afford. Areva has held a virtual monopoly on Niger’s uranium reserves for more than 30 years, but a global rise in nuclear power initiatives has made the former French colony a very popular target for uranium exploration.

So, not only will Areva have to pay more upfront for a once cheap commodity, the French firm is also relinquishing what was once total control of a productive and profitable source of uranium, which may prove far more costly in the long run.

News and Related Story Links:

• Bloomberg:
  Niger Says Uranium Pact With Areva to Boost Revenue 14-Fold

• Reuters:
  Niger state to increase direct sales of uranium

By Don Miller
Contributing Writer

Of all the commodities to ride the volatile global roller coaster in 2007, uranium had the wildest ride. Overall, it gained 28% for the year. But that seemingly simple statistic masks a much-more-complex story.

At one point in June, uranium had gained 84% on the year. But then a mass sell-off – including up to 200 tons auctioned off out of the inventory of the U.S. Department of Energy – drove prices from $138 a pound down to $75 a pound in just three months.  

Even though the U.S. auction was said to flood an already glutted market for uranium, the price roared back to $93 a pound, a price move fueled by a continued demand. Investors can take that incident as a sign of things to come.

At a time when global energy demands are soaring – outstripping the long-term supply of such crucial commodities as crude oil – the long-term outlook for uranium is exceedingly bright. Nuclear power is slowly making a comeback as an electricity source of choice in the U.S. market, and will be a key to the ongoing emergence of such economies as China and India.

Market fundamentals point to demand-driven price increases for uranium. And history shows that when uranium prices move higher, uranium stocks almost always tag along for the ride.

The situation in uranium is reminiscent of the world’s skyrocketing demand for oil. In a classic supply-and-demand imbalance, eventually someone is going to pay the price. With uranium – as with oil – there plain and simple just isn’t enough to go around.

"We are at the beginning stages of a massive bidding war in uranium," said Sol Palha, a noted uranium investor and analyst. 

Nuclear energy is rapidly gaining acceptance as a clean, reliable alternative to burning coal. In a bid to combat global warming and keep up with soaring demand for electricity, countries are rushing to build nuclear power plants. Currently, there are 440 nuclear reactors in operation that generate about 16% of the world’s electricity.

Another 25 are under construction, 38 are on order and 115 are proposed. Also, there are 284 research reactors and 220 nuclear-powered ships and submarines patrolling the oceans – key facts that nevertheless often slip by most industry analysts.

Refined uranium [known in the industry as U308] is what makes nuclear fuel. And the proliferation of new commercial nuclear power plants has the price of the radioactive metal soaring.

Now here’s the thing: All told, those reactors soak up about 77,000 tons of refined uranium every year. Yet, in 2006, only about 50,000 tons of uranium was mined. That has forced some countries to run reactors at only 50% to 60% capacity, while others – such as India – have actually been forced to periodically take reactors off line because they lack the fuel to keep running them
.

For a more-clear picture of the uranium shortfall, consider the chart that follows:

And the insatiable global appetite for electricity – an appetite that induced China to spend a decade building the controversial-but-crucial hydroelectric project known as the Three Gorges dam – will drive demand for uranium even higher.

In the next 15 years, China alone is building 30 new plants, with as many as 200 needed by 2050.  Japan is planning 11 more by 2010, and the United States and United Kingdom are also jumping back onto the nuclear bandwagon. These new plants will only serve to widen the supply/demand gap.

Uranium: Easy to Find – Not Easy to Mine

Now, uranium itself isn’t scarce. In fact, it’s so widespread that you might even have some in your backyard. But in order to mine it, uranium must be found in large concentrations. And only a small number of these concentrated deposits have been discovered worldwide.

With prices escalating, uranium-mining companies are rushing to dig up as much of the stuff as quickly as possible. But that is simpler said than done. It takes seven to 10 years to find and bring a uranium discovery into production. That explains why uranium-mining production was only projected to increase 9% in 2007 over 2006.

According to the Australian Uranium Association, more than 50% of uranium comes from mines in Canada and Australia.  Kazakhstan, Russia, South Africa, Namibia and the United States are smaller producers.   Yet the smart players are already moving to secure supplies. 

"China is doing massive deals in Africa and is now working on ever bigger deals in Kazakhstan," Palha, the analyst, told Money Morning. "China is basically locking up uranium supplies. This effectively means that there will be even less uranium for the rest of the world players."

Russia also has started to stockpile uranium after declaring it a "strategic resource."  Russian Federation President Vladimir Putin recently traveled to Australia and signed a deal to buy uranium. It’s only a matter of time before the Russians stop exporting yellow cake altogether.

And all this is complicated by a flood at Saskatchewan’s Cigar Lake mine – the world’s largest undeveloped high-grade uranium deposit with 232 million pounds of U308 at a grade of 19% [90% of the world's mines have ore grades below 1%]. Damages from the flood will halt the start of production until 2011 – at the earliest.

Since uranium’s supply/demand imbalance clearly won’t be improving anytime soon, the price of uranium is likely to continue its upward march.

Uranium: An "Alternative" Energy Source No Longer

Uranium investing is not for the faint of heart. Another accident like the one at Pennsylvania’s Three Mile Island, or Russia’s Chernobyl, would likely spawn a worldwide anti-nuclear backlash that could send uranium spot prices into a downward spiral for several years.

Even though new technologies and more-efficient power-plant designs have made commercial nuclear power a much-safer proposition, there are still older plants operating throughout the world that are potentially vulnerable to a Chernobyl-like scenario.

Disposal of nuclear waste is another issue that could spell trouble for uranium prices, as the Yucca Mountain Repository isn’t expected to reopen until 2020.

The development of alternative energies like solar and wind are also a threat, although most experts believe these are ancillary energy sources – at best.

What’s becoming increasingly clear is that – despite the admitted dangers of nuclear power – commercial nuclear energy is clearly the safest, cleanest, cheapest source of the massive amounts of electricity needed to fuel global growth, to avoid a worldwide energy crisis that will make the two in the 1970s appear as a costume-rehearsal, and to battle the long-term environmental effects of global warming.

And many safety improvements have been made since Three Mile Island and Chernobyl.

China is working on an advanced reactor using so-called "pebble-bed" technology, which makes a power plant virtually impervious to a meltdown situation. Improvements have also been made in the new generation of reactors, especially in cooling systems and containment domes. U.S. industrial giant General Electric Co. (GE) has developed technology-based products and services that help the operators of so-called "boiling water reactors," or BWR, to run their plans more safely and efficiently. And it’s developed a new "advanced boiling water reactor," or ABWR, design that it says can be built in only four years, and then run cheaply and safely for decades thereafter.

There’s also a "dirty little secret" about the nuclear power business that most investors never consider – but industry insiders know and understand very well. You see, the supply/demand picture isn’t the only catalyst of soaring uranium prices. 

The fact is that refined uranium is only a minuscule part of a power plant’s overall cost. It takes an upfront investment of about $2 billion to build a new nuclear power plant. That’s just the cost of construction.

When you add in the maintenance and labor costs, laying out $100 a pound for uranium to keep your plant running is a really a drop in the financial bucket. Indeed, some analysts estimate that the price of uranium could skyrocket to $2,000 a pound and still be viewed as a viable energy source for plant operators.

That really changes the picture for investors.

Investing in Uranium – Mining the Right Stocks

So where should you look for profit opportunities? If you look at the charts, some uranium mining company stocks move up and down almost in lockstep with spot prices.

If you want a pure play on an increase in the price of uranium itself, Cameco Corp. (CCJ) might be worth a look. It’s the largest producer of uranium in the United States. And it’s straight downstream from a glut of cash contained in a new energy bill that offers $18.5 billion in loans to cover the construction costs of new nuclear plants. It’s no surprise that applications for new U.S. nuclear plants are taking off for the first time in 30 years.

If you’re looking for more safety and diversification, Rio Tinto PLC (RTP) and BHP Billiton Ltd. (BHP) could fill the bill. Both have huge mining operations with large uranium deposits. Both have skilled management teams and offer engineering savvy. And both stand to reap substantial profits from any price surge in yellow cake.

As mentioned, U.S. industrial giant General Electric’s GE Energy unit is a player in the commercial nuclear power market, both here and overseas. As a highly diversified company, it gives you only marginal exposure to the pending surge in nuclear plant construction, but that also diffuses risk. The company has a terrific international exposure, meaning it will benefit from the soaring economic growth in Asia. And it’s in a transition, or turnaround, phase, meaning there should be some extra profit upside for investors who buy in now.

But perhaps the most intriguing company in the nuclear energy industry is Areva, which trades on the EuroNext Paris exchange. The stock is up 35% in 2007 and a whopping 333% in four years. Areva is the largest integrated nuclear company in the world, with manufacturing facilities in 41 countries and a sales network in more than 100 countries. 

It’s a one-stop shop, handling all aspects of nuclear power, including mining and refining, as well as building and maintaining nuke plants. Late last month, U.S. power supplier PPL Corp., (PPL) requested U.S. Nuclear Regulatory Commission licensing approval for the construction and operation of a new Areva U.S. EPR (European Pressurized Reactor) commercial nuclear reactor. Plans call for the plant to be built near Berwick, Pennsylvania. And Areva just signed a contract worth $11.6 billion to build two nuclear plants with China Guangdong Nuclear Power – the largest nuclear power contract in history.

However you decide to play this particular commodity, a bet on uranium is likely to help put a "glow" into your portfolio in 2008.

[Editor's Note: Uranium is just one of the commodities investors should look at in 2008. With the huge global demand for commodities of all types that China's frenetic growth is generating, and the inflationary pressures being spawned by the falling U.S. dollar, investment gurus such as "adventure-capitalist" Jim Rogers say that commodities are a good place to be in 2008. Rogers chronicles specific investment opportunities in both commodities and the shares of specific China-based companies in his just-released bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market." To see how Money Morning can help you can obtain a free copy of Rogers' new book, please click here.]

Writer Don Miller, a regular contributor to Money Morning, last wrote about the 2008 outlook for China. Money Morning’s "Outlook 2008" series last covered the U.S. Economy. Next up: Alternative Energy Investments.

News and Related Story Links:

• Australian Uranium Association:
  World Uranium Mining.

• California Energy Commission:
  Nuclear Power in California: 2007 Status Report.

• Money Morning:
  How to Profit From "La Nouvelle Alliance" – France and China.

• Wikipedia:
  Uranium.

• StockInterview.com:
  U.S. Department of Energy to Auction Uranium in August.

• The Indian Express:
  Low on Uranium, 5 N-Power Units Are Shut Down Early.

• UraniumSeek.com:
  Uranium Wars, by Sol Palha.

• Wikipedia:
  The Three Gorges Hydroelectric Project.

• CNN.com:
  China the Asian Superpower: Three Gorges Dam.

• Reuters:
  PPL Corp. Plans to Set Up Areva EPR Reactor.

[Editors Note: The First of Two Parts. Part Two Runs Tomorrow.]

If you’re planning to send Christmas presents to Canadian relatives this year, the Canadian postal service has a simple warning for you: "Mail your parcels early!" says Paula Shore, an official with the Canada Border Services Agency in Vancouver, B.C.

She’s not joking. Delays are being reported across the country’s postal network, with the three biggest international mail-sorting centers – Montreal, Toronto and Vancouver – all at a choking point. Shifts have been added, and overtime extended, as Canada Post and the Border Services Agency struggle to deal with a 14% year-over-year surge in volumes through to September.

Canada’s mailbag problems have nothing to do with strikes, competition, or rural post-office closures. In fact, the country has become a victim of its own economic success.

The Canadian dollar – known colloquially as the Loonie – is trading at a 50-year high of $1.07 against the U.S. dollar, making it cheaper for Canadians to order goods online from the United States than to buy them locally. That fact has led to a surge in U.S. imports and a raft of extra parcels and mail to deal with. Retailers, who stocked up on goods many months ago when the U.S. dollar was far stronger, are now stuck with shelves of unwanted stock. In some cases, retailers are even trying to attract shoppers by slapping signs promising "American Prices" on their shop fronts.

Although it may not feel like it to those local retailers, Canada’s currency is doing well because the nation’s economy is booming. Sure, it’s "going up by default against a weakening dollar," like almost every other currency in the world, says Adam Cole, a senior currency strategist at the Royal Bank of Canada (RY).

But the underlying strength of the Loonie "is primarily a commodities story," Cole noted. The reason: The world is growing – driven mainly by expanding urban populations in Asia, and China in particular – and it needs an unprecedented amount of raw materials to do so, he said.

Commodities Fueling Growth

That’s great news for Canada since, when it comes to commodities, the country is an absolute Aladdin’s cave. Canada is home to the largest oil reserves outside the Middle East, and boasts the second-biggest natural gas deposits. Its miners are world leaders, conducting 40% of the world’s mining operations, making the U.S. neighbor to the north one of the world’s largest producers of zinc, lead and copper.

Of course, when you buy your nickel or potash from Canadian mines, or your wheat and beef from that country’s Midwest prairie region, you have to pay for the purchase in Canadian dollars. That means you must first sell your U.S. dollars, or British pounds Sterling, or Chinese Yuan, and then buy loonies – an oft-repeated process that pushes up the currency’s relative value. And with oil, gold and most other commodities carrying stratospheric prices, the rest of the world has to pay top dollar for the minerals and energy it buys from Canada.

The net effect of these global financial transactions means that Canada is blessed with something rarely seen in a modern-day developed economy – a budget surplus. In the first five months of the current fiscal year, Canada’s surplus jumped 21% from the same period a year earlier, to $9 billion (C$8.68 billion), according to the country’s Finance Department.

And the commodities boom has also created a jobs bonanza. The U.S. economy created twice as many jobs as expected in October, a pleasant surprise for many who’d been expecting a slump. North of the border, however, the Canadian economy added 63,000 jobs, roughly five times the number that had been expected. The jobless rate in Canada for October was 5.8%, a 33-year low, and a marked decline from the 5.9% reported for September.

For now, it appears Canada is sound enough to ward off much of the spillover impact of a U.S. recession, should the American economy sputter and stall.

"I’m not particularly optimistic about the U.S., but I don’t think the Toronto Stock Exchange is really about the U.S. anymore," Jeff Rubin, chief economist and chief strategist at CIBC World Markets Inc., told Reuters. 

Although 75% of Canadian exports currently go to the U.S. market, more than half of its exports are commodities. [That ratio is actually in decline, although Canada remains the No. 1 U.S. trading partner, according to the U.S. Census Bureau].

"What we’re seeing is strong global growth that no longer seems to be dependent on the U.S., and that’s what allows the Canadian market and, indeed, the broader Canadian economy, to have the measure of independence from the U.S. that it didn’t have in past cycles," CIBC’s Rubin said. "It may be true that Canada sells all of its oil to the United States, but the price at which it does so depends on what’s happening in global oil markets."

The bottom line: The fact that Canada’s commodities are in such demand means that Canadian commodity stocks are promising investments, worth closer study by investors looking to capitalize on global growth. Canada may also be something of a safe haven for investors looking to diversify away from the U.S. market and fears that the U.S. economy is recession-bound.

In part two of this series, we’ll outline precisely which commodities are fueling the Canadian economy, and tell you which companies investors will want to consider popping into their portfolios.

[Part Two Will Appear in Tomorrow's Issue of Money Morning.]

News and Related Story Links:

• Money Morning Investment Analysis:
  With Oil, Uranium and Gold, There’s Nothing Crazy About This Canadian Loonie Tune.

• Money Morning Investment Report:
  Two "CanRoy" Investments for the Oil and Gas Boom.

• Money Morning News:
  Canadian Telecom Telus Misses Third-Quarter Estimates, Even With a 28 Percent Gain in Profits.

• U.S. Census Bureau:
  Top 10 Countries With Which the U.S. Trades (September 2007 Statistics).

"Major operations were impacted by scheduled maintenance and tie-in activity associated with expansion projects," the report said, alluding to an ongoing expansion at the Olympic Dam where uranium was particularly affected.

"[Uranium] production was lower than the June 2007 quarter mainly due to a decline in grade and tonnes milled," the report stated. Uranium production from the company’s Olympic Dam project totaled 933 tonnes in the third quarter, well short of its quarterly capacity of 1,250 tonnes. 

Uranium experienced an electrifying price surge over the past year, peaking at $138 a pound in June.  It was only $37.50 per pound in January 2006. The price has slipped to $75 a pound in recent months, but it’s still well above Olympic Dam’s contract value of less than $20 a pound. 
BHP’s production of copper and nickel, were also below many analyst’s forecasts. Only the company’s output of petroleum beat estimates.  Copper production dropped 10% from the previous quarter, but it was still a 23% improvement over last year. Nickel output fell 19% from the previous quarter and 13% from a year ago.

Iron-ore production climbed 7% to 25.87 million tonnes in the three months through September from a year earlier.  The output is a record high for the company, but it stopped short of meeting analysts expectations, and is only a marginal improvement over the previous quarter.

BHP’s disappointing production figures have forced some analysts to scale back their profit forecasts for the company. ABN Amro cut its 2008 profit estimate by 5.5%, while JPMorgan trimmed its profit estimate by 2.8%. 

News and Related Story Links:

• BHP Billiton:
  BHP Billiton Production Report For The Quarter Ended 30 September 2007

• Money Morning:
  BHP to Sell its Rio Algom unit to Uranium Resources

• Money Morning:
  Three Ways to Profit From Australia’s Strong Dollar and Massive Natural Resource Reserves

• Money Morning:
  ‘Trillion-Dollar’ Mine for BHP

• The Age of Australia:
  Olympic Dam shortfalls nuke BHP

• The Age of Australia:
  BHP moves to send Melbourne jobs west

Uranium Resources Inc. (URRE) agreed to buy a uranium mining company and a mill license from BHP Billiton Ltd. (BHP) for about $126.5 million in cash.

Uranium Resources announced that it would pay $110 million for Rio Algom Mining LLC, whose assets include New Mexico properties with 20 million pounds of U308 uranium ore. The company will pay $16.5 million for a U.S. Nuclear Regulatory Commission (NRC) license to build and operate a conventional uranium mill.

According to published reports, the agreement reached by Uranium Resources calls for the company to assume certain retirement benefits and reclamation liabilities, of which up to $35 million will be pre-funded at closing.

"The purchase of Rio Algom provides one of the key assets we need to achieve our strategic goal to produce 10 million pounds of U3O8 per year by 2014," said Uranium Resources President and Chief Executive Officer Dave Clark. "We believe building a new mill on an NRC licensed site with associated water rights could allow production to begin within four to five years."
The deal should close before June.

Uranium was milled at the site beginning in the 1950s, when Kerr-McGee operated what was then the biggest operating mill in the United States. It was dismantled in 2003.

Uranium Resources is planning to build a new milling facility to process the uranium ore that it will be mining from around the region. The planned mill is expected to process up to 8,000 tons of uranium ore a day, and will employ over 200 people.

News and Related Story Links:

• CNNMoney.com:
  Uranium Resources Buying BHP’s Rio Algom.
• MarketWire.com:
  Strathmore Completes Agreement With Nu-Mex Uranium for US$44.5 Million Commitment at Nose Rock, New Mexico Uranium Project.

• Bloomberg News:
  Alcan Senior Executives to Leave After Rio Tinto Deal.

• Money Morning Investment Analysis:
  Fund Manager Favors BHP, Which is Striking it Big in India.

• Money Morning News:
  BHP Earnings Soar 28.4 Percent.

• Money Morning Investment Analysis:
  Four Ways to Beat the Credit Crunch and Profit From Global Growth.

• Money Morning News:
  Trillion-Dollar Mine for BHP.