Kyoto Equals Nuclear

Over the past few weeks we have been hearing a little more regarding the Kyoto Accord and how it may be implemented over the next 7 years. The Canadian Government promises to have a plan in place soon, it is not surprising to see that we signed on to the agreement with no idea how to reach the targets.

The Kyoto accord is now law and it is going to change the outlook for many segments of the economy some negatively and some positively. The negative implications are going to show up first in any segment of the economy that uses fossil fuels or other chemicals that contribute to greenhouse gas emissions. That will include the auto sector, trucking and transportation, electrical generation and most industrial plants.

The environmental movement may fall victim to the law of unintended consequences arising from the Kyoto accord, the push by the environmental activists for a comprehensive plan to deal with greenhouse gases will likely end up making nuclear power generation a much more favorable alternative for many countries.

A nuclear power plant which does not contribute to the build up of greenhouse gas will be viewed as a viable alternative to coal or natural gas fired generators going forward as the full impact of Kyoto hits home. In many countries the limits on emissions being produced established under Kyoto will restrict their ability to look at traditional forms of electrical generation to meet future demand.

World wide there are 441 nuclear plants in operation at this time and 19 countries depend on nuclear power for 20% or more of their total power needs this is likely to increase. On a global basis there are 34 nuclear power reactors currently under construction most of these are in Asia and Russia. The number of reactors being shut down is slowing in many cases the useful life of the facility is being extended as new technology is implemented.

The increase in the number of nuclear reactors will result in an increase in the demand for uranium. The demand for uranium has consistently been higher than production over the past few years and that situation is going to be aggravated by the increase in nuclear use due to the Kyoto accord. The shortfall between demand and production has been met by utilizing excess military and civilian inventories along with recycled products. These inventories are limited and will not be available over the long term. The price of uranium has more than doubled from $10.00 to $21.00 per pound over the past 2 years and shows no sign of declining in the short term.

The main beneficiaries from an increase in the use of nuclear reactors will be the producers of uranium, the largest being Cameco (CCO-tsx, $56.88, 306-956-6200, www.cameco.com ), Cameco is the worlds lowest cost producer of uranium and supplies approximately 20% of the worlds production. The company has total proven and probable reserves of 550 million pounds of uranium.

The company operates three mines in Northern Saskatchewan, McArthur River, Key Lake, and Rabbit Lake along with two properties in the US, Smith Ranch-Highland in Wyoming and Crow Butte in Nebraska. The company is developing two other mines which are expected to be in production sometime in 2007. The first is the Cigar Lake Saskatchewan property which is the world’s largest undeveloped high grade uranium deposit with proven and probable reserves of 232 million pounds of uranium. The second is the Inkai joint venture, 60% owned by Cameco, in the Republic of Kazakhstan with estimated reserves of 92 million pounds of uranium. The company is also involved in two joint venture gold mines which produced 640,000 ounces of gold in 2004.

Cameco also owns 31.6% of Bruce Power which is a joint venture with TransCanada Corp and BPC Generation Infrastructure Trust. Bruce Power has leased eight Candu reactors located in Ontario, six of which are operational, the six reactors can produce 4,700megawatts of electricity enough to supply approximately 20% of the provinces power requirements.

Cameco produced 20.56 million pounds of uranium in 2004, 2 million pounds more than in 2003, generating revenue of $1.04 billion and earnings of $278.8 million or $1.56 per diluted share. The company recently split the shares 3:1 and increased the annual dividend by 20% to a post split $0.24 per share.

Cameco is in a dominant position on a global scale which should allow it to take advantage of the potential increase in global demand for uranium over the long term. The company is actively working to maintain its global position as the largest supplier of uranium. As the supply of excess military and civilian supply declines the nuclear industry will be forced to rely on the current production to meet its needs this will force the price of uranium higher and should lead to much higher earnings at Cameco.

The stock is a little ahead of itself here and should be purchased on any pull back below $55.00 use a stop at $50.00 with an initial target price of $75.00.