It’s no accident that the bumbling Homer Simpson works as the safety inspector of the Springfield Nuclear Power Plant. When The Simpsons was created in the 1980s, nuclear power was, well…a joke. The general public was spooked by the Chernobyl and Three Mile Island accidents. No one wanted more nuclear power plants or the worry that went along with them. Plants were considered hazards. Many began to lose money, and government bailouts soon followed.

But now, The Economist reports certain trends are moving in nuclear power’s favor. Technological advances help keep plants online and shutdowns low. And new passive safety features have the ability to shut down reactors during an emergency without human intervention. Even Homer Simpson couldn’t accidentally cause a meltdown…

The current political climate helps the nuclear cause as well. Instead of dealing with the hostile regimes controlling most of the world’s supply of fossil fuels, we can look to allies, such as Canada and Australia, for the uranium needed for nuclear facilities.

The United States is still the world’s largest uranium buyer. After all, 20% of the country’s grid is nuclear powered. Japan and France have also dedicated significant resources to nuclear power (France’s power supply is already a whopping 80% nuclear). The world’s resurging energy demands and the return to nuclear technology are helping to fuel the hype.

Back in 2001, uranium traded for about $6.75 per pound. After an epic 47-month price surge, the heavy metal finally took a breather this summer, peaking close to $140 per pound in June. And as uranium began to rise, speculators saw potential and moved in. Demand grew and the number of uranium companies rose from less than 12 to more than 500 today.

These 500-plus companies have done quite well. Take a look at the small-cap UEX Corporation (TSX: UEX). They have mining interests in Saskatchewan, Canada. UEX got in at the right moment. Check out how they’ve done since the uranium run started:

In June of this year, the uranium market began to cool. Tired of having their margins squeezed, nuclear plants stopped buying to decrease demand. Then the speculators began to take profits as the rapid price ascension seemed near its peak. Now, uranium trades around $85 per pound, still 13 times what it traded for only six years ago.

After an unprecedented price run, one-time buyers are dumping their positions as uranium finally begins to correct. But while these fly-by-night uranium speculators are running scared, we are presented with a potentially profitable opportunity to get in on the ground floor.

Even with 500-some companies competing to provide the uranium needed to start up this new wave of nuclear plants coming online, the demand is only going to push the price of uranium through the roof — again. But which ones are going to benefit the most from it?

Well, as always, it’s the small companies that are able to take advantage of this second run. It will be a lot easier for these companies to double or triple in size, which will give shareholders the chance to see huge profits.

But we have to be careful when we pick which one. In a run like this, many will get trampled by some of the large players like Cameco. So we have to find one that won’t.

The first things to look for are reserves and location. Any mining company struggles to find the right location with plentiful reserves. And those that do are the ones that become giants like Cameco and Barrick Gold.

It’s not enough to just have good locations and big reserves. The actual metals in the Earth have to be high grade. To be profitable, companies have to be able to actually mine these metals at a low cost. So the second factor after location and reserves are the grade of their reserves.

Also, to be a competitive mining company, these small-caps have to partner up with an established major miner. These partnerships give the juniors a better exposure to the best reserves and locations.

Lastly, if a company looks completely overbought and seems to be moving only on speculation, it probably means that it is completely overbought and moving only on speculation. To avoid getting in right as everyone else decides to get out, you have to do some back-of-the-envelope math to see how stable the company’s balance sheet is and when it will start to be profitable.

To find a company like this takes plenty of time and careful observance. Most people don’t have that kind of time. And that’s why very few get in on these companies while they are still juniors. So to do it justice, we will be following this trend in the future. Until next time…

Best,
Gunner
October 1, 2007

P.S.: Readers of my special exclusive service, Bulletin Board Elite, just found out about one of these junior uranium miners that fit all of the characteristics mentioned above. It is set to skyrocket.

Penny Stock Nuclear Plants was originally featured in the Penny Sleuth.