LONDON - Shares in uranium producers offer prospects of long-term gains as China ramps up ambitious growth in its nuclear industry, but the ride may be rough due to excess near-term supplies from expanding mines and inventories.

After decades of scant growth of new reactors due to safety and storage concerns, nuclear energy is enjoying growing acceptance as a carbon-free alternative for nations seeking to meet commitments about global warming.

Some 53 reactors are under construction worldwide and another 136 are planned, adding to the 435 now operating, according to the World Nuclear Association (WNA).

Supplies of the silvery metallic element used to fuel reactors are currently abundant, however, and uranium's spot price is likely to underperform in coming months.

Prices may dip after Kazakhstan tripled output over the past four years and is due to overtake Canada this year as the world's biggest producer.

At the same time, the U.S. Department of Energy is due to release additional inventory stocks on the market to fund environmental clean-up work.

The uranium price is likely to tread water in the short term -- we feel that there are some pretty stiff winds that it's facing -- but that doesn't alter the base case. As long-term investors we feel that the story is undiminished, said Will Smith, a London-based portfolio manager on the Geiger Counter fund run by New City Investment Managers that focuses on uranium producers.

CHINESE GROWTH

Many analysts forecast more market surpluses for the near-term, but expect the situation to tighten up, mainly due to China's reactor building programme.

China's demand for uranium is due to triple by 2015 and rocket by nearly tenfold by 2030 as its plans to expand nuclear power gain pace, according to data from the WNA, which represents the global nuclear industry.

China is due to beat its official target to have 40 gigawatts of nuclear energy by 2020 and will increasingly have to work to find enough uranium to feed the plants, officials said.

The growth in Chinese demand is going to tighten up the market over the next two years or so, together with some other scheduled reactor builds that are under construction, said analyst Max Layton at Macquarie in London.

I see the uranium market as a call option on supply disruption. You've got demand growth for the first time in 20 or 30 years and it's putting pressure on supply to respond.

Layton expects the spot price to rise to an average of $58 per pound next year and $75 per lb in 2011 from its current level of $45.50.

The Geiger Counter fund invests in a range of firms from junior companies to major firms like Australia's Energy Resources of Australia Ltd, majority owned by group Rio Tinto, the world's biggest uranium producer.

Smith is bullish on exploration firms such as Extract Resources, which is developing Rossing South in Namibia, one of the world's largest uranium deposits.

The fund's biggest holding is in Mantra Resources Ltd, whose main asset is in Tanzania. We feel this will be the next producer -- they're growing their resources and Tanzania is proving to be a very good host mining country, Smith said.

BIG PRODUCERS TO BENEFIT

Analyst Ian Parkinson at CIBC in Toronto advises buying companies that are already producing.

I think you've got to look more toward the de-risked names. Cameco and Paladin remain strongly positioned to participate in any underlying commodity rally. They are industry leaders, he said.

You can look down the food chain to the explorers, but permitting remains a big hurdle for them. If we see any commodity price strength, it's going to be the producers that will really benefit. Cameco shares have performed in line with the S&P Toronto Global Mining Index, gaining 55 percent this year and outperforming the S&P Toronto composite index by 20 percent.

More cautious analysts say outperformance of stocks in the sector even when the underlying uranium price has been lackluster shows that expectations for future growth are already at least partially in the price.

Analyst Edward Sterck at BMO Capital Markets advises investors to hold their fire for the time being.

There are possibly signs of oversupply coming into the market, which just makes me think perhaps we should just sit back and wait and see what transpires and not make an investment decision right now.

Although spot uranium prices seem low compared to a record peak of $136 per pound in 2007, when prices soared mainly due to buying by hedge funds, the current price is attractive versus lows of $7 a pound in 2000.

I'd say if you look at history, supply in uranium has potentially been more elastic in response to price stimulus than people might now be thinking it is, Sterck said.

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