- The recent sell-off in many energy stocks has created a buying opportunity in the uranium sector.
- Uranium could be one of the world's most undervalued assets and be poised for demand growth.
- Japan plans to restart a number of nuclear plants in the coming months and this could mark the start of a 2015 'nuclear renaissance'.
- Beyond 2015, there a numerous nuclear plants that are either under construction or being planned which should virtually guarantee increased demand for uranium.
The uranium sector was hit hard in the aftermath of the 2008 Financial Crisis, then came another crisis in 2011, when a massive earthquakedamaged nuclear facilities in Japan. That caused another big plunge in demand for uranium for the past few years. More recently, it appears that investors have lost interest in uranium stocks as part of a general and significant sell-off in the energy sector. The nearly 50% plunge in the price of oil in 2014, has had some contagion effects on other stocks in the energy sector, including uranium. However, it is a mistake for the market to sell the uranium sector because oil is cheap now. Nuclear power generates electricity, and oil is primarily used as a fuel for vehicles. Because of this, uranium and oil don't truly compete for the same markets. For that reason, investors should not be selling uranium stocks just because oil is cheap. The energy sector crash has also led to tax-loss selling at the end of 2014. That means beaten down stocks in this sector could be poised to rebound in January and beyond. Let's take a look at a few other positives:
A recent (December 30, 2014) Barron's article titled "Uranium Regains Its Glow" points out that spot prices have jumped from just $28 per pound in May to $44 per pound at the end of 2014. It also points out the recent re-election of Japan's (pro-nuclear power) Prime Minister Shinzo Abe means that the Nuclear Regulation Authority in that country is moving forward with approvals for nuclear power plants to re-start. Analysts at Credit Suisse (NYSE:CS) expect that 6 nuclear plants will be restarted in 2015, and that 22 will be operating in Japan by the end of 2018. That is a significant amount of increased demand for uranium coming in the next few years. However, the expected demand longer-term could be huge, based on what China has planned, the Barron's article states:
The world's second largest economy intends to have 58 gigawatts of nuclear power capacity in 2020, up from 19.2 GW currently, with a further 30 gigawatts still under construction. China currently sources about 5 million pounds of uranium a year from domestic sources and imports between 10 million and 15 million pounds. Should China grow its nuclear power capacity to 58 gigawatts, it would require 50 million pounds a year, according to Credit Suisse.
It's not just restarts in Japan and the huge potential coming from China; there are also over 400 new reactors that are either under construction or being planned in a number of countries including Russia, the United States, Taiwan, South Korea, India, and others. All of this is setting the stage for a significant increase in demand that is likely to eventually result in a supply imbalance that takes uranium prices much higher. With prices still cheap now, but starting to trend higher, this is an ideal time to "stockpile" uranium stocks and hold on for what is likely to be a secular growth story for many years to come.
As the chart below shows, uranium prices started to rebound from the Financial Crisis and by February 2011, it was trading for about $65 per pound. However, the incident in Japan caused uranium prices to sink again. However, we are now starting to see a significant rebound, and this could be the start of a long-term uptrend. If Japan does restart its nuclear reactors, it is possible that uranium prices will head back towards the levels seen in 2011 (just before the earthquake and Tsunami). Denison Mines (NYSEMKT:DNN) was trading for about $1 in July 2010, and surged to over $4 per share by February 2011, as uranium prices rebounded just before the crisis in Japan. Here is another example: In early 2011, stocks like Cameco (NYSE:CCJ) were trading for over $42 per share, which was quite a gain from the $21 level it had traded at just a few months before. This shows the kind of upside uranium stocks could have when uranium prices rebound to even $65 per pound, which is far below the $136 per pound level that was reached in June of 2007.
(click to enlarge)
Chart sourced from Indexmundi.com
A recent Streetinsider.com article points out that analysts at H.C. Wainwright expect uranium prices to exceed $50 per pound within the next 12 months. This is based on the restarts coming in Japan, and on other factors. The article states:
A key consideration in the uranium market is that historically, this has been a thinly traded environment with fewer participants than other commodity markets. As such, a less liquid private marketplace, the uranium spot market can be influenced by one or a small group of participants. At present, multiple US utilities with nuclear power plants are beginning to secure long-term uranium supply for 2017-2018 after not participating in the market in size for a couple years. We believe this collective demand has lifted the spot uranium market to its current level and also expect this trend to continue in the near term.
With the uranium stocks still beaten-down, and with Japan restarts and numerous nuclear facilities under construction, it makes sense to consider adding exposure to this sector in 2015. Investors looking to buy an industry leader should consider looking at Cameco and for a more speculative (higher risk yet potentially much higher reward), it makes sense to consider Denison Mines. Analysts at Raymond James recently called Denison Mines a "top pick" for 2015, because they see takeover potential and the possibility for gains of 70%. I am bullish on both of these stocks and will be writing more about each of these stocks in the near future. Follow me above if you want to read my next articles on this sector.
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Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.