A Haywood Securities report provided an update on the uranium sector.
In a July 19, 2018, research note, Haywood Securities analyst Colin Healey reported that on July 18 the U.S. Department of Commerce launched an investigation into how uranium imports may be threatening national security. "U.S.-focused uranium equities rallied yesterday on the news, although we expect some profit taking is likely in the term," added Healey.
The DOC's move came in response to a joint request for such an inquiry, in accordance with Section 232 of the Trade Expansion Act of 1962, filed in mid-January by two of the U.S.' largest uranium producers, Ur-Energy Inc. (URG:NYSE.MKT; URE:TSX) and Energy Fuels Inc. (EFR:TSX; UUUU:NYSE.American).
Healey pointed out that in that correspondence, the two companies purported that the domestic uranium mining industry is vital to U.S. national security but is suffering dramatically from having to compete with heavily subsidized ex-U.S. producers.
Ur-Energy and Energy Fuels offered two solutions, that a cap be placed on uranium imports and that utilities in the United States be required to buy uranium produced in the U.S. For example, "if the government were to mandate that 25% of its nuclear fuel be sourced domestically, this would require an incremental increase of about 10 million pounds of uranium," Healey indicated.
Healey relayed that the most recent data shows 83% of the uranium the U.S. requires is imported. About 25% comes from Canada, about 24% from Kazakhstan, about 20% from Australia and about 14% from Russia. U.S. uranium production has plummeted by about 90% since the peak in 1980.
The DOC's investigation and any subsequent action are expected to take about a year. By law, the commerce department has 270 days to complete and report the findings of such an investigation along with its recommendations to the U.S. president, who then has 90 days to take action.
The imposition of any tariffs, quotas and/or federal utility purchase mandates resulting from the investigation would greatly benefit U.S. uranium producers and developers because it would allow them to capture a larger share of the domestic market. "This could eventually lead to outperformance from the associated equities and turn the group into sector leaders," suggested Healey.
The companies that could benefit, he wrote, are: Ur-Energy, Energy Fuels, Uranium Energy Corp. (UEC:NYSE.MKT), Azarga Uranium Corp. (AZZ:TSX), Laramide Resources Ltd. (LAM:TSX; LAM:ASX), Peninsula Energy Ltd. (PEN:ASX) and Cameco Corp. (CCO:TSX; CCJ:NYSE). Haywood's favorite stocks in the sector are: NexGen Energy Ltd. (NXE:TSX; NXE:NYSE.MKT), Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT) and Uranium Participation Corp. (U:TSX).
In the interim, near-term drivers of share price in the sector will be news flow, particularly related to the Section 232 investigation, and market sentiment. As such, Haywood recommends investors build positions in "quality uranium names, using news-driven price shocks such as this as an opportunity to rebalance security exposures," Healey noted.
The analyst concluded, "We continue to believe we are in the very early stages of a secular bull market in uranium and that sentiment is beginning to perk up. . .we expect a sustained increase in the long-term price to be the sector's most salient catalyst."