Uranium Market Reaches Critical Juncture
Even as concerns over radiation leaks from Japan’s wrecked Fukushima reactor persist, nuclear power isn’t going away. Quite the opposite.
Investors have an opportunity to position themselves in nuclear and uranium-related stocks that have been written off as dead money. In time, this sector could come roaring back and generate huge profits for those who take advantage of today’s depressed valuations.
Growing Asian Demand for Energy Looks for Nuclear Solutions
Japan, a crowded nation that isn’t rich in natural resources, will have little choice but to restart its nuclear power program – at least if it wants to secure affordable electricity. The alternative is importing increasingly expensive foreign sources of fossil fuels that pollute the air.
But the real growth in demand for nuclear power will come from elsewhere in Asia and the emerging world. Leading uranium producer Cameco (CCJ) reports that 37 new nuclear reactors are under construction in China and India. Cameco projects the two energy-hungry countries to build 70 new reactors over the next decade. By 2030, a total of 370 new nuclear power plants are slated to be built worldwide.
These figures are remarkable, especially when contrasted against all the negative media coverage and bearish analyst commentary surrounding the nuclear industry. Not only is nuclear not going away; it is set to experience steady growth over the next two decades.
Contrarian analyst Reuben Brewer notes that India and China “have little choice but to keep building power plants because large populations and improving economic standards require it. Without adequate power, new buildings are useless. Without electricity, modern conveniences like refrigeration, air conditioning, computers, and cell phones won’t work. It’s why Cameco is planning on notably increasing its uranium output despite currently weak market conditions.“
Uranium Participation Corporation (U.TO), which tracks uranium prices, has been basing out over the past year and a half and appears to be nearing a major upside breakout. If confirmed, the breakout would represent an ideal time to enter the uranium sector – after a multi-year decline has created a compelling value and while momentum is turning positive in the early stage of what could be a multi-year new bull market.
Megatons to Mega-Profits?
In December 2013, the U.S.-Russia Megatons to Megawatts program concluded. During the 20 years of its existence, 500 metric tons of highly enriched uranium from Russian weapons stockpiles (the equivalent of 20,000 warheads) were recycled for use in nuclear power plants. According to the Department of Energy, the nuclear fuel obtained from the decommissioned warheads accounted for nearly half of all nuclear energy produced in the U.S. over a 15-year period.
What had been a significant source of uranium supply is gone. Going forward, more uranium will need to be mined in order to satisfy growing global demand. But since uranium prices have remained low over the past couple of years, uranium producers have struggled financially. Many now lack both the ability and the incentive to invest heavily into new projects.
Uranium producers, as indicated by the Global X Uranium ETF (URA), have been losing market value for three years. But given that the supply/demand fundamentals for uranium itself augur for higher prices in the years ahead, producing uranium can be expected to become profitable again – especially for those producers that still have strong balance sheets despite the carnage in the sector.
This sector isn’t for the faint of heart! But it’s one of the few where compelling opportunities exist in a market where most sectors have gotten overextended to the upside. Now isn’t the time to chase performance.
It’s not necessarily time to put everything into the beaten-down sectors, either (there’s always risk of more downside). But if your risk tolerance permits, now is the best opportunity to take a position in uranium stocks that’s existed in years. If you have a long-term perspective, you’ll be able to ride a very big move higher in this sector as it eventually stages a cyclical recovery.
Global X Uranium ETF At a Glance
Ticker: URA (NYSEArca)
Total Assets: $133.1 million
Foreign Stocks: 92.1%
Number of Holdings: 24
Top 3 Holdings: Cameco (CCJ)……………….. 23.5%
Uranium Participation Corp. (U.TO)……………………. 10.2%
Denison Mines (DML)………. 10.0%