Deep Discounts on Uranium Stocks
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Looking at the historic performance of the Global X Uranium ETF (NYSEMKT: URA), uranium shares were following an upward trend throughout the first part of 2011, but starting in March the downward path began, which continued into 2012. Obviously, this switch in trend coincides with the Fukushima Daiichi nuclear disaster on March 11, 2011. Following the meltdown a wave of negative nuclear sentiment passed through the globe, affecting key markets including India, Germany and the United States. In the months following the accident, uranium prices have slumped by nearly 25%.
After much initial resistance over safety concerns, France concluded that the nation would not be able to abandon their nuclear ambitions in favor of energy alternatives. Other nations too have slowly been reversing the initial attempts to move away from the energy source: China and India resumed their nuclear programs and Japan, despite a national freeze on building new reactors, is exporting nuclear technology to other Southeast Asian nations.
Cameco (NYSE: CCJ), whose market value collapsed by 50% in light of the negative sentiment toward nuclear power, remains optimistic about the future of the energy source. CEO Tim Gitzel states that Cameco’s current estimates of net reactors constructed by the end of the decade (93) are comparable to those before the disaster (104). With current miners trading at heavy discounts, Cameco intends to use its cash reserves and leverage capacity to pursue takeovers.
With $10 and $7.5 billion on their respective balance sheets BHP Billiton (NYSE: BHP) and Vale (NYSE: VALE) are in a position to acquire a number of cheap uranium producers, particularly Australian and Canadian juniors. Prior to the fallback in nuclear sentiment, Canadian uranium miners were trading at P/E ratios between 20 and 35. Although this may have been steep, the earnings ratios have fallen to levels that do not properly reflect long-term industry fundamentals.
Rio Tinto (NYSE: RIO) just completed its acquisition of Hathor Exploration, paying $4.70 per share, in what represented a 65% premium over the previous trading price. As the bidding war between Rio Tinto and Cameco continued, Hathor exploration was at a point trading at $5.06, its all-time high. While market factors fully take into account the pessimistic views emerging following the Japanese earthquakes, the surging uranium demand in Russia, India and China is being ignored.
Nuclear energy stock are likely to follow one of two courses over the next year: either they will simply appreciate in value, or large miners will scoop in and attempt to purchase producers at fire sale prices.
After Chernobyl and the incident at the Three Mile Island, nuclear activity fell out of favor, but existing reactors did no shut down, providing a consistent level of ongoing demand. Over the years, countries began to encourage nuclear energy once again as it offers an environmentally beneficial solution to other alternatives -- production of electricity accounts for approximately 33% of U.S. GHG emissions; nuclear power, however, emits practically no carbon dioxide, mercury or sulfur into the atmosphere.
Hopefully, as Fukushima falls into the annals of history, nations will once again move forward with previously determined nuclear energy plans as history repeats itself. The Fukushima Daiichi meltdown should be something that society learns from and forces the development of tighter safety standards.
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