Invest in this Strong Uranium Miner
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Rising prices are born from simple situations where demand is greater than supply. Uranium miners will experience such a market based on supply and demand trends. Finding great industries with increasing demand, large barriers to entry, and long lead times for new production is not a simple feat. Warren Buffett makes it clear that companies with sustainable advantages provide superior security and returns. Not all uranium miners are the same and you must invest carefully in this sector. The smaller players do not have the same amount of resources or experience to develop assets as the larger players. The greater volatility among the smaller players makes the larger miners a more secure investment.
Oil collapsed to record lows during the 90s and then growing demand caused prices to increase 5 times. With the recent disaster in Japan, uranium spot prices have returned to the $45 to $55 dollar range. This is a great decline from the peak around $130 of only a couple years earlier. Morgan Stanley and others expect a uranium shortfall to occur in the coming years. Growing energy demands in the emerging markets and America's desire to retire older coal plants will maintain demand for nuclear energy.
Cameco Corp (NYSE: CCJ) is one of the largest uranium miners. It has high quality assets in Canada which have uranium concentrations many times the world average. The gross margin of 48.1% is more than 10% higher than that of Dension Mines and the price to book ratio is a healthy 1.57. Cameco may not classify as a pure value play but a price to book ratio of 1.57 is not outrageous. It recently increased its assets in Australia with a $430 million purchase of the Yeelirrie Mine in Western Australia from BHP Billiton. The company's revenue has remained relatively stable over the past couple years as it sells its products on long term contracts. This is the one of the world's best uranium investments as it is has high quality assets, continues to expand production, and has the resources to develop those assets. It also pays a small dividend.
Denison Mines Corp (NYSEMKT: DNN) is a small company with assets in the United States, Canada, Mongolia, and Zambia. Currently the company sells uranium and vanadium but continues to supplement its income with new share issuance. Their gross margin is only 33.8% compared to Cameco's 48.1%. Denison's price to book ratio of 2.06 is higher than Cameco's 1.57. The company has interests in Uranium mills in addition to their exploration projects. The cash flow situation is rather concerning as their amount of cash continues to decline. The constant share dilution is a definite negative and I believe that this stock is too volatile and the fundamentals too shaky for the majority of investors.
Uranerz Energy Corp. (NYSEMKT: URZ) is a very small uranium exploration company based in the U.S. Like Denison it has continually it has relied on the issuance of new shares to finance its activities. The quality of its assets is not anywhere near that of Cameco's Canadian assets. The fact that their assets are in the Powder River Basin of Wyoming is a positive quality as removes some of risks of investing in emerging markets like Zambia. This company is pre-revenue and I believe it is too risky for the majority of individual investors. The short interest ratio is at 20 days which shows the market's wariness for this company. At the current stock price it looks very expensive with a price to book ratio of 2.99. Still, it is a good company to follow over the long run as the company's mines start to come online.
Over the long run demand is set to out strip supply in the Uranium market. Smaller exploration companies may appear attractive with a large amount of upside room. I believe investing in the larger companies like Cameco is the better choice. They have more assets and more experience and are better positioned to develop new assets. The company has a total debt to equity ratio of .20 and they have not needed to rely on new share issuance to the same degree as the smaller players. Their positive cash flow from operations gives more flexibility. Their gross margin is much higher than Denison's while their price to book ratio is lower. These two metrics show that the Cameco offers a stronger business at a lower price. Investing in uranium allows you to help support the world's energy needs while providing stability to the market.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.