Ignore Uninformed PR, Examine the Facts about Uranium

Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nuclear energy is a highly contentious issue and it is easy to get wrapped up in the latest political discussion. Human beings use the availability heuristic to place greater importance on recent events discarding older and harder to remember information. Japan acted in a similar fashion when following Fukushima they stated they were ready to phase out all nuclear power. With the fading of Fukushima into the history books LNG import prices and high cost of being nuclear free caused the Japanese to rethink this plan. More than a year after disaster the government has decided that Japan's currently idled reactors will be brought back online. The nation's geographical isolation and the availability of uranium makes the fuel too attractive to pass up. 

Japan Liquefied Natural Gas Import Price data by YCharts

The Long Term Situation 

Uranium is not as easy to harvest as sunlight. Uranium mines are expensive endeavors and they cannot be developed without years of development. The lag between demand shocks and the subsequent supply response make for great bull and bear markets. Finding that elusive ten-bagger is not easy, but the violent cycles in the uranium market make for a great opportunities. 

There are a number of events on the horizon which will be positive for the uranium market. The Russian and U.S. deal to convert a number of nuclear warheads into fuel is set to end around 2014 or 2015. Around thirty metric tonnes of Russian weapons have been converted per year which has been a major boost to the world's supply of uranium. After Fukushima, the IEA continues to project an increase in nuclear energy capacity in 2013, though at a reduced rate. Even in the midst of safety concerns there are a number of positive factors in the demand side and constriction in the supply side. 

Where to Invest

Cameco Corp (NYSE: CCJ) is one of the world's top uranium miners and recently acquired the Yeelirrie project in Western Australia for $430 million. CCJ's McArthur River facility gives the company a huge strategic advantage due to its extremely high yield rate. Over the past 5 years revenue growth has been .17% while EPS growth was 1.21%. The volatile Uranium spot price hasn't helped earnings and the company already trades at a P/E ratio of 16.2. Some Asian nations like China continue to go ahead with future nuclear development and they will help to maintain a strong level of demand for CCJ's product. At current PE levels CCJ seems rather expensive, but over the coming years the company is set to grow. 

Uranium Energy Corp. (NYSEMKT: UEC) is a small company with operations in Texas and exploratory operations in Paraguay. The company focuses on insitu mining techniques which are more cost effective at lower prices. UEC is still a junior but its assets look promising and it is currently producing at their Palangana facility in Texas. The firm is not expected to be profitable until 2014, but it looks promising. UEC has no debt and a quick ratio of 4.7, but there is a good chance it will need to continue diluting its shares in order to finance its operations. With a short interest ratio of 30 days this stock looks risky but as the price of uranium rises this junior could really take off. 

Denison Mines Corp (NYSEMKT: DNN) has a varied resource base throughout Canada, Zambia, and Mongolia. In addition to the exploration and development portfolio the company owns a 22.5% interest in an uranium mill in Canada. Denison Mines has no debt and its quick ratio of 6.7 is a tad higher than UEC's. Denison is a relatively risky company and is not expected to be profitable in the near future. Share dilution is a potential issue, but when the uranium spot prices comes to a more reasonable level then the company's stock price should revalue accordingly. 

Global X Uranium ETF (NYSEMKT: URA) is not highly diversified, but it is an easy way to gain exposure to a greater slice of the uranium industry. The top five holdings make up 56.8% of assets and Cameco is the largest holding at 19.3%.  Paladin energy is the second largest holding in URA at 14.9% of holdings. The company has operating mines in the African nations of Namibia and Malawi along with a number of exploratory developments in Canada, Niger, and Australia. Uranium is the third largest holding at 10.4% of assets and the company operates a number of mines in Kazakhstan and the USA along with other development projects in Australia and elsewhere. URA is volatile with a beta of 1.9, but its holdings on average are traded at a price to book ratio of .65 in 2012. One downside is the yearly expense fee of .69%, but given the small size of the uranium market this is acceptable. 

Conclusion

It is easy to ignore opportunities a couple years out when everyone is focused on the next one or two quarters. Japan’s decision to reinstate more of their nuclear reactors is a sign that the industry is starting to recover from Fukushima. It is highly unlikely that the spot price of uranium will double tomorrow, but the next couple years are not as bleak. Increasing demand and supply shocks should send the market upward which will cause a boom in profits for CCJ. The other juniors like UEC and DNN are worth some consideration, but their small size makes them very volatile. The ETF URA is another attractive investment as it offers a simple way to invest in Canadian mining juniors. No one can predict the future, but uranium appears to be setting itself as a strong bull market.


MrCanadian1 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure