3 Mining Stocks Looking for a Uranium Rebound
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Presently, almost 70 percent of the world’s electricity is generated by fossil fuels, which include coal, natural gas, and petroleum. An exotic group that comprises hydroelectric, wind, solar, geothermal and nuclear fission makes up the remaining fraction. Of these non-conventional methods, the latter is far and away the most widely used, responsible for roughly one-sixth of global electricity generation. Using current technology, nuclear power depends on uranium-238, the most common variant of the element. Although slightly radioactive in its natural state, uranium is not usable in a nuclear fission reactor until it is properly collected and enriched. In 2011, global uranium production amounted to 54,000 tonnes, after averaging 44,400 tonnes annually over the past decade.
Interestingly, the uranium sector has not been an attractive investment in recent years, as the spot price per pound of uranium oxide has fallen from its 2007-era high of $136.22 to currently rest around $50 a pound. As can be expected, companies involved in uranium mining and enrichment processes have suffered; the Global X Uranium ETF (NYSEMKT: URA) is down over 40 percent since last summer. This downward momentum has been driven by supply boons from Canada and India, and the aftermath of the Fukushima meltdown in Japan.
On the plus side, electricity starved countries like China, Taiwan, South Korea, and Russia have recently announced plans to build more nuclear plants in the coming years. Specifically, the Middle Kingdom, as China is known, has its collective hearts set on building 100 new reactors over the next twenty years. Currently, 27 are in construction. Given that there are currently around 430 reactors in the world today, the significance of these figures can be put into context. On the whole, it is estimated that the number of nuclear plants worldwide will double by the end of the next decade, with the majority of growth taking place in the Asia-Pacific region. Going forward, these demand-side factors should let the bulls run loose, so to speak, which presents an interesting profit opportunity for investors. Below are three companies that are looking for a rebound in the uranium market.
Cameco Corp (NYSE: CCJ)
As the largest uranium mining company in the world, Cameco Corp is easily the best pure play in this area. It’s Saskatchewan-based McArthur River mine accounted for two-thirds of its output in 2011, which surpassed 10,000 tonnes in total. Over the next five years, CCJ expects output to rise by 15 percent per annum. The company recently purchased a majority interest in the ‘Millennium project’ of AREVA Resources Canada, an area with an estimated 800,000 tonnes of untapped uranium. Moreover, CCJ also holds a 30 percent stake in Bruce Power LP, which is one of the largest suppliers of nuclear electricity in North America. In its most recent earnings release, Cameco reported a year-over-year earnings increase of 47.6 percent; this was primarily due to lower than expected taxes and strong sales growth. In fact, the Street’s consensus holds that CCJ will accumulate earnings of $1.64 a share in 2013, compared to the $1.30 it reported last year. Interestingly, Cameco’s earnings have historically traded at a 78 percent premium to the S&P 500’s average over the past decade. This year, shares appear much cheaper, trading at just a 29 percent premium. Using the stock’s historical P/E in conjunction with a $1.64 EPS estimate, we can set a price target of $47.37 by the end of next year. Currently, shares of CJJ trade around $20 a share.
Rio Tinto PLC (NYSE: RIO)
Last year, Rio Tinto was the fifth largest uranium miner, digging up 4,061 tonnes of the radioactive element. Unlike Cameco, Rio is a much more diversified company, also having operations in gold, iron, aluminum, copper, and diamonds. To learn more about Rio Tinto’s linkage to a potential Diamond ETF, continue reading here. The company disappointed with its first quarter earnings results, as copper and iron production was hurt by bad weather. Interestingly, Rio is in talks with China Guangdong Nuclear Power to co-mine the ‘Husab project’ in Namibia. It is estimated that this area holds 145,149 tonnes of uranium, which would be on a fast track back to China’s throng of new nuclear reactors. Analysts are expecting the company’s EPS to total $7.18 by year’s end, and $7.69 by the end of 2013. If shares of RIO remain near their historical valuation levels – which they are at presently – look for a target price in the $70 to $80 range by late next year, assuming consensus holds.
BHP Billiton (NYSE: BHP)
As the operator of the Olympic Dam underground mine in Australia, BHP Billiton owns the second largest uranium hotspot in the world, behind the aforementioned McArthur River mine of Cameco. Like Rio Tinto, BHP Billiton is a diversified mining company that has seen its share price fall over the past year. Interestingly, the stock currently sports P/E (7.4X) and P/CF (5.7X) ratios way below its 5-year historical averages of 14.3X and 11.9X respectively. This undervaluation seems unwarranted, as the company grew its earnings (87.3 percent) and cash flows (143.5 percent) significantly over the past year. Uranium revenues make up between 2 and 4 percent of the company’s total top line depending on the year, so a boost in this market may warrant some optimism, though Cameco’s pure play potential looks more attractive at the moment.
Going forward, it will be important for investors to monitor developments in the uranium industry; the element’s spot price and Chinese demand look to be the most noteworthy. To stay up to date on these issues, check back at WealthLift INSIDER in the coming weeks.
Fool blogger Jake Mann does not own shares in any of the companies mentioned in this article. 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.