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Uranium Stocks are Massively Undervalued

Sell-offs in today’s increasingly volatile markets can be lethal to those psychologically and financially not prepared for such fluctuations, but for the prepared, it is simply more than an opportunity to buy assets at discounted prices. This is doubly true for sectors that are more volatile than the broad market and the major indices tend to be. And one such sector is uranium.

The fundamental story behind uranium is simple: more nuclear reactors are coming online, and these reactors need uranium as fuel. Moreover, the Megatons to Megawatts arrangement, by which Russian nuclear warheads were downblended and sold to the United States as fuel for power plants, is coming to an end; this agreement currently provides the fuel for 1/10th of the US’ electricity demand. As this agreement comes to an end, US power plants will need to go to uranium miners and the uranium market to meet their fuel needs -- thus setting the stage for a rise in prices.

Yet, against this backdrop, uranium stocks are trading well below their pre-Fukushima levels -- which in my opinion suggests the market is still coping with an excessive and irrational fear of nuclear meltdowns. The underlying fundamentals of the global energy situation and the nuclear power industry have not changed; save a few exceptions (Germany, Italy, and Switzerland), countries are still proceeding with nuclear. This is particularly true for China and India, the emerging demand that can be thought of as the “smart money” with the muscle and intent of pushing the the growth of the nuclear industry. So long as China and India remain bullish on nuclear, I believe the outlook for a growing nuclear power industry with increasing demand for uranium remains strong.

Below is a chart of the price of uranium. The fundamental supply/demand imbalance in the market, coupled with the aggressive inflationary monetary policy central banks are employing as part of their strategy for dealing with their respective sovereign debt crisis, should push uranium prices much, much higher. I believe uranium will go back to its 2007 highs near $140/lb -- a far cry from current price of just over $51 per pound. 

Price of Uranium

While I believe there are many uranium stocks worth acquiring, my two favorites that I use as the cornerstone of my uranium portfolio are Cameco Corporation (CCJ) and Uranium Energy Corporation (UEC). Here’s a brief review of each of those companies, and what I like about them:

1. Cameco. Cameco is the largest producer of uranium in North America, is profitable, and is issuing dividends, which explains why I like it: I think it is safe to bet on the incumbent in a bull market, and that’s precisely what Cameco is. The firm anticipates higher uranium prices and is working to double its uranium production by 2018. Cameco is pursuing this goal via strategic acquisitions and through the mines it operates.

Here is a chart of Cameco.

Cameco Uranium Price Chart

2. Uranium Energy Corporation. UEC is a new North American uranium miner headquartered in Texas, USA. The main reason to invest in UEC is because of its management; its CEO, Amir Adnani, is also the founder of the organization and has a unique, diverse background that is so characteristic of innovators. UEC employs in-situ recovery (ISR) mining technology, which is less expensive than traditional open pit mining (though may not yield the same output). ISR mining is much more favorable in our current market, with uranium prices at just above $50; it may take uranium prices above $80 to get more open pit mining opportunities emerge.  

ISR mining strikes me as a disruptive technology that can enable firms with a competence in ISR to gain a foothold in the market that traditional open pit mining firms are ignoring because of its fairly small size. Primarily because of its management and that it is ahead of other North American ISR uranium miners in terms of getting to production, UEC is my most preferred ISR uranium miner.   

By. Simit Patel of Informed Trades




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