For Jeb Handwerger of Gold Stock Trades, it's not a matter of if the uranium sector will rebound, but when. He's already pounced on the three-year low that hit the spot price in 2011, but as Handwerger tells The Energy Report, investors can still benefit from an equity uptick in the uranium, potash and coal sectors.
The Energy Report: In your view Jeb, what factors are influencing energy markets right now?
Jeb Handwerger: The junior market and the Toronto Stock Exchange Venture had a considerable downtrend since the beginning of 2011. A downtrend like this creates a fear that this will never end, and this ultimately becomes the consensus among investors. But one has to really think rationally during these periods of extreme pessimism. When there's fear and blood in the streets is when the investors who have a longer-term approach are able to buy cheap assets. Declining prices have been occurring against an improving fundamental background. Investors have to overcome the fear and panic and look at the improving underlying technicals we're seeing in many of the markets, especially in energy, and particularly in nuclear.
TER: Do you see any catalytic event, or is this just going to be a slow transition?
JH: We're already seeing the catalytic event. Last October, uranium hit $40/pound [$40/lb] and investors completely neglected the sector. I said "pounce on three-year lows" and argued that increased mergers and acquisitions [M&A] would be a major catalyst. Since then, there's been a major M&A uptick in the uranium sector. ARMZ Uranium Holding Co. took Uranium One Inc. (OTC:SXRZF) for a premium right after that.
There are so few public, producing uranium companies out there. As more are picked off, there will be even fewer companies in the space, which will cause a price spike in equities. That buying will create more buying as the market reaches extreme euphoria. We saw this in 2010, before Fukushima, when these stocks could move about 300-400% in weeks. That's how fast these things could turn.
There are also plenty of mine delays. Majors like Rio Tinto Plc (NYSE:RIO) and BHP Billiton Ltd. (NYSE:BHP) are having to defer projects that account for over 20 million pounds [20 Mlb] of potential supply. There are long-term delivery deals being made, such as the one Paladin signed with utilities. Japan is restarting many of its reactors and investing in new technology to update the plants that are offline. The real demand for uranium is generated by China, which is building many new reactors. The U.S. gets 20% of its power from nuclear; China currently gets only 2%. China is dealing with really serious air pollution issues from coal-fired power plants, and is pushing to switch to nuclear power.
The demand fundamentals are extremely strong, yet the price of uranium hasn't reacted. Gold nearly doubled since pre-2007 highs at $1,000 and is still up 60%. Uranium had a high of around $137/lb and is now 70% below that. Uranium has a lot of catching up to do, considering the potential supply shortfall in 2014, when 14% of the world's supply, which the U.S. relies on, is coming off the market. People don't realize the U.S. uses 50-60 Mlb of uranium each year. It's the largest uranium consumer, yet only 4 Mlb come from domestic production. It imports all of this from secondary suppliers. That's why the U.S. junior near-term producers are going to be the next targets. The Athabasca Basin explorers are going to get a lot more investment interest. Europe has 160 nuclear reactors, the largest per capita in the world. It only has one operating uranium mine, in the Czech Republic. So Europe is going to have to look for additional supplies domestically. These are the areas that investors need to focus on.
TER: What do you think is going to happen with the dozens, if not hundreds, of smaller uranium explorers floating around out there, which may or may not be able to survive?
JH: Many companies, especially the juniors, will have to band together to protect their assets, especially if they have cash. There's going to be a lot of consolidation among the juniors. The near-term producers are going to be targets. This disconnect is creating an opportunity for private equity to come in and pick up these assets for pennies on the dollar. So management is going to have to really think of ways to do strategic mergers and acquisitions in order to protect shareholders.
TER: Let's talk about some of the companies you like.
JH: Among the near-term producers in the U.S., you have Uranium Energy Corp. (NYSEMKT:UEC), which is in Texas and producing.
In Canada, we like the Elliot Lake region, which has a history of uranium production with REE byproducts.
Another one that we're following is a company called Lakeland Resources Inc. (OTCQX:LRESF). It has some interesting properties.
TER: Are a lot of these companies undervalued?
JH: Yes. The recent uranium acquisitions were valued about $10/lb. Uranium One was acquired for $12/lb. Hathor was about $10. Compare those to what enterprise value per pound some of these juniors are trading at. They're just ridiculously undervalued. Just taking that as a comparison, you see what sort of discount you can get now in the market. If this M&A continues in H2/13, and we believe it will, you're going to see a major rerating. That's why these companies are going to have to band together. With fewer companies, there would be a focus for investment capital and for the public markets instead of having it spread around. Real properties in places like the Athabasca Basin or Elliot Lake will not just disappear. Either they're going to go into private hands or be merged. This is what happens in this sector.
TER: What other resource sectors are you following?
JH: Potash is one area we all understand because we need fertilizer to feed growing populations. Potash is controlled by a few companies but the real demand over the next decade is going to come from China and India. India has no domestic potash. China is now the largest consumer of potash. The U.S. imports 90% of its potash.
TER: So what's your investment strategy now?
JH: You have to buy when there's blood in the streets and real value. That's when you have to step in and pick up the bargains. One should fight the crowd when you see value and learn to wait. To paraphrase Jesse Livermore, money is not made in the buying or selling, but in the waiting.
Many investors are chasing the latest trend hitting new highs rather than doing their homework and finding discounted opportunities that are trading close to liquidation levels. Look at discounted opportunities, study the fundamentals and invest in bargains. Stay away from chasing sectors that are overbought with questionable fundamentals. Be careful of analysts who recommend stocks at 50 times earnings and ignore companies that are trading below book value or cash value.
TER: It was good talking with you, Jeb.
JH: Thank you so much.
This interview was conducted by Zig Lambo of The Energy Report.
Jeb Handwerger is a newsletter writer who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets-particularly the precious metals sector. Subscribe to his free newsletter.
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