It is imperative when looking at specific sectors like uranium, which can move in and out of favor quickly because of temporary setbacks, to take a deep breath and contemplate whether or not negative conditions are temporary or truly detrimental to an industry over the long term.
That's the case with nuclear power and uranium, which have suffered bad press from the unfortunate accident in Fukushima, putting the sector in a temporary tailspin.
Right after the failure in Fukushima, countries like Germany made a decision to get rid of nuclear power as an energy source. The problem with that, as Japan quickly found out, was it couldn't meet its energy needs without it, so Japan has already started up some of the nuclear reactors that had been shut down. It's even possible Japan may start building new reactors to meet its energy needs, after rolling blackouts came about because of the shutdown of the plants.
Even though Germany remains verbally committed to ridding itself of nuclear energy, we'll see how the people of the country respond if they have to experience rolling blackouts as well, if the cost of energy soars.
Japan has already elected a pro-nuclear Prime Minister, and high costs of imported natural gas in Germany has resulted in higher energy costs for consumers. Angela Merkel is also facing stiff opposition, and a government more friendly to nuclear could emerge.
The point is we need to take these types of announcements with a grain of salt when they're made, as there are probably no governments of developed nations in the world that will survive if they don't have energy policies in place that meet the needs of their people. Expensive wind farms and solar won't do it.
As for Japan and Germany, they aren't the major players in the sector, with China and India, as with most commodity demand, being the countries to watch. China already has a robust nuclear policy in place.
Bringing up Japan and Germany are for the purpose of showing how an incident that may only happen once every few hundred years, won't, for the most part, dictate energy policy, even in the midst of media hype and fear mongering. Japan's reversal towards nuclear energy confirms this.
Media Hype Versus Reality
So how many people have died from the Fukushima incident? Absolutely zero. How many people have died from cancer or radiation poisoning from Fukushima? Another big zero. That's the reality, according to a report from the World Health Organization.
It shows how supposedly smart people can respond in a knee-jerk reaction to events and make decisions that have a dramatic effect on millions of people, even though literally no casualties came from radiation leaks at this time.
If you were to believe the media, you would think thousands had perished from the radiation, when in fact it was the tsunami that killed thousands of people.
To take it a step further, the nuclear bombings of Hiroshima and Nagasaki produced about 630 deaths from various cancers and leukemia. That's from the 90,000 survivors of the blast to this day.
The health of survivors has been monitored since the bombings in 1945. There have been an estimated 527 excess deaths from solid cancers and 103 from leukemia. (Approximately 150,000 people died immediately from the explosions or within months from injuries and radiation poisoning.) Altogether about 1,900 cases of cancer, including those that were not fatal, have been attributed to the bombs.
This isn't to minimize what happened, but to say the dangers associated with exposure of people to radiation don't appear to be anywhere close to the perception people have had imprinted on their minds by media outlets. Once this is understood and the emotional clutter dissipates, the data will show nuclear energy is far less dangerous than it is being painted. Those looking at nuclear as a potential investment need to keep this in mind.
Is Nuclear a Growth Industry?
The problem with what I just said is whether emotion and fear or data and logic will win out concerning the nuclear industry. While some countries like Germany may stop using nuclear energy, many more are working hard to bring nuclear energy to their countries. This far outweighs the media focus on the few cutbacks in nuclear being proposed. Investors need to start believing this, as nuclear energy demand is only going to grow, as will those companies providing the uranium for it.
What has to be understood is media will continue to report on the relatively few countries that are at this time abandoning or not looking to nuclear as an energy source, largely ignoring the numerous countries pursuing a nuclear strategy.
Even the U.S. is starting to approve new nuclear projects.
I've included so many links because it needs to be understood that nuclear energy is in strong demand, and it's definitely a very significant growth industry; one that will continue to grow for decades. Selective media coverage can't hide the fact the world needs and wants nuclear energy.
The World Nuclear Association says there are 60 nuclear reactors being built at this time, with approximately 150 more in the planning stages, which are scheduled to come online within the next decade. Beyond that, the WNA said there are over 200 more nuclear reactors in the pipeline. If that's not a growth industry, I don't know what is.
China and Nuclear
Since China is by far the biggest market for nuclear energy, we need to take a look at the Middle Kingdom by itself:
Zhang Huazhu, chairman of the China Nuclear Energy Association said this:
There will be 41 operating nuclear power units in China by 2015 or a little later.
At that time, China will be building nearly 20 extra nuclear power plants.
China now has six power plants and 15 working nuclear power units, producing nearly 3.5 percent of the world's total electricity generated by nuclear power, which also accounts for 1.85 percent of China's total electricity generation.
According to the World Nuclear Association, almost half of all new nuclear reactors are being built in China. That will double the nuclear capacity in the world by 2030.
Over the next decade, China could build as many as 100 or more nuclear power plants, easily making them the most important country to watch in this market.
Now that we've seen conclusive evidence the nuclear industry is not only continuing to grow, but will be a growth industry for many decades, it's now time to look at uranium and whether there is enough to supply nuclear growth.
In the short term, the major uranium supply catalysts will be the expiration of the Russian HEU agreement and the restarting of reactors in Japan.
Below is a look at when suspected shortfalls of uranium are likely to happen. As you can see, it could come in the middle of 2013 onward. More than likely it'll be the latter part of 2013 or early 2014 before the supply equation has an impact on uranium prices and the companies providing it.
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This also assumes Russia won't change its mind about the HEU agreement. At this time, there is no reason to believe Russia will do that. This will remove 24 million pounds of U3O8 a year from the market.
Per the WNA, uranium demand for 2013 is a little above 66,500 tons. Mine output at this time is close to 55,000 tons. Normally these shortfalls have been made up from secondary sources such as the recycling of uranium from Russian nuclear weapon stockpiles. That major secondary source will dry up by the end of 2013, providing a probable catalyst for higher uranium prices on lower supply.
It looks like in the near term we're very close to uranium prices beginning an upward move. By near term I mean from 3 months to about a year.
Further out, from about 2015 to 2020, uranium supply and its effect on price will be influenced by whether or not Husab mines and Cigar Lake startups are on time or not. If not, supply will struggle, with prices going even further up. If the mines launch in a timely manner, uranium supply and demand should balance out, with prices being more predictable, as they'll be based on the number of nuclear reactors being brought online from then on.
The problem isn't the amount of uranium resources available, it is that most of it hasn't been developed or delineated yet. Again, the uranium supply, for a season of time, looks like it won't be able to meet the demand. This is where and when the opportunity lies as far as an entry point is concerned.
Once more supply comes online, the uranium industry will probably be a reliable, steady growth industry. But as it stands now, it's going to be a very stimulating and volatile industry; one which will cough and sputter a little, yet one that continues on an upward trajectory.
Kazakhstan and Supply
Some of you may wonder about the effect increased uranium from Kazakhstan could have on the market. That could be a supply risk if it quickly pushed more uranium onto the market.
It seems the days of rapid supply from Kazakhstan are winding down though. The reason it was producing at that rate (from 2,022t in 2001 to 19,450t in 2011, or 28 percent of world supply) was because of the deposits that were easily accessible. Most of that has already been mined, and new deposits are deeper and cost more to produce. So it looks like it won't be able to meet the growing demand for uranium based upon the catalysts mentioned above.
Over time that could change, but we're talking of the near and intermediate term supply, not the long term. Uranium prices will also have to rise to make profitably accessing the deeper deposits viable.
The uranium price for immediate delivery has plummeted 40 percent since the earthquake and tsunami in Japan. That's actually good, as the ongoing media nonsense endlessly reminding everyone of the once-in-a-millennia event, makes it better for investors to grab some bargains before the price of uranium and associated companies rise. Just don't buy into the idea there are all sorts of uncertainties as to whether or not nuclear is going to grow. There is absolutely no doubt it's about to reverse course, if it really ever got off course. All it really did was hit a temporary bump in the road from a very rare anomaly.
As for recent price performance of uranium, it climbed to almost $140 a pound in 2007, falling to about $40 before recovering to $70 a pound in the early part of 2011. Uranium was finding its price at that time, and of course was hit hard by the earthquake and tsunami that devastated Fukushima.
My expectations are uranium prices will rise incrementally when they do start moving up, and there will be intermittent surges as news of numerous nuclear reactors coming online is reported in the media. Prices will also move up quickly when the reality emerges about the shortage in uranium heading our way.
In the short term, there is a catch-22 situation, with the low price of uranium prohibiting new mine production. If Russia sticks to its guns, secondary sources will start to be seen as drying up as 2013 goes on, causing uranium prices to spike. Again, the risk is if Russia is pressured to change its mind.
If this scenario plays out, eventually uranium miners will ramp up new production. The good news is that will take time, and that's what is being focused on in this article: the time from now until uranium prices rise to sustainable production levels for miners. There is now a window of opportunity to get in before that happens.
We don't know if there will be any further downside in this turnaround scenario, but we're close to being in the place where uranium will be a good addition to our portfolios.
Other factors in the supply and pricing equation for uranium which could hold prices temporarily down are contract delivery deferrals, existing mine supply, inventory selling in Japan, and a boost in uranium dispositions from the U.S. Department of Energy. This could cause prices to continue in the $40s for now.
In circumstances and conditions mentioned above, I prefer pure play uranium companies more than those companies that have it as one of the many commodities or energy sources they sell. That's not to say a company that is diversified won't benefit from what we're talking about, it's that they must be measured by numerous factors in every segment they serve. They could do fantastic in uranium but take a beating in other areas.
So I'm only going to include companies that are heavily exposed to uranium and the nuclear industry. We're not going to talk about them here, but companies building reactors and serving the industry in other capacities will also benefit from the reversal in uranium prices.
One thing to bear in mind is when the news of a supply shortage plays out, that, more than anything, will move the uranium market. All the technicals and other factors like the management team, debt load, and production costs will be laid aside as the reason for investing in the sector. That means many players not intimately familiar with nuclear and uranium will be investing in uranium companies based solely on the supply/demand equation.
So the key thing under the scenario suggested here is to look at entry points for companies or ETFs.
With that in mind, included are two of the larger uranium players, one medium-sized company, and another that has dropped to below $1 a share.
Every company or ETF we'll look at have basically the same chart movement, telling the story of when uranium and nuclear were in favor, how they fell and recovered some, and finally when Fukushima occurred and the accompanying fallout to this day. Not all charts are equal, as some represent fewer years than others, so they won't look quite the same because some are spread across longer periods of time.
Current Ratings on Some Companies
We'll start with the largest publicly traded pure uranium player - Cameco Corporation (NYSE:CCJ). It has actually proven to be very resilient in a tough market, although it has been range bound at $18 to $22 per share. Even when the earnings recently dropped by 93 percent in the first quarter, the market basically gave a collective yawn, as things like timing of deliveries can play a big role in quarterly performances. But more importantly, the media narrative is changing, and realization that demand is about to rise is starting to drive nuclear. This is why Cameco's share price, other than early after the earnings report, hasn't moved much.
This is a good sign for the entire uranium industry, as it shows key investors understand it's about to turn around, and companies are experiencing the last pangs before that begins to happen. Timing of the catalysts is of course the major question, and it's a matter of when, not if it happens. It's doubtful, barring an unforeseen event, that there will be any major downward risk on prices going forward.
One of the strengths of Cameco is its high-concentration deposits at McArthur Lake. Cigar Lake will also pay off for the company in a big way.
Cameco should be the safest play in uranium, but it will probably not rise near as high as some of the other companies in the field based upon percentages.
Uranium One Inc.
Next is Uranium One Inc. (OTC:SXRZF), which has a market cap as of this writing of $2.63 billion. It has traded as high as almost $16 a share, so at $2.75, it will experience some very nice share price movements over the next couple of years. It'll move in a wider range than Cameco, but it will also generate more profits as well for those with stronger stomachs who can manage the volatility.
Denison Mines Corp.
One of my favorites in the uranium play is Denison Mines Corp. (NYSEMKT:DNN). They've been hammered down from over $25 a share in the latter part of 2006 to only a little over a dollar a share as I write. Even a move to $6 a share at this entry point would produce a five bagger. Over time it's sure to do even better than that. I don't see the value of waiting much longer to get into uranium if Denison is your company of choice.
The closing of the deal with Fission Energy boosts the uranium reserves of the company, making it stronger as the story unfolds.
For those with some risk tolerance and patience, USEC Inc. (USU) could be the answer. It has had some big moments over the years, rising to over $23 a share in 2007, and now trading at a paltry $0.34 a share.
One of the major concerns for USEC is the somewhat surprising announcement its ACP project will cost $1 billion more than thought. Not a small thing to forget to tell shareholders and potential investors.
Yet the point of this article is the overcoming of usual company elements and concerns by the direction of the uranium sector itself. If that happens with USEC, you can see how quickly the share price could rise. The risk is there, but so is the potential reward. I think this would be one to get into quick and then get out just as quick when the share price moves up.
This is one company that even the positive uranium news may not help hold its share price once things settle down. That could change, but we'll have to wait to see company reports over the next couple of quarters to confirm that. Management is also very suspect for the company.
Uranium and Nuclear ETFs
In the current scenario I'm not as fond of ETFs targeting the sector, as the weightings have changed to reflect the past weak market. There are companies included that are only exposed to uranium as a small portion of their overall portfolio. That should change over the next year, but for now that is what is in place.
For example, look at the graph of the top holdings of Market Vectors Uranium+Nuclear Enrgy ETF (NYSEARCA:NLR). This isn't bad, as the ETFs had to adjust to deal with the plummet in uranium prices. But if they continue with these types of companies, they may not get the full effect of the upward trend about to take place.
Top Ten Holdings of NLR
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On the other hand, if a number of big investors come in that aren't real familiar with uranium and nuclear, we could see them overwhelm these types of considerations and simply push the share price up. Short term that could work, but over the long haul, it would eventually weigh on the price of the ETFs.
So in the short term, ETFs may not do that well, but they should respond nicely as management changes the investment percentage in different companies and puts more capital in pure uranium plays.
For Global X Uranium ETF (NYSEARCA:URA), which has the goal of moving in line with the Solactive Global Uranium Index, with a minimum of 80 percent of its overall assets invested in the securities of the underlying index, is trading near all-time lows, which makes it a great contrarian play.
Since it measures the performance of global companies in the uranium industry, it's well positioned to take advantage of any upward move in uranium prices.
There are many other good uranium-exposed companies to invest in, but those above were included to give an idea of range and possibilities in different market cap points.
We are close to the inflection point with nuclear and uranium. The negative effects of Fukushima are winding down as the narrative has begun to change in the media, making investors more aware of the reversal about to happen in the months ahead.
It needs to be carefully watched before the full media blitz begins, as once that happens it'll become another uranium bandwagon, where investors slow to enter will have to start chasing the price upwards.
Depending on where you want to place your capital, the time is soon coming to make that decision. Again, this is why Dennison is so appealing to me, as there isn't much more to look for concerning a bottom, even if it were to drop more. When the story unfolds and media reports continue to turn more positive, a company like that will surge on the news.
Of course the overall sector will rise, and that will take the majority of uranium companies with it.
If there are still doubts in your mind, go to the links included above to confirm the volume of nuclear reactors coming online - both now and in the future - as well as the supply catalysts that will result in shortages in the near term.
In that regard, what could cause uranium to move upward in price more gradually would be if Japan decides to reopen its reactors at a slower pace. Either way, uranium is still poised to reverse direction, and those getting in at a good entry point should do very well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.