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By Daniel Harrison

Back in May this year, HardAssetsInvestor.com featured a story about an under-the-radar bull market in uranium. After having fallen along with everything else in the credit meltdown, uranium was beginning to show some strong gains in the first quarter, rising to $51/lb from the high 30's.

But then something strange happened: The bull market fell apart. Even as the global economy began to recover, boosting equity and commodity prices more or less across the board, the price of U3O8 plunged during the summer, falling around 15 percent.

In September, uranium spot prices fell an additional 7 percent, dragging down the price of the yellowcake powder to its lowest levels since March, at $42.75/lb.

While it is common for uranium prices to fall during the summer periods, such a big fall is worrying for producers of yellowcake, given that it was already 60 percent below its June 2007 peak before the summer.

For some companies, the scenario of continued lower prices has translated into production cuts and layoffs. For example, privately held Encino, Texas.-based Mesteña Uranium has had to terminate 90 employees, and reduce production by a quarter, to 650,000 lbs a year.

"The global nuclear renaissance has been put on hold," Paul Goranson, Mesteña's vice president and operations chief, told The Statesman recently. "We ramped up [on employees], but we've had to cut them back fast."

Larger firms have also had their ups and downs. Despite a rise this year, shares of Cameco, the world's second-biggest uranium miner, have been volatile. Analysts are concerned that the company will not hit annual production targets of 20.1 million lbs, after output in the second quarter dropped 27 percent, to 3.8 million lbs.

Situation: Abnormal

Toronto-based Paradigm Capital analyst David Davidson is one of those analysts. "To hit the target, things really have to go normal," Davidson told Bloomberg in August. "And for Cameco, things haven't often gone normal."

To complicate matters further, it's difficult to know for sure whether there is much value lying around in the uranium equity space right now, since the bulk of uranium producers have soared along with the rest of the stock market since March. For example, year-to-date Cameco has jumped around 70 percent, while the world's largest uranium miner Rio Tinto has more than doubled.

In the nuclear energy ETF space, performances are similarly strong. Market Vectors Nuclear Energy (NYSE Arca: NLR), iShares S&P Global Nuclear Energy Index (Nasdaq: NUCL) and PowerShares Global Nuclear Energy (NYSE Arca: PKN) have all risen in line with broader indexes, by 18 to 25 percent.

While it's true that there is somewhat of a commodity bull market getting under way, uranium prices remain relatively weak, not to mention unstable. The U.S. Department of Energy recently stated that it will transfer $200 million of excess government uranium to the United States Enrichment Corp. The move would effectively flood the market for uranium with excess supply and harm prices, similar to the way the introduction of former Soviet uranium did in the early 1990s.

"The loss of mining and mining-related jobs in Wyoming and elsewhere will be a direct outcome of the Department's present course," wrote Wyoming Gov. Dave Freudenthal in a letter to U.S. Energy Secretary Steven Chu petitioning for a veto of the transfer last Monday. "Given the already softening commercial market, I find it hard to envision that a determination of ‘no adverse material impact' can be achieved relative to these transfers."

Another reason for a downturn in the price of uranium is the lack of hedge funds in the market. At one point, hedge fund buying accounted for up to 25 percent of ownership. Now, they're looking elsewhere.

Naturally, lower production coupled with lower prices does not translate into increased earnings. While Cameco's second-quarter profit was higher than expected, that was down to stronger results from its electricity business. The story is similar for Rio Tinto, where other divisions offset the weak uranium unit results. In that sense, firms' current valuations may seem too high in light of the actual market for yellowcake.

Yet while the short-term outlook for uranium might be weak, there are encouraging long-term signs. China has stockpiled 8 million pounds' worth of uranium this year; Iran claims that it needs up to 300 kgs of nuclear fuel for the next 18 months to service one of its reactors; Britain's Financial Services Authority [FSA] chief Lord Adair Turner intends to implement a price floor for carbon emissions, while giving a bonus to companies that use nuclear fuel. Perhaps the most exciting uranium story is in India, where there is a relative shortage. The world's second-most-populous country has an immediate shortage of a staggering 100,000 tons of uranium, or nearly half a percent of the world's total supply.

For an investor interested in partaking in the uranium story over the long term, purchasing a basket of small-cap uranium producers may make more sense than buying a nuclear ETF or a large producer, which appear overvalued right now.

Bart Jaworski, an analyst with Raymond James, likes pink-sheet-listed stocks such as Denison Mines (OTC:DMLCF), Hathor Exploration (OTC:HTHXF) and Ur-Energy (AMEX: URG).

Other small companies in the uranium space include Uranium Resources (Nasdaq: URRE) and Uranerz Energy (AMEX: URZ). Beware however, that most of these companies are explorers rather than producers, and as a result, there are no guarantees that they will eventually profit from a price increase of yellowcake.

Whatever your approach, it is clear that mining for value in the uranium space is not as simple as for other commodity producers right now. Before going shopping, beware of the sector's vulnerability to dramatic supply/demand moves and the precarious valuations of its producers. Uranium might be a big story, but it might be best to wait for a bit before diving in.