Uranium prices have gotten clobbered during the past three years, in the wake of Japan's high-profile nuclear power plant accident and an uneven economic recovery.
But if you think the nuclear power industry is down for the count, think again. New reactors are on the drawing board and the recovery is strengthening in developed and developing countries, adding new impetus to uranium's prospects around the world.
An aggressive, small-cap play on uranium's resurgence is Uranium Energy Corp (UEC). Based in Corpus Christi, Texas with a market cap of $95 million, UEC is engaged in the exploration, extraction and processing of uranium concentrates.
Founded in 2003, the company holds mineral rights in uranium mining projects in Arizona, Colorado, New Mexico, Texas, and Wyoming, as well as in Paraguay.
This uranium producer is poised for glowing returns, as its projects ramp up and the price of uranium bounces back from its lows.
The situation for uranium certainly looked bleak three years ago. In March 2011, Japan faced a nuclear disaster that riveted the world. A mammoth earthquake triggered a 50-foot tsunami that inundated Japan's Fukushima Daiichi nuclear station, resulting in a nuclear accident that rated a 7-the highest possible level-on the International Nuclear and Radiological Event Scale maintained by the International Atomic Energy Agency. That's the same level reached by the Chernobyl meltdown in 1986 in the Ukraine.
Investors who are currently negative about uranium's prospects seem to forget that In the months leading up to the Japanese accident, uranium prices already had been increasing, countering their downward spiral after the Great Recession of 2008-2009. The spot price rose from $42.38 a pound in January 2010 to $72.63/lb. in January 2011. Then, when the tsunami off the coast of Japan washed over Fukushima Daiichi, uranium prices immediately began another decline and now hover at around $33/lb.
However, as the Japanese disaster increasingly recedes in the rear view mirror, uranium demand is picking up again. China and other nations are resuming their reactor building programs and Japan is shaking off its fear of nuclear power. This growth dynamic is fueled by the accelerating global economic recovery.
China is keen to find alternatives to fossil fuels, as the country grapples with a worsening pollution problem. Admittedly, Europe's global growth engine-Germany-has forsaken nuclear power in the wake of Fukushima Daiichi, but most other countries are not following suit.
Even Japan, where the calamity struck, is slowly re-embracing nuclear power, reflected by recent political victories in the country of candidates who are unabashedly pro-nuclear. The Land of the Rising Sun meets about a third of its energy needs with nuclear power, a heavy reliance that's unlikely to change.
Japan recently announced that it would begin re-starting many of the plants that it had shut down after the accident, probably a prelude to getting all of them back on line.
The upshot: Uranium is on the verge of a comeback, which would especially benefit low-cost uranium producers. According to a uranium report from financial services firm Cantor Fitzgerald, uranium prices should average $43.25/lb. in 2014, rising to $62.50/lb. in 2015 and $70/lb. in 2016.
Meanwhile, the World Nuclear Association (WNA) reports that China now has 20 nuclear reactors in operation, 28 more under construction and others in development. The country's government plans to more than triple its nuclear capacity by 2020, with additional expansion after that.
In the United States, three new reactors are under construction, with an additional 9 planned and 15 proposed. Growing concerns about climate change are prompting even the most ardent environmentalists to reconsider their opposition to the nuclear option.
Altogether around the world, 67 new reactors are currently under construction. WNA expects these plants to generate 33 million pounds of new uranium demand every year.
The Trend is UEC's Friend
UEC provides a direct, highly leveraged play on rising uranium prices. In the meantime, the company's earnings performance has stabilized. For the six months ended January 31, UEC reported fiscal 2014 earnings per share (NYSEARCA:EPS) of ($0.15), exactly the same net loss reported during the same period a year ago.
This junior uranium miner shrewdly lowered production when uranium prices were scraping bottom, at the same time keeping its balance sheet in order. In January, the company reported $9 million in cash and cash equivalents on hand.
On April 15, UEC announced the production permitting stage of its Burke Hollow project in Texas. Burke Hollow is an integral part of UEC's hub-and-spoke extraction strategy, providing feed to the company's scalable Hobson Processing Plant. The latter is an in-situ recovery uranium processing plant with a physical capacity of 2 million pounds of yellow cake per year.
Now, with manageable debt and sufficient cash on hand, the company is preparing to quickly ramp up production as prices rise. The company's uranium production costs come in at about $23/lb., a relatively low level that ensures robust operating margins.
UEC's cost of production compares favorably to those of its peers, such as Canada's Cameco Corp. (NYSE:CCJ), one of the world's largest uranium producers. Cameco is known for being one of the industry's lowest-cost producers. In 2013, Cameco's total cost per pound produced averaged C$27.87 ($1 Canadian = $0.92 U.S.), low but nonetheless higher than UEC's.
Of course, as with any small-cap mining company, this stock entails caveats and is only suitable for aggressive investors. Capital allocation and capital access top the list of risks; a company of this size could simply run out of money. Moreover, another nuclear disaster would pull the rug out from under the price of uranium-as well as the company's future profitability.
Moreover, as a commodity producer, UEC is by definition cyclical. An unexpected slowdown in global economic growth would weigh down the company, just as it gets ready to boost production.
Regardless, rising uranium prices appear to be in the cards into the foreseeable future, making UEC a compelling bet now for those seeking market-beating gains in an overbought market.
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. I have no business relationship with any company whose stock is mentioned in this article.