Over the past few months, there has been a large move in uranium spot prices. The spot price had been in the $40-$45 range until moving to the upside in early August. Uranium hit this low after the bubble burst at $137/lb. The spot price is now sitting at $62. This move in the commodity has caused exponential moves in the stock prices of uranium companies. I hope this article can be used as a general guide to the uranium space and why companies that have negative earnings, have seen large increases in stock price and market capitalization.
The first step is to look at who the companies are, and what they do. Looking through the long list of companies (that is if the average investor can find them) many either trade on exchanges outside the U.S. or are large miners that are not pure or major plays on uranium. Two good examples are BHP Billiton (BHP) or Rio Tinto (RIO). Here is a list of companies broken into three groups. Groups are arranged largest market capitalization to the smallest. The groups are exploration and production, enrichment, and waste management. Not all are pure plays, but I chose companies with a large enough presence to uranium that earnings are significantly affected by changes in the price of uranium.
Exploration and production
Cameco (CCJ) is the world's largest pure play in uranium, with a market cap of $15.73 billion. The fact that it is located in Canada, and has low margins, allows Cameco to make money at low spot prices. Cameco has Legacy Contracts to protect the company to the downside of prices. Although these contracts have protected it to the downside, it also protects companies purchasing uranium from the price moving up. It is a type of hedge for both the producer and consumer. Cameco has sold uranium on the spot market, but it is now a purchaser to meet the demands of its current contracts. Cameco may be the best purchase for those wanting to buy into the uranium space, but who do not care to take on higher risk metrics. Some 16% of the world's is produced by Cameco. The company recently signed a long term contract to provide uranium to China. Company estimates has uranium production doubling by 2018.
Frontier Gold (FRG) has a market cap of $1.74 billion and also mines gold, silver and copper along with its uranium properties. The company has mines in the U.S., Canada and Turkey. Frontier's shares have doubled over the last six months. The company's move has been somewhat muted based on exposure to other metals. FRG will own approximately $259 million in Paladin (PALAF.PK) stock after all of Frontier's uranium assets are sold in an all stock deal. So you can indirectly invest in Paladin through this company.
Denison Mines (DNN) has a market cap of $1.14 billion. Denison has locations in the U.S. and Canada, with exploration sites in development in Zambia and Mongolia. Denison is a little different as it produces Vanadium as a co product. The company recycles uranium waste and gold.
Uranium Energy Corp (UEC) has a market cap of $423 million and is located primarily in the U.S. On December 20th, the company was installed in the S&P/TSX Mining index. Rodman Renshaw raised its guidance to $7.50.
Uranium Resources Inc. (URRE) has a market cap of $312 million and is located in Texas. Its primary mines are in New Mexico and Texas.
UR-Energy Inc (URG) has a market cap of $298 million. The company is primarily in the U.S. and Canada. Rodman and Renshaw just raised its price target to $4.25.
Uranerz Energy Corporation Comm (URZ) has a market cap of $234 million and is primarily working locations in the U.S. and Canada. It is currently an exploration stage company and has signed contracts with utilities such as Excelon.
Crosshair Exploration and Mining (CXZ) with a market cap of $83 million. The company produces uranium, vanadium and gold, along with other precious metals in the U.S. and Canada.
USEC Inc. (USU) is a company that provides a different service with respect to uranium. USEC has contracted with the U.S. and Russia to convert old nuclear warheads into usable nuclear fuel. USEC's market cap is $681 million and is located in the U.S. There is fear that USEC will have problems going forward as the Russians decided not to renew their contract that expires in 2013. However, some are speculating that the U.S. will start expanding into nuclear in the upcoming years. This will create work to dispose of the tails produced at the power plants.
At this point the E and P companies look to benefit now from the increased price of uranium, and I would guess they are better investments in the short term. USEC does have some downside as its margins have been decreasing. The upside is the new enrichment facility the company is trying to complete. This would help to increase margins substantially, but the stock took a hit when USEC was turned down for a low interest loan by the federal government. This company also provides radioactive waste disposal, but it was placed under this heading because of the specifics on what its main business is.
EnergySolutions Inc. (ES) has a market cap of $500 million. The company provides cleanup services for radioactive waste. This company has a forward PE of 13 and a dividend.
US Ecology (ECOL) has a market cap of $316 million and provides radioactive and hazardous waste disposal services.
Perma-Fix Environmental Services (PESI) is another waste management company with a market cap of $88 million. The company provides some of the same services of nuclear waste,
The last group listed are ETFs that have nuclear exposure, which are URA, NUCL, NLR, and PKN. If one does not want to purchase stocks, these ETFs provide a basket. In some cases they will provide the investor access to purchase companies abroad that they wouldn't be able to get exposure to otherwise.
It is important to remember the last run up with respect to uranium prices, before one dives into an investment. While the uranium spot price is up a considerable amount over a short period of time, it is still less than half of the all time high. Also, the last peak was hit in a very short time, just as the bubble popped even faster. To follow the uranium spot price there are two links, here and here. Another factor is the current price at which the smaller exploration and production companies need to make money. As stated earlier, Cameco is making money due to its lower cost production, but many of these companies need to obtain a price closer to $60 a pound.
Lastly, the spot price increase is due to countries buying up uranium to fuel their nuclear reactors under construction (China, Russia, India, etc.). With this in mind, then the move to the upside is only the beginning and a price of $100 a pound is not out of the question.
Russia just purchased Mantra for $10/lb of uranium in the ground. Russia also purchased a 51% stake in Uranium One. China signed a long term deal with Cameco. France just signed a deal with India to provide nuclear reactors and fuel for the next 25 years. Russia will be recycling their nukes through 2013, and although I am unsure how much uranium it provides, the U.S. imports 90% of the fuel it uses in reactors.
France, Korea, Japan, China, Russia, and India are increasing their nuclear energy by building more reactors. India has reported it has 4560 Megawatts of nuclear power, but that it plans to increase this fourteen times by 2032. China currently has 11 nuclear reactors with another 28 being built. China has plans for 120 reactors total. To give an idea of how big the difference would be, the U.S. has 104 in operation. The 11 reactors produce 9100 megawatts. By 2010 it plans to increase this number to 70000-80000. A consultant from UXC states that that would bring China's uranium consumption to 50-60 million pounds. Currently the world only uses 190 million pounds. China has capacity to produce 2 million pounds a year, so the rest will have to be imported.
Currently, I am a long term bull ready to ride out any downside to market price of uranium. Even though there are still stockpiles of uranium, it seems that countries with excess cash are going to fight over uranium knowing that Russia is pulling a large source in 2013. I have long positions in DNN, UEC, URG, URZ, and USU. I am looking for a pullback on URRE to buy. I am also looking to add to positions on pull backs.
Disclosure: I am long USU, URG, URZ, DNN, UEC.