The Fukushima nuclear emergency in Japan created a move in the uranium space that was unbelievable. Those who had shorted the uranium miners have made some money. This is the problem with growth stocks, many investors looking for a quick profit are just as quick to get out of a stock if it begins to turn to the negative.
I had told several investors that I was getting out of uranium shortly after the DOE (Department of Energy) stated it would be dumping uranium into the spot market. This wasn't because I thought this group was going to price down, but because I believed it may trend sideways for a while. It seemed like the market had priced some of these names for $100/lb. uranium. That assumption seemed to be correct as the spot market was moving up a few dollars a week. But just as the uranium market was going to take off, 1.3 million pounds hit the spot market. Rumors were that China had dumped some uranium to artificially keep the price down and, shortly after, the DOE stated it would start getting rid of its inventory. This created a bearish short term trend in this space.
Now that the Fukushima tragedy has occurred, there are several problems associated with getting into this trade. The first is the extra uranium coming to the spot market. The DOE said it would be selling 2000 tonnes of uranium per year from 2011 to 2013. The Department of Energy has approximately 58000 tonnes built up from the cold war. The reasoning for the sale was supposedly to help cover the cost of cleaning up the Portsmouth enrichment plant in Ohio. This report was bearish for the price of uranium, as it stated the price would decrease 4.9 to 8.9 from the November of 2010 price of $60.25/lb. This would place the price of uranium in the $55/lb range. The spot market didn't react very fast to the announcement, or at least as fast as I thought it would. But as of recently, the price of uranium is already trading in that range.
Many of the uranium names were bid up before Japan's earthquake and subsequent tsunami so the initial re-tracement seemed to be valuing many of the names within the realm of proper value of current long term uranium prices. At the time of the initial fall in pricing, valuation seemed correct. But after cutting many market caps in half, the selling seems overdone. Let's see what this means for the companies within this industry.
It should be noted that contrarians will buy stocks that are hated and beaten down based on long term value. But value investors may not jump into these stocks as they are too speculative. The other reason I am pessimistic is that hedge funds love to short the heck out of these types of stocks, and they may continue to do this until we have certainty with respect to the outcome for Japan.
I cannot stress enough not to buy these stocks anytime in the immediate future. I am a bit worried about the outcome in Japan, and mostly because we haven't heard anything concrete from the Japanese government as to whether it has control of the situation. The reason we haven't heard any news on this situation is because no one knows if any of damaged reactors will melt down. More recent reports have stated radioactive iodine has been found in tap water in Tokyo and other cities. Also, Japan has lost several reactors and this should create a void for uranium usage, as these reactors will probably be shut down for good.
The day after the Fukushima disaster, China immediately stated it was putting on hold the nuclear reactors it was planning to build. This may have been positioning, but it will negatively impact the price of uranium nonetheless. It is safe to say that China will have to continue its nuclear program as it seems the only long term solution to the country's uranium needs.
Looking at names in the space, we would first need to figure out which companies can produce uranium cheap enough to make a profit if uranium keeps going lower. Cameco (CCJ) isn't too worried as its legacy contracts are designed for the purpose of protecting the company from price drops in uranium. Cameco has one of the lowest production costs per pound in the industry, as its uranium concentrations are some of the highest in the industry. McArthur River concentrations are 19.53% and Cigar Lake has 17.04%.
I covered Cameco earlier this year here. Legacy contracts have protected Cameco to the downside, through some of lowest uranium prices in history, but insulates the buyer from much higher prices, generally $100/lb. It seems Cameco is getting the better deal here. Cameco is a conservative buy within this industry. If a long term bet was to be made, it should probably be with this stock. Cameco has been through more difficult times than this, such as when uranium sold at an incredible discount after the cold war.
Alka Singh was recently interviewed by The Energy Report. The interview here gave the impression that uranium stocks could have very good long term fundamentals at this price. Ms. Singh said not to buy right now because of all of the negative sentiment. She did state that names with low production costs would be the best, like Uranium Energy Corp. (UEC) and Uranium Resources Inc. (URRE). Singh thought that Denison (DNN) had higher costs and that lead her to stay away from that specific stock. She also stated that Paladin (PALAF.PK), with its signed contracts and production, was also well placed.
I analyzed Uranium Resources (URRE) here. There are several reasons to like this company. The first is that it has existing production of 1.2 million pounds per year at Crownpoint. The company has several locations that are very close to production. In February of this year, URRE stated that it will not continue to produce from one of its Texas locations as $48/lb. in production costs was too high to be profitable.
Uranium Resource has two current contracts to purchase its uranium. The first contract is with Itochu (ITOCY.PK). This contract has a floor of $37/pound and a ceiling of $43 per pound. This contract is based on the uranium spot price. Its second contract is based on the long term price of uranium with a discount. I have not been able to find its production cost per pound of uranium at this time, but the company has stated ISR can produce uranium for under $40/lb. Most of the companies within this space have costs that are between $35 and $39, when royalties and taxes are included. Analyst estimates have this company growing 20% per year for the next five years.
Uranium Energy (UEC) will have production on line in the fourth quarter of this year. Alka Singh is also partial to this stock due to contracts in place and the fact that the company is considerably closer to production than many of its competitors. I covered this stock here. It seems UEC is well positioned as it has one site ready to produce by the end of this year, and another ISR [in-situ recovery] mine coming on line soon. UEC currently has a PE of 8.39 and has the possibility of turning a profit next year. Four analysts cover this name and believe this stock will grow 81.6% this year and 828.6% next year. In the case of this stock, I would watch this name for any downgrades or reduction in the $6.89 price target. There are many opinions out there, but the analysts are the best place to start if an investment is to be made.
Denison (DNN) is another company already in production. In 2010 it produced 1.6 million pounds of uranium. The big story at Denison is its Wheeler River discovery. It is possible this find could have concentrations like Cameco's McArthur River or Cigar Lake. I wrote on Denison here. Denison is an interesting company. It produces vanadium along with uranium, which has been appreciating in price. So this stock will be somewhat insulated from the decreased price of uranium. Denison's uranium costs have decreased significantly to $38.22 per pound as of September of last year. Denison has attributed this to its conversion to ISR mining. I would guess if Wheeler River is as big as expected, this cost could decrease further. Denison is currently covered by one analyst, and they have Denison growing by a 100% next year.
Uranurz (URZ) is an ISR uranium miner in the United States. Uranerz has very low production costs. It states that its operating costs are $24/lb. If royalties and taxes are added, this cost increases to $35/lb. Uranerz will be in production phase sometime next year. The company has two contracts set, one with Excelon (EXC) and the other with an unnamed entity. I wrote an article on Uranurz here. Uranerz is covered by two analysts. This year they have Uranerz in negative growth, but next year the analysts see earnings growth of 81.2%. This company's costs are very low when compared to its ISR counterparts.
Ur-Energy (URG) is another name currently close to uranium production. Ur-Energy is on track to start producing this year. This company states that Lost Creek is feasible at the uranium price of $40 per pound. This stock has not been liked since they cut shares earlier this year. I wrote an article on this stock here.
As I said earlier, I would not buy any of these stocks until there is more clarity. If any of these names push towards a yearly low, I may start a position. The biggest worry for this sector is the announcement that nuclear reactors are being cancelled, or if countries increase regulations to the point it will take longer to get the permits to start building. No need to catch a falling dagger here, wait until uranium prices find a bottom. As these stocks will move up and down significantly on a daily basis. To decrease risk, these stocks are in several different ETFs such as URA, NLR, NUCL, and PKN.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DNN, URZ, UEC, URG, CCJ over the next 72 hours.
Additional disclosure: Valuation and analyst estimates are from Yahoo Finance. This is a listing of stocks to be used as a general list to study from and not a buy recommendation. The names here are highly volitile, and should be bought after studying extensively