The global economy is still recovering from the effects of the Japanese earthquake in March 2011, but none more than the uranium industry. When the tsunami ripped through the Fukushima Daiichi nuclear plant, it damaged the reactors and in particular the Number 3 reactor. Worldwide panic swept across financial markets as fears of a major meltdown shook investor's confidence. In turn, uranium stocks plummeted across the board, most losing more than 50% in price. While most companies bounced back from their March 2011 lows, uranium miners have not. However, there are promising signs from the industry.
Looking at the price itself reveals not only a 31% drop from a recent high, but also no signs of recovery. The decline in the price can be a bit disconcerting as it may reflect easing demand; however the current price level doesn’t appear to be sustainable for the longer term. While demand may be tepid at the moment, emerging markets are eventually going to turn back to uranium as a source of power. It is too pure and efficient not to use. While there will always be dangers using the material, benefits outweigh the risks in my opinion. Not only does uranium produce more power than solar or hydrologic, it is also less expensive and more reliable.
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To begin, Cameco Corp (CCJ), the world's largest miner of uranium produced relatively poor results for the second quarter. Earnings declined about 23%, through the end of the second quarter. Its forward guidance was much more promising as its noted sales completed are likely to fall into Q3. The company currently has contracts that expand through 2016, more than enough time for the industry to make a comeback. Although Germany has scaled back its nuclear programs, emerging markets such as China and India have pushed forward with full steam.
There are even signs that nuclear expansion in the US may take hold. There is currently a moratorium that may be lifted to begin mining for uranium in Virginia. Cameco has only reduced its outlook for demand marginally, which is also a promising sign. With close to 85 new reactors expected to be constructed through the end of the decade, CCJ clearly has high expectations for the future. The growth prospects of CJJ and uranium industry, in addition to a 20% expected dividend increase within the next 5-years, and 12 buy recommendations, make CCJ a great addition to any investor's portfolio.
After producing better than expected earnings, the stock price of Uranium One (OTC:SXRZF) surged. This was led by stronger than expected revenue in addition to a positive outlook for the industry. After dropping more than 60% from its high back in early February, the company is trading at an extremely attractive price. The future demand for cheap reliable power from emerging markets will be too strong, which clearly doesn't warrant such low prices across the industry. The company currently has 14 buy recommendations along with price targets back near its highs in February. That would make for a nice triple digit return, which may sound unrealistic but really isn’t much a stretch should demand and the outlook for uranium improve. When demand returns, the raw price of uranium will move higher and provide a nice bump to the bottom lines of miners across the industry.
If you don’t like the prospect of either the above-mentioned companies, one can invest in the somewhat newly formed, Global X Uranium ETF (URA). While CCJ and UUU comprise about 35% of the ETF, URA also has sizable position in other uranium and rare metal miners. The ETF has recovered nicely off its $9.54 low on August 8. The next sign of resistance could be the 50-day MA at $11.86. It is likely URA will test this area in the coming weeks. Based on the outlook of the industry and the ETF's members' guidance, I see no reason why URA can't climb to $20 a share in the near future.
While there are still some mysteries outlining the future of the nuclear industry, there are positive insights to build an investment thesis around. Demand from emerging markets is going to be strong in the coming years. Even though Germany claims to be scaling back their nuclear plans, new projects in the US and UK look to outweigh such cutbacks. Increasing demand should bolster the price for uranium and provide some nice cushion to the bottom line, making miners across the globe more profitable.