Uranium One Bottoms Out

Sep.15.11 | About: Uranium One (SXRZF)

Monday’s explosion at a nuclear waste treatment site in Southern France sent Uranium One (OTC:SXRZF) shares to a 52-week low. Despite a seven-percent recovery Tuesday, Uranium One is still well below the $6.50 level where it was trading in March before the accident at the Fukushima Daiichi nuclear facility.

There is no catalyst to send Uranium One shares higher in the next 18-24 months, but there are signs the stock has bottomed out.

  • Stabilizing spot prices 24% below pre-Fukushima levels: Ux consulting says the spot market price for uranium-oxide concentrate was unchanged at $50.50 US a pound last week based on limited activity. The spot market is where financial investors buy and sell – and trading is done for uranium deliveries scheduled within the next 12 months. Uranium One has the lowest production costs ($15 per pound) in the industry, so the company can make money as competitors shutter expensive mines to deal with lower prices. The company recently reported a five-fold increase in second-quarter profit.
  • Contract prices provide some downside protection: Nuclear-power utilites buy most of their uranium supply using long-term contracts. Uranium One’s production and sales guidance is unchanged from last year -- and 21 million pounds are already contracted for delivery to customers. “This is equivalent to the next two years’ production and one quarter of this is to be sold at a fixed price of $67 per pound (subject to escalation),” Dundee Capital Markets wrote in a recent note to clients.
  • Demand to increase as supply decreases: The Kazakhstan state nuclear company plans a 100-fold increase in sales of uranium pellets to China within three years as the number of nuclear plants in the country triples. Meantime, Russia will likely cease exports of uranium from decommissioned nuclear weapons when a supply deal runs out in 2013. Both pieces of information suggest the laws of supply and demand are lining up in favour of well-capitalized uranium producers that don't have to worry about the difficulties of financing new production post-Fukushima.

With Uranium One’s development projects in Australia, Tanzania, and the United States, potentially adding significant capacity as early as 2013, the shares are a deep-value play. But there is also explosive growth potential for the company if the uranium market recovers as expected, or investor sentiment improves because Chinese nuclear utilities start buying in the spot market.

Disclosure: I am long OTC:SXRZF.