Uranium Stocks Are Too Cheap To Ignore

Includes: CCJ, DNN, RIO, URA
by: Steven Bulwa

I always prefer to buy stocks on sale than on momentum. Buying low and selling high is an age old idiom that actually makes sense. Obviously not every depressed or beaten down stock represents value and some are permanently broken, but returns are greater from a lower cost basis. When a sector or stock with strong long term prospects is dragged lower by an extraordinary event then it should be considered an unusual opportunity. I believe this is the case for the uranium sector post the Japan earthquake disaster and I am investing in the sector through shares of industry leader Cameco (NYSE:CCJ).

Sentiment is Negative but Prospects Remain Strong

In the post Japan aftermath Europe has indicated intentions to reduce its nuclear power initiatives. That is relatively insignificant relative to the uptick in nuclear power efforts in Asia and India. From a recent article in Bloomberg on Cameco:

There are 433 operable reactors globally and 62 under construction around the world, according to the WNA. China is building 26, plans to construct another 51 and has proposed 120 others, the WNA data show. Developing nations are adding nuclear capacity to meet growing electricity demand and to diversify away from power generated from oil, gas and coal.

From another piece in The Energy Report:

It will be full steam ahead in China, India and other developing nations, says Casey Research Chairman Doug Casey, and the Western world is tiny in comparison. In fact, "I'd say uranium is a great place to be for at least the next generation."

From an article titled 2012 Uranium Market Outlook:

Though the underlying investment trends for the 2011 uranium market were directly impacted by the nuclear tragedy at Fukushima in March, Gavin Wendt, Founding Director & Senior Resource Analyst at MineLife foresees a longer term bullish uranium investment thesis. “From a broader perspective, the history of the past 30 years in the uranium industry with respect to previous incidents at Three Mile Island in the USA and Chernobyl in the Ukraine demonstrated that base demand did not fall, as existing reactors in use worldwide were not shut down.”

The World’s Largest Uranium Producer is Equally Bullish

In a recent interview Cameco Corp’s CEO Tim Gitzel said some investors underestimate the potential for supply shortfalls to spur higher prices for the nuclear fuel. From the article in Bloomberg:

Global mined uranium supply was 53,663 tons in 2010, according to the World Nuclear Association. That’s not enough to cover global demand, and so some utilities also use fuel recovered from Russian warheads under the Highly Enriched Uranium agreement, which has run since the 1990s.

Gitzel said Russia will withdraw from the HEU accord by the end of 2013, removing 24 million pounds of supply. “There’s a lot, and I spoke to some of them this week, who think the HEU agreement is still going to be around,” Gitzel said. “We don’t.”

Although Germany plans to phase out nuclear power, there will be a net 93 new reactors by the end of the decade, Gitzel said. That compares with Cameco’s projection prior to the Japanese earthquake and tsunami of as many as 104, he said.

CEO Gitzel also said;

“The game’s not played in Europe anymore,” ….”The game is played in Asia. China’s barely blinked post Fukushima.”

Industry Players Recognize Value

Rio Tinto (NYSE:RIO) recently outbid Cameco for publicly traded uranium miner Hathor Exploration in a sure indication that while investors are skittish, industry executives believe the prospects for the nuclear power sector are strong. RIO’s bid represented a 65% premium over Hathor’s valuation before the offer. Industry observers took this as a bullish signal on insider’s sentiment:

“The bidding war indicates the significant value that industry insiders and experts see on uranium companies,” Bruno del Ama, who runs the Global X Uranium ETF (NYSEARCA:URA) and oversees $1.3 billion as chief executive officer of Global X Management Co. in New York, said via telephone. “Nuclear demand will continue to be significant, driven primarily by significant buildup of nuclear reactors in emerging markets such as China.”

Strong Prospects not Reflected in Uranium Stocks

Shares in uranium producing companies were decimated in the aftermath of the Japan disaster in spite of predictions for growing long term demand. The World Uranium Index which tracks the performance of the stocks of global uranium companies has fallen roughly 40% since the incident and leading producer Cameco has fallen more than 50%. Cameco’s stock performance has historically followed the Index very closely and often outperforms the index for long periods of time, like the 3 years leading up to Fukushima. Given the current relative weakness in Cameco shares, I believe CCJ is more deeply undervalued than the sector in general. Whenever able to buy a market leader at a discount to a sector that you favor that is too good an opportunity to pass up. When the uranium sector returns to favor there is likely a 10% additional return to be made closing the spread between the Index and the more depressed shares in Cameco.

(Click to enlarge)

Energy Remains in a Long Term Bull Market

As evidenced by the developing world’s plans to expand nuclear energy capabilities, uranium will remain a key component of the global energy bull market. Valuations of companies in the sector are depressed because of a unique event. It was a tragic event but the world’s nuclear initiatives are moving forward and I believe we will one day look back at this selloff as a historic buying opportunity. I am actively accumulating shares in Cameco and Denison Mines (NYSEMKT:DNN).

Disclosure: I am long CCJ, DNN.