Seeking Alpha
Long only, value, special situations, long-term horizon
Profile| Send Message| ()  

After an absolutely catastrophic 2011, uranium miners and the commodity itself have performed exceedingly well to start off 2012. The initial cause of last year's weakness was the Japanese nuclear catastrophe that followed the Fukushima Daiichi nuclear power plant getting hit by an earthquake and tsunami. The aftermath created a renewed fear of the radioactive power source, hitting the uranium mining industry's immediate and future demand projections.

Shortly after the Japanese nuclear issue, Germany added to the concern by stating that it would reduce its use of nuclear power and slowly eliminate the power source. Expectations of additional similar policy decisions, coupled with rapidly falling natural gas prices, rendered nuclear power an unloved source of energy. As a result, the uranium prices fell, as did the equity of uranium miners.

Nonetheless, both China and India have announced ambitious multi-year nuclear development plans, with China planning to increase its nuclear capacity eight-fold by the end of the decade, and India planning to increase its production thirteen-fold. Other nations within Asia and Southeast Asia may follow the lead of the larger ones, and it is wholly possible that such demand will eventually replace and even significantly overshadow present First World demand for uranium.

Below are listed several companies with business substantially relating to uranium mining and/or production: Cameco (CCJ), Denison Mines (DNN), Uranerz Energy (URZ), Uranium Resources (URRE) and USEC (USU). I have included their 1-week, 2012-to-date and 6-month equity performance rates.

Several of the uranium miners and producers, and the commodity itself, performed exceedingly well to start off 2012, dramatically outperforming the strength seen in the broader market, but many have since become range-bound. These stocks are now up an average of 25.98 percent so far in 2012, though down 4.05 percent last week, while most of the rest of the market was appreciating. Some investors may be rotating out of these shippers and into other industries or allocations.

Below is a 2012-to-date performance comparison chart for the group:

Much of the industry's recent strength appeared inspired by a short-term bidding war that broke out between Cameco Corp (CCJ), a uranium miner, and Rio Tinto (RIO), a large and diversified mining company, over Hathor, a Canadian uranium miner. Rio Tinto ended up winning the war and Hathor, but the competition for its uranium mining assets indicated these competitors recognized potential future demand and/or price increases for the commodity.

It is possible that uranium demand from new and sizable locations such as China and India, will soon outpace uranium supply, possibly creating dramatic shortages and price spikes to both uranium and the shares of uranium producers. Of course, it is also possible that thorium could replace uranium, or that some new power source might make uranium-based reactors obsolete. It should be expected that this industry will continue to exhibit high risk/reward characteristics, and that investment allocations should be limited accordingly.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.

Source: Recent Performance Review Of 5 Uranium Producers