Nuclear Equities: The Week Of June 25 - July 1, 2012

|
Includes: CCJ, DNN, LEU, NLR, URA
by: NEIG

We have been here before. Hoping for the market to turn the corner on the back of positive industry and macro headlines, but against the backdrop of continuing uncertainty and substantial downside risks. Japan's decision to restart 2 nuclear reactors and renewed hope that China would aggressively move forward with its massive nuclear program drew considerable attention from a number of media sources. A few analysts and commentators, in their eternal wisdom, are once again calling for a beginning of a new bull market for nuclear energy stocks. Resulting positive headlines, aided by less negative macro sentiment, helped send nuclear equities higher. Uranium ETF (NYSEARCA:URA) and Nuclear Energy ETF (NYSEARCA:NLR) are off their lows, while Cameco (NYSE:CCJ) is showing its best performance for nearly two months. The problem with the headline driven market is that, unless it is supported by a shift in industry fundamentals, its effect is only temporary. Remember headline driven investor excitement over uranium stocks in 1Q12? What about recent optimism about Denison Mines' (NYSEMKT:DNN) disposition of US assets? Investors would need to stay cautious as headlines attract an impulse buyer, while real demand often remains on the sidelines.

Below are a few interesting bits & pieces that we have seen the week of June 25 - July 1, 2012.

  • As expected, the Japanese government presented three options for a new energy policy on Friday and opened them to public debate before selecting one in August. The options for 2030 electricity generation from nuclear energy are: 1) 0%; 2) 15% 3) 25-30%. Adopting a single option would serve as an important catalyst not only for Japan but for the nuclear industry in general. (learn more)
  • USEC (USU) updated its outlook for 2012. Revenue is expected to increase to $1.9 billion (over $1.7 billion last year). Gross profit margin also expected to improve over 2011. Still plenty of uncertainty remains on the horizon related to the Paducah operating timeline, future of the ACP and continued cooperation on Russian SWUs. (learn more)
  • The research community remains divided on the prospects for the industry:Bank of America upgraded their view for the industry, while CLSA did exactly the opposite by lowering their expectation for the uranium market. Goldman Sachs and Morgan Stanley are taking a more guarded approach. Last week both issued notes advising their clients not to read too much into the news of two reactor restarts in Japan (in light of the risk that remaining restarts could be stalled). The notes effectively mirror our assessment from 3 weeks ago.
  • Spot uranium price remains unchanged at $50.75/lb. Term price indicator remains the same as well at 61.50 (UxC) / $61(Tradetech). (learn more)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.