Last week Morgan Stanley Research team upgraded their expectations for the uranium price outlook. Just like many other sell-side research publications, MS believes that uranium supply will struggle with the growing demand unless the uranium price improves and new supply projects come online. Morgan Stanley is not alone in their conclusion. A great number of other analysts, producers and industry enthusiasts have felt the same way for a while now. Yet, uranium prices are still on the decline and uranium equities stubbornly continue to underperform.
While we applaud MS brevity in their decision to embrace the outlook for nuclear fuel in the period of falling uranium prices, we also would like to point out that, with very few exceptions, nuclear energy analysts have been consistently wrong in their investment recommendations in the post-Fukushima world. Additional details for analyst expectations relative to the actual performance of uranium equities are shown in the table below:
|Company||Average 12M Price Target||Average 12M Price Target||Actual Price||Actial Price||12M Return / Analyst Expectation||12M Return / Actual|
|Uranium One (OTC:SXRZF)||5.17||4.52||2.52||2.35||+105.2%||-6.7%|
|Paladin Energy (OTCPK:PALAF)||2.99||1.99||1.65||1.28||+81.2%||-22.4%|
Prices shown in USD for Cameco and UEC and in CAD for Uranium One, Paladin Energy, and UPC.
Source: Bloomberg, NEIG
To be clear, we do not disagree with the underlying logic of the report. But we do question the timing of it. Indeed, over the next 10-15 years the projected demand is likely to outstrip the supply available at the current price level (assuming that over the next several years Japan will restart at least half of its nuclear fleet, China will resume its nuclear build up, no other significant nuclear power adopts a phase-out plan and no additional secondary supply sources enter the market). Like others, we also believe that to reflect this imbalance uranium prices are likely to rise again, however this is a prospect for a medium-term horizon. Issuing "buy" recommendations at this time is either disingenuous or lacking basic understanding of what drives uranium equities. We should remember that the difference between good and less than mediocre analyst recommendations often comes down to their timeliness.
Time will tell whether the MS team will be more successful in timing of their report. Meanwhile, we would like to encourage the analyst community to adjust their expectations towards reflecting near-term challenges for the uranium industry and prospects for slow, uneven recovery. Sky high near-term price targets do not serve anyone good. They are misleading to the investment community, damaging to analyst reputation and certainly do not reflect near-term industry fundamentals.