Most of the uranium mining stocks have corrected sharply from recent highs, but technically, this should present a good buying opportunity with a strong rally expected by the end of the year.
Global estimates suggest that demand for uranium is likely to be much greater than the supply for the foreseeable future as over 25 new nuclear plants are currently under construction and even more are planned. Additionally, the Russian program to sell the highly enriched uranium from its nuclear warheads will likely end in 2013 as their need for uranium has also picked up considerably. Spot uranium prices peaked close to $140 per pound in 2007 and hit a low around $40 per pound in 2010. In the past five months, prices have risen as high as $75, but are currently a bit lower.
Chart Analysis: Cameco Corporation (CCJ) is by far the dominant player in the field as this $15 billion company is involved in all facets of finding and processing uranium as well as the sale of nuclear electricity. CCJ traded as high as $44.81 in February, but has now dropped back below $40.
- The weekly chart shows that the $44-$45 level represents resistance going back to 2008. CCJ traded as high as $56 in 2007
- The next strong support is in the $37-$37.60 area with the early-2010 highs at $33.75
- The major 38.2% retracement support from the 2009 lows and the minor 50% support calculated from the July 2010 lows converge nicely at $32.60
- The volume has been quite heavy on the recent decline. The weekly on-balance volume (OBV) turned positive last July as its downtrend (line b) was overcome
- The weekly OBV did confirm the recent highs but has just dropped below its weighted moving average (WMA), while the daily OBV analysis is negative
- Initial resistance is in the $40 area and a close back above $41.60 would be positive
The other two uranium plays are much smaller companies than Cameco. Uranium Resources (URRE) has a capitalization of just over $200 million, but its chart pattern does look quite interesting and the stock is also quite liquid.
- URRE surged from $1.16 in late-October 2010 to almost $4.00 by December the same year. The weekly chart shows a flag formation (lines a and b), which is likely a continuation pattern
- Once UURE moves back above $3.50, it should hit $5.00, if not $7.00
- The lower boundaries of the flag formation and the major 50% retracement support are in the $2.20-$2.30 area. The 61.8% support is at $1.77
- The weekly OBV confirmed the recent high but has dropped back below its weighted moving average. Typically, it would take at least two to three more weeks before it could bottom out
Denison Mines Corp. (DNN) is a much larger company with a capitalization of over $1 billion and interests in both the US and Canada. It peaked recently at $4.48 and was recently trading at $3.46. It was trading at just over $1.00 in July 2010.
. The 38.2% support is now at $3.20 with the 50% support and the 2009 highs at $2.80
. The 61.8% support is at $2.40 with key chart support at $2.32
- DNN traded as high as $15.01 in May 2007 and the major 38.2% resistance level is at $6.00, which is the next major upside target
- The volume on the recent decline was quite heavy as the announced sale of additional stock hit DNN hard in the latter part of 2010
- The weekly OBV confirmed the recent highs and is sill holding above its weighted moving average
- Initial strong resistance in the $3.90-$4.00 area
What It Means: The long-term demand picture for uranium is very strong and the charts for these three stocks suggest that each is undergoing a normal correction that should provide a good buying opportunity in advance of higher prices later in the year.
How to Profit: Clearly, the safest play in this sector is CCJ since it has the dominant position in the industry. I looked at some of the ETFs that hold these stocks, but the limited trading history and not-so-clear chart patterns make me favor the individual stocks instead. I would buy CCJ at $35.24-$35.66 with a stop at $32.44 (risk of approx. 9%). A position in CCJ could be supplemented by a position in one or both of the more speculative stocks like DNN or URRE, but no more than 5% of your portfolio should be committed, in total.
For DNN, the risk is a bit higher, but the upside potential also should be significant. I would look to buy DNN at $2.85-$2.98 with a stop at $2.67 (risk of approx. 10.4%).
For URRE, which is a potential acquisition target, the risk in percentage terms is even higher, making it suitable only for the most speculative part of your portfolio. I would look to buy at $1.92-$2.08 with a stop at $1.69 (risk of approx. 18%).