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No More Nukes? Don't Bet On It

|Includes: LEU, URZ, Westwater Resources, Inc. (WWR)

The Fukushima disaster in March 2011 was a watershed in nuclear power generation. When the tsunami badly damaged the Fukushima reactor and resulted in radiation release, the Japanese government shut down its nuclear reactors. Even more significant, Europe also reacted strongly to the accident, with Germany announcing plans to end all nuclear power generation within a decade and other nations halting consideration of new facilities. As late as September 2012, Japan announced that it would end all nuclear power generation within 30 years. This was a complete reversal of course for a resource-poor nation that had planned to increase its nuclear capacity to half of its electricity requirements by 2030. Yet, with a new government now in power after mid-December elections, it appears Japan will return to nuclear power. The Minister of Economy, Trade, and Industry announced in early January that the government favors restarting reactors assuming that they are inspected and blessed by the newly-created Nuclear Regulation Authority

So what does that mean from an investing standpoint? Japan has been one of the largest markets for uranium thanks to its extensive investment in nuclear power. Should its reactor fleet begin restarting, that will be enough to drive the spot price of uranium higher. That will be good news for uranium producers. All of these companies are a bit beaten down right now thanks to the condition of the global uranium market over the past couple of years, but brighter prospects should be ahead. All of these companies operate in the U.S., so they are not subject to the geopolitical risks that affect production in many parts of the world.

Uranium Resources, Inc. (NASDAQ: URRE) is the first small-cap uranium company we'll consider. It has about 183,000 acres containing an estimated 101.4 million pounds of mineralized uranium in place in Texas and New Mexico, plus two processing facilities in Texas. With a last close at $3.11, it is currently 74.30 percent off its 52-week high but 21.96 percent off its 52-week low. The company has had troubled earnings results for the past few years, but it has steadily cut costs and should be on track to benefit from rising uranium demand. It also completed the acquisition of Neutron Energy, Inc. on August. 31, 2012.

USEC, Inc. (NYSE: USU) is another producer of low-enriched uranium for use in commercial power reactors. It currently services about 150 plants worldwide. It last closed at $0.55, 17.02 percent off its 52-week low and 65.41 percent off its 52-week high. Its EPS performance was positive until 2011, when it was punished by events in Japan. However, in Q3 2012 it brought earnings for the quarter positive again. Although it anticipates a loss for 2012, much of that loss will be special charges. USEC recently raised its projected cash flow from operations from $30 million to $60 million. It also announced on February 11 that it will be selling one of its subsidiaries, NAC International, Inc., for $45 million.

Uranerz Energy Corp. (NYSE: URZ) controls 87,414 acres and holds an 81 percent interest in 62,152 acres owned by Arkose Mining Venture, all in the U.S. (Its owned property is in Wyoming.) It is primarily a mining operation. The last close was $1.40, 29.63 percent off its 52-week low and 51.05 percent off its 52-week high. Of the three options discussed here, Uranerz is most favored by analysts. Thomson Reuters rates it neutral and Second Opinion recently upgraded its long recommendation on January 22. The company will take a hit from changing its accounting treatment of some construction at its Wyoming site which was improperly capitalized and that may provide an even better buy opportunity if its share price dips as a result.

None of these companies is particularly pretty at the moment. However, the change of attitude toward nuclear power in Japan is sudden and recent, so the potential benefits for uranium producers should still be under the radar at the moment. This is a good opportunity to pick up one or more of them cheaply.