An incredible run over the past few years – and its radioactive properties – have earned uranium the nickname “hot gold”. But in recent months, with the metal now around 38% below its June peak, many investors might have been forgiven for thinking that “fool’s gold” might be a more appropriate nickname. So is the uranium bull still intact?
It’s important to put the fall into context. Between 2000 and its peak in June this year, the price of uranium shot up from around $7 per pound to $130. The latest push higher began in October 2006, when news came that the Cigar Lake mine in Saskatchewan in Canada had been flooded.
The mine, owned by Canadian uranium giant Cameco, was expected to provide about 18 million tonnes of uranium a year, or 17% of world production, when it began producing in 2008. But the flood means the mine is now unlikely to come on stream until 2011 at least. That’s a problem – in 2006, the world’s nuclear reactors used 173 million pounds of uranium, according to Ux Consulting. But uranium mines only supplied 103 million pounds, with the gap being met by dwindling US and Russian stockpiles of weapons-grade uranium from decommissioned nuclear weapons.
This imbalance has attracted buying from hedge funds as well as power plant operators. Speculators held about 25% of the total supply of uranium produced in 2005 and 2006, says Andrew Mickey of BreakAway Investor. This helped push the spot uranium price higher, until it hit June’s peak of around $130.
So what caused the slump? Uranium tends to be thinly traded in summer. Plus demand from utilities for fuelling reactors has fallen 72% since peaking on 6 April, says Tradetech, a leading information provider for the nuclear industry, as operators baulk at high prices. The credit crunch has forced hedge funds to sell uranium holdings to fund losses elsewhere. Plus the US Department of Energy’s recent auction of half a million pounds of uranium further diluted the price, now around $85 a pound.
But this bull market isn’t over yet. The fundamentals supporting the uranium price haven’t gone away – in fact, the supply and demand imbalance could get worse. Resource Capital Research reports that in the past 12 months, the number of proposed nuclear reactors has risen by 67% to 256 as governments across the globe turn to nuclear as a way to cut carbon emissions quickly and relatively painlessly. “Between now and 2011 we have to come up with 100 million pounds of uranium inventory,” says Raymond Goldie of Toronto-based Salman Partners. “And it’s not clear we have 100 million pounds.” Gary Stoker of uranium trader Nufcor International reckons that by 2012 about 40% of uranium supply will depend on mines yet to be constructed – and as Cigar Lake shows, “there’s a lot of speculation in those production plans”.
That makes this a buying opportunity, says Fadi Shadid of US stockbroker Friedman, Billings, Ramsey Group – and one to grasp before the autumn. “October tends to be 50% more active than other months of the year. It coincides with the refuelling cycles at nuclear plants in the US. March and October for the last ten years have tended to be more active.” Goldie reckons the price could “run up again between now and 2011 to as much as 200 bucks”. We look at one stock set to benefit below.
The best play on uranium
The surge in the uranium price has spawned reams of new small-cap uranium explorers, most of which have seen their stock prices battered by the recent decline in the metal’s price. With the uranium price and stockmarkets in general likely to experience more volatility going ahead, we reckon investors would be better buying into the higher-quality end of the sector. The closest thing to a uranium blue chip is Cameco (NYSE:CCJ).
The company is the largest uranium miner, accounting for around 20% of uranium production, and also processes the metal for use in reactors. Its shares were hit badly by the flooding at Cigar Lake last year. Coupled with the falling uranium price, the stock is trading near its lowest level in two years, at C$42, on a forward p/e of 24. But “while it will take some time for management to regain investor confidence following these problems, we believe this represents a buying opportunity,” said RBC Capital Markets analyst Fraser Phillips in a recent note. The broker has a target of $63 a share. Raymond Goldie of Salman Partners agrees. Up to January 2006, he says, Cameco’s share price tracked the uranium price closely. “Since then the price of uranium [even] at $85 is still 125% higher than… in January 2006,” while Cameco has only gained around 17% since then.