Ask a room full of resource analysts whether they’re bullish or bearish on uranium and most will answer bullish — then break into a half-hour lecture on why.
Rick Rule, resource investment guru and chairman of Sprott US Holdings, recently called uranium’s weak spot price an “anomaly that won’t last very long.” He asserted, ”[t]here are more nuclear plants under construction today than in the past three decades. They’re going to be buying uranium.”
David Sadowski, geologist and Raymond James analyst, said his firm is “definitely bullish on the outlook for uranium. Although prices have softened in recent months, we have a very strong conviction that this trend is soon to reverse and investors should be exposed to uranium today.”
The Fukushima Disaster 18 months ago continues to weigh heavily on the uranium market and is casting a shadow of uncertainty. Utility companies, noted for their cautious conservatism, are holding back on purchases in the U308 spot market and are waiting to see whether or not Japan and Germany are serious about shelving their nuclear programs. Last week, TradeTech’s spot price indicator slid another 90 cents to $46.50/lb, its lowest level in two years.
Turning away from nuclear power “not feasible”
Jeb Handwerger, analyst and founder of Gold Stock Trades, told Uranium Investing News that he believes “we are very close to the bottom in spot prices. The market is beginning to realize that nuclear power has a future in the world’s energy mix.”
Handwerger sees the post-Fukushima government rhetoric against nuclear power in Japan and Germany as purely political and shortsighted. “For modern industrial nations facing skyrocketing electricity prices it’s impossible to meet energy demands without incorporating nuclear power into their energy mix.”
He noted that the crisis in Fukushima was the result of a natural disaster — a magnitude-9 earthquake that resulted in a cataclysmic tsunami — not a nuclear accident. That same earthquake caused a hydroelectric dam in the Fukushima district to collapse, destroying thousands of homes and killing hundreds of people; yet there was no huge public outcry against the use of hydroelectric power.
Today, governments around the world are looking to increase energy production from reliable sources while reducing their carbon footprint. Most understand that nuclear power is a crucial part of the solution to rising energy demand. “It’s not feasible to turn away from nuclear power without grave economical costs to a modern industrial nation,” explained Handwerger. “It’s ridiculous to bet your energy future on one solution, like solar or coal or natural gas.”
Nuclear power’s importance recognized globally
Countries are building nuclear reactors. Sadowski pointed out in his interview with The Energy Report that “there are nine more reactors in the planned and proposed category today than there were before [Fukushima].”
Nuclear power reactors are under construction not only in energy-hungry nations like China and India, but also in oil-rich Saudia Arabia and the United Arab Emirates. “What this means to me is that even the countries with tons of oil know nuclear is the future. The 21st century is going to be nuclear,” said Jeb Handwerger.
It’s not just governments. According to Handwerger, “big money is also realizing where the future of energy is going.” For example, Shaw Group (NYSE:SHAW), which is building four reactors in Georgia and South Carolina, was recently taken over by Chicago Bridge & Iron (NYSE:CBI) for $3 billion because of its position in the nuclear industry. The new company, CB&I Shaw, will have a hand in building nuclear power plants, gas-processing plants and oil storage tanks.
Another great example, according to Handwerger, is Bill Gates’ position as one of the primary investors in TerraPower, a nuclear reactor design company. “Gates has invested tens of millions of dollars. To me, that’s a testament that forward-looking people know that when it comes to power, you need a mix. And that mix has to include nuclear,” he said.
All this nuclear development will require more uranium than above-ground supplies can provide, creating opportunity for uranium miners and the investors who believe in them.
“We’re seeing countries around the world building reactors. So we can expect to see more utilities signing long-term supply deals like the one Paladin just signed,” noted Handwerger. Paladin Energy (TSX:PDN,ASX:PDN) recently hooked a six-year supply deal under which an unidentified utility will give the Australia-based miner an upfront payment of $200 million for 13.73 million pounds of U308. Payment will be made in 2013, but Paladin does not have to start delivering until 2019. Handwerger calls the deal “a significant development that tells me utilities are in disparate need of uranium.”
Uranium set to rebound
The world consumes nearly 180 million pounds of uranium annually, yet production only totals about 140 million pounds. Secondary supplies from the highly-enriched uranium agreement (HEU) with Russia is set to expire next year, which, said Handwerger, has yet to be factored into uranium share prices. Sadowski has said the end of the HEU agreement will remove about 13 percent of global annual supply.
Raymond James is forecasting a three-year supply shortfall beginning in 2014, with prices climbing past $70/lb in 2014 to average about that in the long term. Morgan Stanley sees prices starting to rebound in 2014 on a supply deficit to average $69.50/lb in 2020.
Notable improvements in the share prices of uranium stocks signal the beginning of a turn in the uranium sector, Handwerger believes. “Risk-on appetite is growing. Supply/demand fundamentals are healthy. Cameco (TSX:CCO,NYSE:CCJ) and Paladin shares, among others, are rebounding and beginning to move above the 200-day moving average, a key pyschological level, for the first time in many months.”
He also pointed out that several uranium stocks have had huge volume days recently, including Denison Mines (TSX:DML,AMEX:DNN) and Uranerz Energy (TSX:URZ,AMEX:URZ). “Uranium investors are beginning to sense that the uranium price is bottoming and that uranium miners are on the verge of a potential upswing. As we’ve seen in the past, when this sector turns it does so aggressively.”
M&A activity likely to increase
Most in the industry say spot prices must reach around $70/lb to make the majority of uranium projects economical. The general consensus is that spot prices will probably sit low for at least the next year or so since major utilities are covered for supplies in the short term. Given that environment, it will be hard for some juniors to weather the storm. Handwerger told Uranium Investing News that investors can expect to see a lot more merger and acquisition (M&A) activity in the coming months and years. “There are so many juniors out there with ridiculously low valuations — they’re sitting at a huge discount,” he said.
Besides Cameco, which has admitted it is hungry for acquisitions, other majors in the uranium space that no doubt have an eye out for possible takeover targets include Uranium One (TSX:UUU), AREVA (EPA:AREVA) and Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO). Handwerger believes that companies in Europe and the Americas that are close to production will be the most favored.
Uranium companies to keep an eye on
Europe, which boasts 160 nuclear reactors, is the highest per capita user of nuclear power as a continent in the world, according to Handwerger. In Europe, he likes European Uranium Resources (TSXV:EUU), which counts AREVA (10 percent) as one of its major shareholders. The company controls the Kuriskova deposit in Slovakia, which could become one of the lowest-cost uranium mines in the world.
The United States — home to nearly a quarter of the world’s nuclear reactors — presents an interesting and potentially lucrative opportunity for investors. It consumes 55 million pounds of uranium a year and produces as little as 4 million pounds. Here, Handwerger likes three near-term producers: Uranium Energy (AMEX:UEC), Uranerz, and Ur-Energy (AMEX:URG,TSX:URE).
Handwerger especially favors well-propertied companies like Denison, UEX (TSX:UEX) and Fission Energy (TSXV:FIS), all of which have projects in Canada’s Athabasca Basin. “In this region you have extremely economic deposits and high grades — grades that are not seen anywhere else in the world.” Canada recently signed a uranium supply agreement with China that allows Canadian companies to export uranium to the Asian nation.
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
Jeb Handwerger holds direct investment interest in European Uranium Resources, Ur-Energy, Uranerz Energy and Denison Mines.