Since last summer, uranium prices have gone from $40/lb. to $70/lb. for the U3O8 compound of uranium, otherwise known as “yellowcake.” Many uranium stocks, including Cameco (NYSE: CCJ), Dennison Mines (AMEX: DNN) and Uranium Resources (NASDAQ: URRE), have rallied in this environment. Investors should be wondering if this move in uranium stocks has further to go.
Investing in Uranium
Uranium is different than most energy commodities as most of the trading is conducted in the over-the-counter market. There is a spot market and an illiquid futures market, but they play a lesser role in setting prices than they do for oil or natural gas.
One good thing about uranium is that the cost of the fuel is relatively small in comparison to the cost of the nuclear power plant. So once the decision to build a nuclear reactor is made, it is likely that this nuclear reactor will reliably use a lot of uranium for 30 to 40 years. So investors should pay attention to the number of new reactors coming on the market. Currently, there are close to 100 new reactors coming on line in the next 10 years (some old reactors might not close with new technologies that extend their life depending on the level of fossil fuel prices).
Beneficial Market Disequilibrium
About 85% of total annual production is sold under long-term contracts, and the other15% trades on the spot market. The rule of thumb is the bigger the uranium producer, the more geared it is toward long-term contracts.
You have to remember that since 1985, uranium use has exceeded the available supply from Western sources. Production from mining currently satisfies just 62% of market demand.
The remaining supply of uranium comes from reprocessing of used reactor fuel, stockpiles, and the dismantling of nuclear weapons. This is a 25-year shortfall in production that could cause the previous $140 high-water mark established in 2007 to be exceeded as new reactors come online.
A major source of uranium — the dismantling of Russian nuclear weapons — is due to end in 2013, which will result in the equivalent of a large mine being completely shut down. More reactors and a tighter uranium market mean higher prices.
3 Uranium Stocks, 1 ETF for Your Portfolio
The go-to stock in the uranium space is Cameco (NYSE: CCJ). This is a large-cap miner with huge reserves, but less leverage than smaller miners. This is because as a key global supplier of the nuclear fuel, utilities choose to enter in long-term contracts with the company. There was an issue with mine flooding that delayed a new project for several years, but that now has been resolved and the new supply should hit the market just as the Russian supply from nuclear weapons ends in 2013.
The company has three divisions: uranium, fuel services and electricity generation. As a diversified nuclear player I would consider this a less leveraged, more of a long-term buy-and-hold candidate. With a market cap of $16 billion, this is by far the largest pure play on uranium available to U.S. investors. CCJ is up about 63% in the past six months, and 3% year-to-date.
A smaller, more leveraged play is Dennison Mines (AMEX: DNN). This uranium stock has a market cap of $1.25 billion. While most of Cameco’s sales contracts are longer-term, most of Dennison’s sales are on the spot market. Uranium sales are forecast to be approximately 1.3 million pounds of U3O8 in 2011. Only 500,000 pounds will be sold into long-term contracts and the remainder will be sold on the spot market. Dennison also mines vanadium — a stainless steel component — of which sales are projected to be 2.8 million pounds of V2O5 in 2011.
The cash cost of production is expected to average approximately $43.50 per pound of U3O8 net of vanadium credits, excluding sales royalties. You can see why DNN stock was close to $1 when uranium prices were near $40 last summer, as the company virtually barely broke even or lost money, while now DNN stock is soaring with uranium at $70. If uranium heads to $100 in 2011 then DNN will likely double from here. Management cut a lot of operational costs when uranium went from $140 to $40 in the 2007-2009 period, so now there is more upside leverage. DNN is up 146% in the past six months, and 9% year-to-date.
Another more speculative stock is Uranium Resources (NASDAQ: URRE) — though currently the company produces little to no uranium. It has produced uranium over the years, but due to high costs or other issues is choosing to conserve cash at the moment. There are uranium deposits in the 183,000 acres and 101.4 million pounds of in-place mineralized uranium holdings in New Mexico that the company owns. The stock will move with uranium prices as investors will anticipate that this would give incentives to management to restart production. Still, this is not for the faint of heart, and the stock promises much higher volatility than Dennison. URRE is up 430% in the past six months, and down 19% year-to-date.
Finally, the Market Vectors Uranium+Nuclear Energy ETF (NYSE: NLR) is the least leveraged way to play the nuclear boom. This ETF also gives an investor a bit more diversity, as it extends beyond mining. Mining is only 38.5%, while nuclear generation comes in at 24% with generators like Exelon (NYSE: EXC) included. Various equipment infrastructure and services companies comprise the rest of the ETF. NLR is up 27% in the past six months, and 3% year-to-date.
Whichever play you consider, keep in mind that in the next 10 years, a record number of reactors are coming online — all at a time when the market has seen less mining output than consumption for 25 years. This promises explosive returns for the right stocks.
