Uranium Stages A Comeback

Uranium may be coming back into play two years after the Fukushima disaster, as Japan looks to restart some of its idle reactors and global supplies look to tighten a bit. Larger companies operating in the space have already seen their share prices begin to recover over the past couple months as these fundamentals improve, with Cameco Corp (CCJ) up 9.5%, Denison Mines Corp (DNN) up 7.2% and Uranerz Energy Corp (URZ) up about 1%. But many investors are wondering if this recovery will persist in the coming months [for more uranium news and analysis subscribe to our free newsletter].

Cameco Is Confident in a Recovery

In its fourth-quarter earnings release, Cameco indicated that it was “confident in a positive future for [the] industry based on its fundamentals.” The company sees strong indications that additional plants will be coming online in Japan, while the end of Russia’s enriched uranium agreement could remove a very significant 24 million pounds of uranium from the world’s annual supply. These factors are further compounded by major delays or cancellations of many new mine products due to the prevailing uncertainty surrounding the industry.

UraniumManagement provided some additional insights on its conference call, where Kenneth Seitz, senior VP of marketing, said exploration and corporate development indicated that deferrals have taken a hit, presumably due to the new federal government in Japan giving Japanese utilities greater confidence that their inventories will be required. He added that York Consulting put out some recent numbers showing those utilities have spent somewhere between $12 billion and $13 billion on safety upgrades, suggesting a belief their units will restart [see also The Ten Commandments of Commodity Investing].

CEO Timothy Gitzel added in his remarks that 64 nuclear reactors are under construction today, with uranium demand projected to grow by 3% annually through 2022. Secondary supplies within the industry are also diminishing, he added, with the removal of Russia’s supplies being equivalent to more than Cameco’s entire production in 2012. And finally, the delay of projects due to prior weakness has created a gap in primary supplies, making for a very unpredictable market in the event that demand begins to pick up from current levels.

Risks to Watch for in the Market

Uranium is a bit like natural gas in that it’s volatile and has burned a lot of traders over the past few years. During the past two decades, the commodity has risen from $20 to $130 before falling down to $40 where it has remained for quite some time. The majority of the fall may have been due to the Fukushima meltdown that took about a fifth of the world’s supply offline overnight. But it should also be noted that the highly regulated industry has a very unstable and complicated supply chain that contributes to the volatility, making it a somewhat risky investment environment [see also 25 Things Every Financial Advisor Should Know About Commodities].

Looking ahead, uranium could be adversely affected in the near-term by the events in Japan and any global economic trends suggesting a slowdown in growth for nations across the world. The retirement of old reactors and uncertainty in Japan persisted longer than many investors hoped in 2012, and the same could be true moving into 2013. Finally, secondary supplies still exist in the market, with countries like the U.S. maintaining inventories of over 100 million pounds, that could come into the market in more substantial ways moving forward.

Best Ways to Play the Industry

There are several different ways for investors to gain exposure to uranium. The Global X Uranium ETF (URA) is a $150 million ETF that  is designed to track the price movements in shares of companies which are active in the uranium mining industry. Investing in stocks from all around the world, this fund will offer a great way for investors to maintain diverse exposure to this market segment [see also Detailing The Uranium ETF (URA) With Bruno del Ama].

The Bottom Line

Moving forward, building some exposure to these stocks into a diversified stock portfolio could help boost returns, if industry supply and demand dynamics pan out as many expect. With the resumption of nuclear power in Japan, Russian supply coming offline and uncertainty still present in the primary supply market, there are many catalysts that could send this commodity higher in 2013 and beyond.

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Disclosure: No positions at time of writing.

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