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Uranium plays for the patient contrarian

Investors who have been waiting for a rebound in uranium since the Fukushima Daiichi disaster in Japan, caused by an earthquake and tsunami in 2011, will have a wait a little longer.


Investors who have been waiting for a rebound in uranium since the Fukushima Daiichi disaster in Japan, caused by an earthquake and tsunami in 2011, will have a wait a little longer.

 

Only two of Japan’s nuclear reactors have been brought back online since the disaster, compared with a pre-disaster count of 56. As a result, the spot price of uranium has sunk to a near eight-year low. 

 

“There’s no short-term demand for uranium right now,” said Mickey Fulp of the Mercenary Geologist newsletter during a panel discussion at the Toronto Resource Investment conference this morning. “That’s the reason the spot price is at US$34 per lb.”

 

This month, both of Japan’s reactors had been shut down for inspection, leaving the nation with no nuclear power. It’s not clear when they will restart.

 

While much has been made about the coming end of the Megatons to Megawatts program, which has seen the U.S. recycle Russian nuclear warheads into a form that can be used to feed U.S. reactors, the utilities that buy uranium are not worried about a supply crunch, said Tom Drolet of Drolet and Associates Energy Services.

 

“They say ‘we’ve got uranium inventory coming out of our ears,’” he told the audience. The program expires at the end of the year. If there ever were a really serious shortage of uranium, Drolet added, the U.S., Russia, and Japan all also have huge national inventories.

 

Even with a healthy supply in the market, over the medium and long-term, the picture brightens considerably for uranium, said Fulp.

 

“If you’re a contrarian, you have to have patience,” he told the audience.

 

Panel member Marin Katusa of Casey Research echoed that sentiment, noting that while Rick Rule of Sprott Global Resource Investments and Doug Casey are known for having made a lot of money in the uranium space in 2006, they actually first started talking uranium in 1998.

 

“They stood there for seven years banging the drum on uranium, and eventually they were right,” Katusa said. “Be patient… Don’t think about selling your stock in a week or two weeks.”

 

In the U.S., one in five homes is powered by nuclear energy, a statistic that’s unlikely to change, Katusa said.

 

Drolet noted that electricity is a “micro-second” market where supply and demand must be constantly matched. In that context, we need a balance of energy sources — nuclear and hydroelectricity as a base; coal and natural gas as “daytime peakers” that supply the extra juice needed at times of high demand; and renewables like solar and wind – to ensure a stable energy supply.

“If nukes go away, that base gets terribly weakened,” Drolet said, explaining that hydro power is pretty much at its limit because the big rivers have all been dammed.

 

Although the uranium price has declined drastically since its shortlived 2007 high of US$147 per lb., the spot price isn’t the price investors should pay attention to.

 

“The spot price really doesn’t matter,” Katusa said. “Over 90% is traded in the long-term market, which is a lot higher.”

 

In the second quarter of the year, for example, Cameco (TSX: CCO; NYSE: CCJ) sold its uranium oxide at a realized price of US$46.30 per lb. One of Fulp’s uranium stock picks, Uranium Energy Corp. (NYSE-MKT: UEC) has locked into long-term contracts to sell its production at US$60 per lb.

 

In any case, Katusa pointed out that, as in the case of Fission Uranium (TSXV: FCU) and Alpha Minerals’ (TSXV: AMW) Patterson North Lake uranium project, in Saskatchewan’s Athabasca basin, discovery will still be rewarded – even if the project would have questionable economics at the current spot price.

 

While Chris Berry of House Mountain Partners said he is partial to near-term, low-cost producers, Katusa warned that it may be difficult for companies to make money in the short term because the uranium market won’t be moving higher anytime soon.

 

Stock picks

 

Mickey Fulp: Uranerz Energy (TSX: URZ; NYSE-MKT: URZ), Uranium Energy Corp. (NYSE-MKT: UEC); Energy Fuels (TSX: EFR)

 

Marin Katusa: Lower-risk pick: Uranium Participation Corp. (TSX: U); medium-risk pick: Uranium Energy Corp. (NYSE-MKT: UEC); High-risk pick: Skyharbour Resources (TSXV: SYH)

 

Tom Drolet: Cameco (TSX: CCO; NYSE: CCJ) as a well-managed “steady eddy” with a good track record (Cigar Lake aside); Energy Fuels (TSX: EFR) as a company with good projects and management

 

Chris Berry: Uranerz Energy (TSX: URZ; NYSE-MKT: URZ) as a potentially low-cost producer with an in-situ recovery (ISR) project in the U.S.

 

*This article was updated from the original version on Sept. 16*