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Published: November 4, 2010
What's one of the
hottest micro-cap stocks of the last three months? I'll give you
a clue: it's a mining company that's stock tripled in value
since mid-August. But instead of mining gold, silver or
platinum, this company digs something else entirely different
out of the earth.
If you guessed lithium, it's a good guess, but you'd be wrong.
The company in question, Uranium Resources (Nasdaq: URRE),
actually mines uranium, as you might guess. Uranium Resources'
surging shares have company. Shares of Uranerz Energy (AMEX:
URZ) and UR Energy (NYSE: URG) have roughly doubled,
while most other uranium plays have also tacked on strong gains
in recent months.
The surging stocks are the result of rising prices for uranium
on the spot market. In late October, the radioactive metal
tacked on a +10% gain in just one week to around $52 per pound.
The question now is whether the rally can continue, or is a
pullback the next move?
To understand the road ahead, you need to look back. When I
wrote about the sector back in June I noted that uranium had
slumped to a multi-year low of $40 per pound. The key culprit
for weak prices: Kazakhstan, which single-handedly altered the
supply/demand equation for uranium by boosting production from
19 million pounds in 2008 to estimates of more than 40 million
pounds this year. Much of that Kazakh production went straight
to China, which has been stockpiling uranium in anticipation of
a massive build out of its nuclear power sector, and the rest
went to the open market, pushing supply ahead of demand.
China also explains why prices are rising now. The China-Kazakh
long-term supply deal is winding down, and China has allegedly
returned to the open market to buy even more uranium. Yet two
factors will conspire for uranium prices to hit a ceiling in the
near-term. First, China is building a backlog for future needs
and is unlikely to pay much higher prices if it can simply wait
for the supply/demand equation to change. Industry analysts
think that's about to happen. Many high-cost mines were
shuttered when uranium fell to $40 a pound, but would be brought
back on line as uranium moves toward $60 a pound.
At this point, with few-near-term catalysts, uranium prices
could be hit by profit-taking, likely creating a better entry
point for near-term gains. You can track uranium spot prices at
this web site.
A solid long-term play
But uranium looks like it has much more room to run over the
long haul as demand will keep rising. In a recent report, Morgan
Stanley's analysts noted that 147 new nuclear power plants will
be built over the next decade. That figure rises to 330 if you
account for all of the proposed but yet-to-be-approved plants.
China leads the way with 159 proposed plants, while India (60),
Russia (44) and the United States (31) account for the bulk of
the remaining planned sites.
As the rising role of nuclear power starts to become more
evident, industry players will have increasing confidence in the
strong long-term demand for uranium. And that could push uranium
toward the $65 to $70 mark in a few years -- that's a +25% to
+35% spike from current levels. Moreover, share prices of key
players could rise at an even faster clip, thanks to high
operating leverage at uranium mines.
Safe vs. speculative
Investors can look to protect their downside while seeking
reasonable upside by investing in the industry's blue-chip
player Cameco (NYSE: CCJ), which I profiled back in July.
Shares have already risen +30% since then, but they could be hit
by profit-taking if uranium prices cool. But longer-term, you're
likely looking at +50% upside from here if uranium surges toward
the $70 mark.
Another relatively safe play for investors is Uranium
Participation Corp. (TSX: U), which holds uranium in inventory
and thus its shares closely track the underlying commodity.
(Note: This is a Canadian company that trades on the Toronto
Stock Exchange. Buying and selling stocks in this exchange is
relatively easy for most individual investors, but call your
broker for more information if you're interested.)
Action to Take --> Uranium ran to $136 a pound in 2007. That was
based on pure fevered speculation, and most industry players
quickly realized that such prices were unsupported by any
underlying fundamentals. Still, a rebound to just half that peak
would be great news for the stocks in this sector. And with the
nuclear renaissance taking shape in coming years, we may get
there sooner than many think.
As noted earlier, Uranium Resources, Uranerz Energy and UR
Energy are all highly leveraged to uranium prices, moving three
to five times faster than the underlying commodity's price. But
I'm averse to chasing speculative names after a strong run, and
would suggest closely watching the names for a hoped-for
pullback. Other stocks that have potentially significant upside
include Paladin Energy (PALAF.PK), which trades on the
pink
sheets, and Bannerman Resources (TSX: BAN).
-- David Sterman
Staff Writer
StreetAuthority
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