I'd like to issue a mea culpa. Back in January, I thought the
stars were aligned for a big upward move in the price of uranium
and all of the uranium-related stocks. The radioactive metal had
slumped badly in 2011, but after a solid start to 2012, it looked
as if it was finally time to buy.
"A bottoming process appears to have ended, and with manyshares
far from their 52-week highs, these beaten-down names couldoffer
material upside in 2012,"
I wrote back then
That's wasn't a timelycall . The price spike was just a
head-fake and uranium prices dipped even lower, as the chart for
this uranium-focused ETF shows.
I'd normally be willing to simply close the book on this losing
investment idea and move on. But I remain convinced investors need
to track uranium, because at some point -- perhaps soon --
investors could revisit this out-of-favor investment.
In recent weeks, a pair of news items could help underscore the
investment thesis I laid out back in January: In coming years,
demand for uranium will likely be higher than many anticipate. And
to understand this thesis, you need to look at Asia.
First, much has been written about Japan's desire to shut down
all nuclear power plants. The country is heading into summer with
plans to sharply curtail energy usage to make up for all of that
lost power. Japanese industry is up in arms, predicting the country
could lose many jobs as factories close.
In response, Japan has begun to restart a pair of reactors in
the Ohi region. It's a small step, but Japan's Prime Minister
Yoshihiko Noda has made it clear the country needs more plants
because it simply can't afford to be truly nuclear-free. The
country has just announced plans to invest heavily in solar power,
and is also sucking in massive amounts of natural gas and crude
But that won't be enough.
Even if Japan wanted to be truly independent of nuclear power,
then the government estimates it would cost the
roughly $40 billion annually to pay for extra fossil fuel imports.
That's money Japan can ill afford to bleed when it faces so many
fiscal problems. That's why it appears increasingly likely Japan
will have a number of nuclear plants back online by next summer,
after the country's nuclear regulatory panel will have had a chance
to review safety upgrades this winter.
Yet it is China that is about to become the big story in
nuclear. After the nuclear crisis hit Japan last year, China
decided to halt its nuclear development plans to take a fresh look
at planned reactor designs. That process now appears complete.
"After a thorough design safety review, China's nuclear build
(largest incremental uranium demand this decade) is set to resume,"
wrote Merrill Lynch analysts in June 21 note to clients.
China is known as one of the world's biggest polluters, thanks
to its heavy reliance on aging coal-fired power plants. The fact
that China's energy demands will likely keep growing only
exacerbates this problem. That's why China is keen to move forward
with plans to build dozens of nuclear power plants to meet
government targets of 70-80 Megawatts (
) of electricity by 2020. If this happens, then China will
single-handedly account for more than 50% of the projected global
growth in uranium demand during the next decade.
Merrill Lynch has been analyzing the news out of Japan and
China, and now says "it's time to start building positions in
uranium equities." The firm has just upgraded its rating on
, the world's largest uranium producer, from "neutral" to "buy."
rising from a recent $21 to $27. Yet this looks like a near-term
target to me, and if demand for uranium plays out in the next few
years as I suspect, then there's no reason shares can't move back
up above $40 during the next few years -- a level seen in late 2007
and again in early 2011. That's nearly double where the stock is
Back in January, I suggested some micro-cap and small-cap
uranium stocks that may have even more upside, including
Uranium Energy Corp. (NYSE:
Uranerz Energy (NYSE:
Uranium Resources (Nasdaq:
GSE Systems (NYSE:
. These also carry higher risk, so Cameco is the safer play for
investors looking to take a more conservative approach to this
Risks to Consider:
Any further nuclear power-related crises would set this
industry back once again.
Action to Take -->
Nuclear is not the solution everywhere. But for fast-growing
resource-starved economies like China and India, as well as
power-hungry economies such as Japan, nuclear energy still looks
set to play a major role in the global energy industry. This sector
has been badly bruised and now trades near decade lows, but
far-sighted investors would do well to brush up on their knowledge
of this industry now, because there are many stocks in this sector
that could easily double or more.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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