Uranium stocks have been on a wild ride over the past 10 years. From dizzying heights to epic lows following the Fukushima Disaster. Owning uranium stocks has been a frustrating endeavor for many, but with many demand fundamentals still intact and over 40 nuclear reactors under construction savvy investors are bargain hunting in this beleaguered sector.
Uranium Price – 10 Year Chart
Uranium stocks have always had one thing on their side: demand fundamentals. With annual uranium production growing from about 100.0 million pounds U3O8 in 2004 to 146.0 million lbs in 2014, the need to feed uranium reactors continues to grow. UxCo has predicted global production will increase to 187.9 million pounds U3O8 in 2025.
source: http://www.denisonmines.com/i/pdf/Notices/2014-Annual-Information-Form.pdf
Uranium stocks to benefit from increased electricity generation
With the ongoing construction of over 40 nuclear power plants around the world simple math suggests consumption is set to increase.
In a late December article, featured on Seeking Alpha, titled Cameco: Set For A Comeback, the demand narrative is outlined:
“According to the World Nuclear Association, there are around 60 new reactors under construction this year in 15 countries. This is because the share of nuclear power in electricity generation is set to increase. This year, around 397 megawatts of electricity will be generated using nuclear power, and this will go up to 717 megawatts by 2040.”
source: http://seekingalpha.com/article/3770476-cameco-set-for-a-comeback
While energy demand will always increase as populations grow and become developed, the means of achieving higher production, particularly in the nuclear energy sector, is not always the same.
Efficiency. Recyclability. These are two terms the investor seeking out uranium stocks needs to be familiar with.
The World Nuclear Association, updated its stance on the Uranium Markets in February of 2015 and discussed the efficiency of which some reactors are being operated:
“…capacity is growing slowly, and at the same time the reactors are being run more productively, with higher capacity factors, and reactor power levels. However, these factors increasing fuel demand are offset by a trend for increased efficiencies, so demand is dampened – over the 20 years from 1970 there was a 25% reduction in uranium demand per kWh output in Europe due to such improvements, which continue today.”
source: http://www.world-nuclear.org/info/nuclear-fuel-cycle/uranium-resources/u…
Despite uranium production declining in 2013 and 2014, one company is poised to lead a revival in uranium production. That company is Cameco, whose Cigar Lake mine came into production at the end of 2014.
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Cameco: uranium stock poised for growth
Cameco owns just over 50% of the Cigar Lake operation which the company announced on January 6th is expected to produce 16 million packaged pounds of uranium concentrate (U3O8) in 2016. Cameco reported that:
“The McClean Lake mill’s operating licence has a current annual production limit of 13 million pounds. AREVA plans to submit an application to the Canadian Nuclear Safety Commission to increase the mill’s licensed annual production limit. Full achievement of the 2016 production outlook for Cigar Lake is subject to securing regulatory approvals necessary to increase mill production.”
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Cameco explains quite bluntly that its competitive position is based on controlling ownership of the world’s largest high-grade reserves and low-cost operations: Cigar Lake and the McArthur River-Key Lake operation..
Cigar Lake has grades 100 times the world average. Located in northern Saskatchewan, Cameco boasts owning 50% of the world’s highest grade uranium mine.
Cigar Lake is huge containing 234.9 million lbs of U3O8, of which 117.5 million lbs is Cameco’s share. With a 98.5% metallurgical recovery rate, this is a project that will produce for years.
Cameco’s share of its McArthur River property is a whopping 241 million lbs U3O8.
source: https://www.cameco.com/businesses/uranium-operations/canada/cigar-lake/r…
The high grade properties allow for significant profit opportunity. Cameco recorded annual revenue of $2.4 billion in 2014 and $638 million in annual gross profit, despite the weak uranium prices that plagued the market in 2014. Cameco achieved this by forward selling much of its product, recording an average annual realized price of $52.37 per pound.
As of January 4, 2016, uranium prices traded at $34.50 U3O8 per pound.
Cameco will report the final 2015 production for Cigar Lake in its fourth quarter results on February 5, 2016.
UxCo has estimated in its Q4 Outlook that existing mine production plus new planned and potential mine production will increase primary uranium supply from 146.0 million pounds U3O8 in 2014 to 187.9 million pounds U3O8 in 2025.
source: http://www.denisonmines.com/s/Primary_Uranium_Supply.asp
Uranium stocks flounder near lows
Anemic global growth has most commodities lingering near their lows of this cycle. Fortunately for investors who’ve yet to pick a horse in this race, prices of uranium stocks remain depressed.
The ETF Global X Uranium has fallen by nearly 50% in the past 9 months and hit a new 52-week low today.
Global X Uranium traded for $12.72 after being as high as $24.42 in mid-2015.
Global X Uranium ETF – 1 Year Chart
Cameco has fared slightly better, losing about 30% from its high in 2015.
Cameco – 1 Year Chart
Canada is the second largest producer of uranium in the world, having produced 9,134 tonnes in 2014. The country’s output will be increasing in 2015 when Cameco’s Cigar Lake mine and its production numbers are factored in. If uranium prices are to stabilize and increase in the coming years, Cameco is uniquely positioned due to the size of its high-grade deposits and established global reach.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.
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