Over the past four weeks the price of uranium has begun to tick up, breaking a multi-month downtrend and marking the first sign of a market bottom. This article examines the outlook for the uranium market as well as ways to profit from a potential market reversal.
The first sign of a market bottom
Daily uranium price data is very difficult to come by, however Uranium Participation Corp. (TSE:U) acts as a good proxy for uranium since the company invests in and holds physical uranium. As the chart below shows, the company made a significant reversal on 19 November and has since risen more than 13%.
A 5 month chart of Uranium Participation Corp. (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
Looking at a long-term (weekly) chart of Uranium Participation Corp., we can see that the mid-November low of $4.69 is an area that has provided support in the past.
A 7 year weekly chart of Uranium Participation Corp. (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
During the summer of 2007 the price of uranium spiked to more than $130 per pound and then fell sharply, taking the share price of uranium companies with it. The selloff in both the commodity and the stocks lasted for more than a year, however Uranium Participation Corp. eventually made a bottom at $4.50, right where it did last month.
Some of the uranium producers, companies such as Cameco Corp. (NYSE:CCJ) and Denison Mines (NYSEAMEX:DNN), also look to be finding a bottom. However Strathmore Minerals, another company we like in the space, remains in the doldrums.
Nuclear industry outlook
In the aftermath of the accident at the Fukushima nuclear plant in Japan the nation shut down all but 2 of its 50 nuclear reactors. In the weeks that followed Germany followed suit, shutting down most of its nuclear power plants, and other nations ordered urgent safety reviews.
Germany has now decided to phase out nuclear energy generation entirely by 2022, and Japan plans to do the same by around 2040. France, which currently gets around 75% of its energy from nuclear, plans to halve its capacity by 2025, and Belgium and Switzerland have similar goals.
Meanwhile, China has said that it will press ahead with the construction of 23 nuclear facilities which are due for completion by 2020. Therefore, even if Japan, Germany and France were to phase out their nuclear energy generation entirely, the 119 gigawatts of lost capacity would be almost entirely replaced by the 110 gigawatts China plans to add by 2035.
Countries including Russia, South Korea and India are also in the process of expanding their nuclear capacity, however even without significant growth in the number of reactors in operation, there is still reason for optimism.
In 2013 a Russian program which takes uranium from decommissioned nuclear weapons and converts it into reactor fuel, comes to an end. The termination of this program (known as Megatons to Megawatts), will remove around 24 million pounds of uranium supply from the market, something which has the potential to send the price of both the metal and the companies that produce it, substantially higher.
The bottom line
Those looking to profit from a near-term rise in the price of uranium could do so by going long producers such as Cameco Corp (NYSE:CCJ) or Denison Mines (NYSEAMEX:DNN). It remains to be seen whether these stocks have made a final bottom for the move however, and therefore caution is still warranted.