Minuscule Valuations And Robust Demand Could Propel Uranium Stocks Higher
Uranium stocks. No asset has been pummeled into submission quite like it since the Great Recession. But due to several positive converging factors, uranium could be among the safest and most lucrative plays around. Yes, even before an (eventual) slowing and recessionary economy tears a strip into most assets.
If you’re familiar with uranium spot prices over the past decade, you might think I’m crazy. Uranium spot prices reached an all-time high of $143.00/lb in May 2007, only to crash to $20.70 today (rebounding from $18.00/lb in November 2016). That’s an 85.52% decline in slightly over a decade, making it easily one of the worst investments during that stretch.
But good investing is about forecasting where prices are going, not where they’ve been. There’s a potpourri of positive factors now working in uranium’s favor. And the best part is, uranium stocks are dirt cheap. The entirety of the coming move is still on the table, waiting to be pounced upon by savvy investors.
Interested in knowing why? I detail some of the uranium stocks’ main tailwinds below.
#1 Coming Shift from “Overvalued” to “Undervalued” Assets
In case you missed it, the stock market is embroiled in a central bank, liquidity-fueled bubble. The liquidity tide has raised most boats (growth stocks foremost), but legacy industrial and value stocks have also participated. In fact, there are very few sectors that haven’t benefited from the liquidity bubble being blown since 2009.
The noted exception, however, is mining stocks. Uranium stocks, in particular, have experienced acute weakness.
Clear evidence of mining stocks disfavor is represented in the SPDR S&P Metals and Mining (NYSEARCA: XME). This ETF was trading at around 95 in June 2008; today, it sits at 32.75 (an approximately 65% decline). This ETF holds uranium stocks among its core holdings.
How is the above “evidence” that uranium stocks are the place to be? The answer lies in asset rotation. We believe the rotation from growth (which includes any company growing EPS three percent these days) into undervalued sectors is relatively close at hand.
Why? Because when the economy slows and eventually enters a recession, earnings will crash. They always do. That’s when investors will shun ultra-expensive “growth” and “growth/value” hybrids stocks into “deep value” and mining shares, whose share prices are already heavily discounted.
With uranium already trading 85% off its highs, there’s little downside remaining. The recession may shave a few thousand megawatt hours off demand, but electricity demand won’t crash. Electricity demand will hold up better than many other industrial sectors.
Uranium is the ultimate “buy low” maneuver, and unlike other industries, won’t experience crashing end-user demand. I expect institutional money to rotate into uranium stocks more than base metal mining stocks.
#2 The Ghost of Fukushima Fades
Uranium spot prices had already been cascading lower since mid-2007. A supply crunch that propelled prices skyward was eventually resolved, and prices had been falling hard for several years. The last thing it needed was another crisis. Unfortunately, that’s exactly what happened.
The triple nuclear meltdowns at Fukushima, Japan in March 2011 delivered the one-two punch that uranium is still recovering from today. The disaster was damaging to the industry because it shuttered demand for existing power generation and delayed new construction as countries re-examined nuclear’s safety profile.
With existing uranium feedstock demand slowed and future demand in question, uranium stocks and prices acted accordingly.
Fortunately for uranium investors, the world seems to be shaking off the crisis.
Most mothballed reactors in Japan have since reopened, and without major incidents since 2011, the environmental skepticism towards nuclear is fading away.
This has led to increased demand for dozens of countries that wish to go nuclear.
Overall, 45 countries are actively considering starting their own nuclear power programs. Nuclear power is currently being planned or seriously considered in 20 countries worldwide. China alone has 20 new nuclear plants under construction. (Source: “Emerging Nuclear Energy Countries,” World Nuclear Association, August 2017.)
With Fukushima in the rear view mirror (at least, in the media cycle; serious radioactivity leakage is ongoing) and demand exploding worldwide, we’re bullish on uranium’s demand profile.
#3 Coming Uranium Shortage?
With numerous nuclear plants coming online in the next few years, Morningstar is projecting a 40% surge in uranium usage by 2025. (Source: “The Best Investment Of The Decade…,” Nasdaq, September 12, 2017).
One of the reasons for the shortage: power companies haven’t purchased enough forward contracts. Of the 635 million pounds of uranium consumed by reactors since 2013, only enough future contracts have been purchased for 245 million pounds of supply.
On the supply side, obviously crashing prices have done little to incentivize mining companies to produce more. It’s barely profitable at $20.00/lb, when all-in costs are considered. Like any base metal, cuts in production are directly related to the price at which it trades. U.S. Uranium production, for example, has been flat or falling for a decade.
So looking at the big picture, rising demand and ho-hum production equal a favorable investment outlook. We expect the future supply shortfall can only be narrowed by rising prices. Uranium stocks should be huge benefactors of rising prices.
#4 Excellent Growth Profile
So with all the reactors coming online, will uranium demand keep increasing? Or will advances in technology limit the amount of feedstock needed to generate each kilowatt hour? The latter appears to be true.
According to a 2015 World Nuclear Association (WNA ) Nuclear Fuel Report, a 26% increase in uranium demand is forecast between 2015-25. Overall demand will depend on the actual amount of plants being built. But the WNA reference scenario projects continuing strong demand of 22% between 2020 to 2030, with new construction rates fueling demand until at least 2030. (Source: “Uranium Markets,” World Nuclear Association, July 2017).
So as we can see, uranium growth demand should be robust for more than a decade. That’s more than most commodities can expect, save for a select few like lithium.
Uranium stocks should be huge benefactors of rising prices.
#5 Continued Drumbeat of “Global Warming”
Whether you believe global warming is real or not is inconsequential. The world’s “elite,” non-governmental organizations, government think tanks, and media are all pushing the narrative. The clear goal is to credit a carbon trading system, which designates how much fossil fuels industries and consumers can use.
Obviously, should this agenda advance, low carbon footprint energy sources like uranium stand to benefit.
That doesn’t mean uranium doesn’t have its own environmental concerns. Emission leaks can devastate local environments, and Fukushima continues to be the “gift” that keeps on “giving.”
But the governing elite doesn’t seem too concerned about that. As long as the “man-made global warming” agenda continues to be foisted on the public, low-carbon sources like uranium will receive preferential treatment.
And preferential treatment always helps demand.
Our bottom line is this: a 20%-plus long-term demand growth profile, combined with likely supply shortages and a severely depressed price equals a winner in our eyes. Investors can also sleep at night knowing further downside is very restricted.
Throw in the fact that there’s a strong chance “undervalued” assets come back in vogue, and the recipe is ripe for a major move upward in uranium spot prices. Uranium stocks will stand to capitalize.
I wouldn’t be surprised to see uranium spot prices approach $40.00/lb or more by 2020. If so, leveraged uranium producers could easily triple or quadruple in price.
A fantastic return profile considering the limited nature of further uranium spot price downside.