Special Free Report From The Motley Fool
If you’re like me, you’ve seen the phrase “past performance does not reflect future results” so many times in company reports or investment presentations that it has almost completely lost its meaning. But if we apply this phrase to the price of individual stocks, it can become a powerful message for Foolish investors.
We Fools believe that over short periods, stock prices are no better than a random indication of a company’s true long-term value. A currently depressed stock price can often have very little to do with actual long-term company fundamentals.
In this report we’re going to outline a big theme, along with two ways you can invest in it. Even though both the theme and the stocks have been somewhat radioactive for current shareholders, a case can be made for future returns being far different for those who get in at current levels.
We’re talking uranium, the primary ingredient in the generation of nuclear power. Nuclear power satisfied 12.3% of the world’s energy needs in 2012 , and has several significant advantages over its fossil fuel peers like coal. Primarily, the generation of nuclear power does not produce smoke or carbon dioxide, and therefore does not contribute greenhouse gases to the atmosphere. This primary advantage has led a sizeable portion of the developing world to make nuclear power its choice as the 21st century’s emerging source of energy.
Since the March 2011 Fukushima Daiichi nuclear disaster in Japan, the world has soured on nuclear power. But while sentiment has shifted for now, the long-term prognosis for nuclear power hasn’t changed much from before Fukushima. Nations have reviewed their policies that surround this source of power, and though degrees of indecision remain, it is clear that the world will rely more and more heavily on nuclear power to satiate the ever-increasing need for energy.
Significant growth ahead
According to the International Atomic Energy Agency (IAEA), as of April 2014, there were 435 nuclear reactors in the world, which produce 373GW of power. Another 72 reactors were under construction, and even after the disaster in Japan, a plethora of planned projects remain in the works.
UxC (a nuclear industry consultant) believes that a further 408 nuclear reactors, representing 442GW of power, will come online in the coming decade and beyond . While older reactors will be taken offline between now and the time these plans come to fruition, the potential growth remains very significant.
The China angle
Even though it’s slowed of late, China’s emergence as the global economy’s growth engine is hardly a secret, and therefore it’s no surprise that the country is leading the way in making this the century for nuclear power. The emerging superpower has plans to build 90 of the 408 total reactors now on the books. Twenty-eight nuclear projects are currently under construction in China , which may reassure Fools that the country’s plans are real and achievable. India and Russia also plan to make nuclear a sizeable portion of their power grid include, with 30 projects each in the planning stages, again according to UxC.
At the core
Uranium will fuel this nuclear movement. Given the negative headlines and all of the short-term wavering by various governments that has occurred since the Fukushima disaster, the price of uranium is in the dumps. At current levels, its spot price sits well below pre-Fukushima levels, at a low not seen since before the financial crisis.
The stock prices of the companies that supply uranium have also taken a beating. But given the projected ramp in nuclear power now poised to take hold, don’t expect these uranium companies’ stocks to stay depressed for long.
What about supply?
We know that new reactor construction will drive uranium demand. But to believe that uranium stocks won’t stay depressed for long, we need to look at uranium supply, too. The actual amount of uranium that exists matters less than the price at which miners can extract that supply from the earth and still earn a decent return.
An analyst at CIBC estimates that demand for uranium in 2011 was 161 million lbs, and he expects this to grow to 278 million lbs by 2025. But a current cost curve indicates that with spot prices below $40/lb, the industry can only economically produce about 40 million lbs of uranium. That just won’t cut it, even in the relatively short term.
Furthermore, there is evidence that companies are being somewhat rational about the current pricing environment. Mining behemoth BHP Billiton (NYSE:BHP) grabbed headlines by announcing that it would delay a $20 billion expansion of its Olympic Dam project in Australia , one of the world’s best-known uranium resources. This project is expected to produce 40 million pounds of uranium per year once the expansion comes to fruition, and has total resources of more than 5 billion pounds. The uranium is there, but it can’t be extracted for a reasonable rate of return at current prices.
The bottom line: For the planned global demand to be satisfied in the coming decades, the price of the commodity must go up.
You’ve got an edge
Given the attractive long-term supply/demand dynamic that exists, the uranium space offers a near textbook case of how do-it-yourself investors are perfectly positioned to outmanoeuver the big institutional “smart” money.
Many professional investors lack the long-term patience this uranium story needs to play out. Couple this with the potential for continued short-term noise and uncertainty as the Fukushima situation continues to play out, and you’re left with a space far too unstable for most pros to handle. They will be back, but not until some serious money has already been made.
Picking the right uranium miner depends solely on your appetite for risk. Regardless of your tolerance here, you need to be satisfied with the company’s ability to remain solvent, however long uranium prices remain depressed. Since this could literally mean years, companies need strong balance sheets and access to capital. You want to be sure your horse makes it to race day!
Two stocks set to take advantage of the trend
Two companies that offer very different degrees of risk are Cameco (TSX:CCO) and UEX (TSX:UEX).
Cameco is the biggest and most widely known of the Canadian uranium companies; therefore, it probably offers the least risk—and least reward. But even so, should the price of uranium climb to the $70-$80 range that some predict would make the required supply available, Cameco’s shares could very easily double. The company produces 15% of the world’s uranium and holds a growing portfolio of related assets . If there is a horse that will make it to the race, Cameco is it.
UEX takes us right to the other end of the risk curve, but with corresponding rewards. UEX is a purely developmental stage company. This is a company with just six employees but it has interests in two sizeable potential operations in the northern portion of Saskatchewan, a region known as the Athabasca Basin.
The bigger of the two properties is Shea Creek. With an indicated and inferred (I+I) uranium resource that has been measured at 95.8 million pounds, this property hosts the largest undeveloped uranium deposit in a region that produces 15% of the world’s annual uranium. UEX is a 49% owner of Shea Creek, with the other 51% being held by a subsidiary of AREVA, the French nuclear juggernaut. AREVA is the exploration operator on the property, meaning that UEX is basically along for the ride and acts more as a financier of the property’s exploration and development.
I cannot stress enough that UEX is a highly speculative way to enter this race. The company has no debt, but that’s largely because there isn’t a banker or financier in the world that would lend it a nickel. UEX needs the capital markets to continue with its development programs. The only reason I am willing to give it a pass is its links to two very prominent companies in the uranium space. The partnership with AREVA was mentioned earlier. The other relationship is with none other than Cameco, which owns 21.95% of UEX . This ownership stake has existed since July 2002, when UEX was formed to purchase the Hidden Bay project from Cameco. In addition to this ownership stake, should UEX ever be ready to produce, a milling arrangement with Cameco is already in place, as is a marketing and financing agreement.
The probability of UEX ever bringing either of these projects to production is incredibly low. Because of the huge amounts of capital required to develop a mine, and the already cozy relationship that exists with two of the industry’s biggest players, the more likely scenario would see the company being acquired. With the two assets continuing to show promise, and given the bottom-dwelling price of the commodity, a takeout could occur sooner rather than later.
To be clear, the investment case behind UEX is entirely different from the one that surrounds Cameco. We want to be sure, however, that you are aware of the range of opportunities that are available in this space.
The long term
Betting on energy is a safe long-term gamble, since the world is in constant need for more of it. Purchasing an already significant but still-growing source of energy like uranium at a depressed price is just too good of an opportunity to pass up.
With an entirely favourable long-term supply/demand dynamic for the commodity in place, it’s a good bet that the future stock prices for both of the companies that have been profiled will look nothing like they have in the recent past!
Your next step
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All figures as of December 18, 2014. Fool contributor Iain Butler owned shares of Cameco at the time this report was updated. The Motley Fool has no positions in the stocks mentioned above. All figures stated in Canadian dollars.
This report is: (a) for general information purposes only and not intended as investing advice; and (b) not to be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, recommendation, or sponsorship of any entity or security by The Motley Fool Canada, ULC, its employees and affiliates (collectively, “TMF”). This report represents the opinion of the individual author and does not attempt to give you professional financial advice or advice that relates to your personal circumstances.
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