[Ed Note:] There’s some considerable carnage in DR headquarters this week. A Christmas flu has not only taken out your regular editor Dan Denning but a good chunk of the staff as well.
While we hope for their speedy recovery, Diggers & Drillers editor Dr. Alex Cowie agreed to step in and share his insight on the resource sector. Please enjoy…]
In the last five years, the uranium sector has had more false starts than a frog race. And uranium stocks have left a long list of burnt shareholders in their wake. But now it looks like investors are gearing up to roll the dice one more time.
Beaten up uranium stocks have soared in the last few days. For example, Australia’s leading uranium stock, Paladin (ASX: PDN), once trading at $10, was down as low as just 76 cents last month. But in the space of a week, Paladin has jumped 37.1%
It’s a similar tale from Energy Resources of Australia (ASX: ERA). After spending the last three years falling 96% from $26 to just $1.10, it has just jumped 20.3% in the space of a week.
This week’s Japanese election win for the nuclear-friendly LDP has been the trigger to set off this rally. The idea being that under the new mob, there is more chance of seeing most of Japan’s 50 or so reactors come back online, creating renewed uranium demand.
But there is more to the rally than meets the eye. There is something else in the wind. And just perhaps…we really are looking at the start of the next rally in uranium stocks…
At any rate, the spot price for uranium certainly wouldn’t give you any clues that the sector was about to turn up. After holding its ground around the $52 / lb level for most of the first half of this year, it had then crashed down to $42 / lb by October.
Such a low price is a pretty tragic state of affairs for the sector. Marginal projects become unviable, and such a low price makes it hard to justify building any new mines.
Uranium Price on its Knees Again
The only glimmer of hope is that uranium has unexpectedly picked up slightly in the last few weeks. By last week, it had climbed a few bucks to hit $45.50.
But what’s interesting to note is that the last rally in the uranium price started from the low 40’s. So it’ll be worth keeping tabs on the uranium price in coming months, in case we’re about to see a rerun of that.
What really got me thinking about uranium stocks ahead of the rally was the big increase in corporate deals in the sector. In last week’s December Issue of Diggers and Drillers, I made a few comments on this:
‘Deals for uranium stocks also picked up, which is interesting. Uranium has been in the dog house for so long that at some point it has to become the ultimate contrarian play. The uranium spot price recently fell as low as $41 / lb, so I wouldn’t hold your breath. But with more corporate deals picking up, uranium should be on your radar at least.’
Uranium really is the ultimate contrarian play.
There is a sound investment case behind it. Yet I can’t think of a tougher commodity to get investors interested in. It’s the ‘pariah’ of the resource community. Everyone hates it. But there are two blunt forces in play that could make that irrelevant.
Firstly, 2013 will see the global supply of uranium chopped off at the knees. This is because the ‘Megatons to Megawatts’ program, which has been converting Russian warheads into nuclear fuel, expires in 2013.
For years, this has met a big chunk of global demand, and without it there will be a gaping hole in the market. Secondly, even after Fukushima, the world is still building a huge fleet of nuclear reactors.
China is the elephant in the room here, and may have been quiet on the subject, but is still full steam ahead with its nuclear plans. In a recent report from Resource Capital Research, the analysts said:
‘Strong growth in nuclear reactor construction is expected to continue globally with 484 planned and proposed nuclear reactors (Nov ’12) up 2 from 482 pre-Fukushima (Mar ’11). Growth is expected to remain particularly strong in Asia, with Chinese expansion continuing to lead the pack. China’s official installed nuclear capacity projections are 70-80 GWe by 2020, 200 GWe by 2030 and 400-500 GWe by 2050. This compares with a 12 GWe capacity today (15 reactors). China has 26 reactors currently under construction.
‘Support and demand for new nuclear power reactors is expected not only from China and India, but also South Korea, USA, UK, the Middle East, Russia and Ukraine.
‘Demand for uranium is expected to increase from around 164mlbspa U3O8 in 2011 to 226mlbspa by 2020 and 280mlbspa by 2030. Current primary supply of uranium (139mlbs U3O8 2011) is only around 50% of expected uranium demand in 2020.’
This is a very bullish scenario. And as my colleague Callum Newman wrote in Money Morning recently about uranium, ‘Uranium is shaping up to be a classic resource scenario [...] a supply/demand imbalance in a market everybody hates.’
Cal is right. It’s hard to find a more contrarian commodity investment proposition. I mean, the market REALLY hates uranium. But…just maybe…it’s time to give this ‘pariah’ another go.
Uranium looks like being a resource to watch in 2013.
Dr. Alex Cowie
for The Daily Reckoning Australia
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