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Long-Term Outlook for Uranium Continues to Improve

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Last month, the uranium market got a big boost from a draft of Japan's new Basic Energy Plan. Indeed, the long-term outlook for uranium market and producers such as Cameco Corporation (NYSE: CCJ  ) , Denison Mines (NYSEMKT: DNN  ) , Paladin Energy, Areva, and Rio Tinto's (NYSE: RIO  ) subsidiary Energy Resources has certainly improved due to supply cuts and anticipated demand.

One of the key drivers for uranium market in the long term will be China, which already has 20 nuclear reactors in operation and is constructing 28 more. A statement from Chinese President Xi Jinping this week has highlighted the fact that the world's second-largest economy sees nuclear energy playing an important role in ensuring its energy security.

Uranium making a comeback
The spot price of uranium has continued to hover around $35 per pound, down 50% from the price prior to the Fukushima power plant meltdown in March 2011. Still, the long-term outlook for uranium has certainly improved as nuclear energy is once again being seen favorably, especially by emerging economies such as China, India, and Russia. Even before a draft of Japan's new Basic Energy Plan came out, the outlook for the uranium market had been improving, mainly due to a supply cut from miners such as Paladin and Cameco and anticipated demand. Much of that demand will come from China.

China will be key driver
According to the World Nuclear Association, China is constructing 28 nuclear reactors. That is nearly 40% of the nuclear reactors being constructed globally. In fact, China's nuclear energy growth was something even Cameco noted in its outlook for the industry. The company noted that China brought three nuclear reactors online in 2013.

China's focus on nuclear energy can also be gauged from the fact that the country's top nuclear companies are getting ready for initial public offerings. According to The Wall Street Journal, the companies are hoping to raise money to fund future nuclear reactor construction.

China's emphasis on nuclear energy stems from the fact that the country is looking to cut its reliance on coal and tackle its serious pollution problems. Still, in the post-Fukushima world safety is a major concern when it comes to nuclear power plants. But a statement from China's President suggests that the country remains committed to nuclear energy even as it places a great deal of importance on safety.

China's commitment
Earlier this week, speaking at the Nuclear Security Summit in The Hague, China's President Xi Jinping said that development and utilization of nuclear energy gave new impetus to the progress of humanity. While Jinping noted that the development of nuclear energy has its associated risks and challenges, he sees the peaceful use of nuclear energy as important to ensuring security and tackling climate change. Jinping's statement, while placing a great deal of importance on safety, highlights China's commitment to nuclear energy.

Long-term outlook
While the debate over safety of nuclear power plants continues three years after the Fukushima meltdown, the future of nuclear energy is certainly secured. The statement from Jinping and Japan's energy plan highlights the fact that nuclear energy will play an important role in securing energy needs in countries that have limited energy resources or are looking to tackle pollution problems. In fact, in Germany, which has closed eight nuclear reactors and plans to shut down the remaining reactors by 2022, there have been calls to delay the phase-out nuclear power plants in order to cut reliance on Russian gas in the wake of the Ukrainian crisis.

Given this scenario, the long-term outlook for the uranium market is continuing to improve. Not surprisingly, Cameco shares have outperformed the S&P 500 so far this year. While Cameco shares have fallen nearly 4% this week, investors should look at the pullback as a buying opportunity.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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