I've followed uranium companies, both large and small, for the past six years. Rarely has market sentiment been so poor. Understandably, with the uranium spot price near a nine-year low, at about $28/pound, moods among industry participants are depressed. While I can't say that an imminent spike in the spot price is in the cards, even a modest move back above $30/pound could spark a decent rally in uranium stocks.
Investors need to remember that in the months leading up to Japan's terrible Fukushima accident in 2011, long-term uranium prices were in the low $70s per pound. The long-term price takes into consideration operating reactors plus future reactors under construction and planned and proposed reactors. With all of Japan's roughly 50 reactors still offline, it's easy to understand why the spot price is as depressed as the uranium producers themselves: too much supply, and too little demand.
Utility contracting has to pick up again by next year
Utilities that buy uranium have not been in the market for the past 12-24 months in typical fashion. With the oversupply of uranium, utilities have not felt compelled to sign long-term contracts. However, all of that will likely change by next year. Utilities need to lock in some additional supply for 2016-17, but many are really wide open for 2018 and beyond -- perhaps more wide open just four years out then they've ever been. When long-term contracting activity picks up again, and it must, producers should be able to regain some degree of pricing power. Clearly, the spot price of $28/pound is not a realistic market indicator.
Just as the spot price collapsed by 20% to $28/pound fairly quickly on very little transactional volume, I believe the price could bounce back to the $30s/pound without much trouble at all. More important will be the long-term contract price, which currently stands at $45/pound. Even a modest uptick to $50/pound, perhaps by the end of 2014, would be a positive boost to overall sentiment.
Green shoots?
I mentioned green shoots in the title of this article. A growing list of supply being taken offline by companies like Paladin (PALAF -1.00%) and new mines by Cameco (CCJ -1.68%) and Areva (NASDAQOTH: ARVCF) being either temporarily delayed or pretty much mothballed. For example, Cameco announced it is not proceeding with permitting its Millennium project, which hosts 46.8 million pounds. Both Areva and Paladin have large mines in Africa on care and maintenance.
Even low-cost In-Situ Recovery companies in the U.S. are curtailing production. Companies like Uranium Energy Corp (UEC -1.92%), Uranerz, and Ur-Energy (URG -2.37%). Why operate at ultra-thin operating margins? It's prudent for these companies, that don't have giant sized resources, to keep the pounds in the ground until higher uranium prices return. Note, Ur-Energy and Uranerz are still producing at reduced capacity to fulfill customer contracts that were signed when the uranium price was higher.
The green shoot I want to highlight is that finally, after 12-18 months of market pundits talking about reactor restarts in Japan -- finally, I think we could see some. To be fair, it won't be a lot of restarts, but maybe 2-6 by year end. Some pundits are still calling for 6-12 restarts.
Bottom line
Investors may want to do some homework on uranium stocks for possible buying opportunities in coming months. Talk of Japanese restarts has been around so long that it's a lot like the boy who cried wolf. However, green shoots may be popping up.
