Uranium prices are currently only in the low-$20s per pound, which is a far cry from the $150 per pound that it fetched at its peak a decade ago. That said, a recent report from RBC Capital Markets suggests that better days could lie ahead for the metal's prices. While that rising tide would lift the entire sector, the two uranium stocks that investors should consider buying today with that future in mind are Cameco Corp. (NYSE:CCJ) and Denison Mines Corp. (NYSEMKT:DNN).
The coming bull run
According to RBC Capital Markets, the price of uranium will likely be relatively range-bound in the near term, generally holding between $20 to $25 per pound over the next two years as the market works through its current supply issues. Beyond that, though, it foresees prices starting to creep up to the $30 to $40 per pound range from 2019 through 2021 due to the impending roll-off of contracts.
Then things get interesting: RBC believes that prices will start to spike after 2021 because the uranium mining industry isn't expected to be producing enough uranium to meet market demand, which should spur the development of new mines. In RBC's view, prices could hit $70 a pound by 2028.
Propelling the rising demand for uranium is the fact that countries continue to build nuclear reactors. In fact, there are currently 57 nuclear reactors under construction around the world, 20 of them in China. Those new reactors will increase that country's nuclear power generating capacity from 35 GWe up to 58 GWe by 2020. The expectation is that as all of these new reactors worldwide come online, it will start driving up the price of uranium.
The assets to survive and thrive
That looming bull run in prices plays right into the hands of Cameco, which is currently the world's second largest uranium producer. While it has struggled due to the lower prices its production has commanded in recent years, CEO Tim Gitzel had this to say to investors last quarter:
Once the uncertainty clears and uranium demand picks up, we expect prices will move significantly higher, and we will be in the enviable position of being able to respond with expanded capacity at our low-cost, world-class assets.
These top-tier assets include its McArthur River mine in Canada, the world's largest high-grade uranium mine, which the company estimates has more than 258.1 million pounds of uranium remaining. In addition, Cameco owns a stake in Cigar Lake, where uranium grades are 100 times the world average, and Inkai, which is a significant source of low-cost uranium. In addition, the company has other sites where it has curtailed production due to market conditions, and thus the ability to ramp up output when demand rises. Finally, it has several growth projects in development that it could bring online when conditions permit. All of this makes Cameco a top option for investors seeking to profit from the steady improvement in uranium prices that is likely to occur in the coming years.
The long-term bet on higher prices
One of the many mines that Cameco has in development is the Wheeler River project. However, since Cameco only holds a 30% stake in it, investors could capture a much higher reward by going with its developer Denison Mines, which owns a 60% stake that could rise to 66% by the end of next year. While the project is only in the pre-feasibility study phase, it is the largest undeveloped uranium project in the Athabasca Basin of Canada, which is home to both the McArthur River and Cigar Lake mines. If everything goes according to plan, this new mine could start producing by 2025, just in time to catch the expected surge in uranium prices.
Even if prices don't top $70 a pound in the coming years, Denison Mines could still do very well. It expects that Wheeler River's average production cost would be about $19 per pound, so it could earn a healthy return on its investment in the project even at today's prices, and exponentially higher profit margins if prices match RBC's expectations.
That said, Denison Mines is a much higher risk investment than Cameco. What makes the company a huge gamble is that, as a development stage miner, it isn't yet generating any cash flow, meaning it needs to secure outside financing just to fund its share of the construction at Wheeler River. Finding that funding will be tough given the uranium market's current doldrums.
If RBC Capital Markets is right, uranium prices could skyrocket in the coming years, which should take uranium stocks along for the ride. The best-positioned company to ride that wave is Cameco, thanks to its top-tier portfolio of low-cost mines and the tools it has to expand its capacity. One of those tools is Denison Mines' Wheeler River project, which has the potential to be a tremendous value creator. It's a mine that could fuel explosive growth in Denison's stock price -- if the company can scrape together the cash to build it without diluting current shareholders into the ground.