Worries over Kazakhstan's ability to maintain the production levels necessary to keep the world supplied with uranium sparked a bull market in uranium stocks on Friday. Shares of Cameco (CCJ 5.67%), the world's No. 2 producer of uranium and by far the most valuable uranium stock in the West with a $22 billion market capitalization, gained nearly 10% in afternoon trading, while smaller Denison Mines (DNN 3.79%) and Uranium Energy (UEC 4.49%) both surged past 10% gains.
As noted earlier today, both uranium and uranium stock prices are spiking in response to a warning from Kazakh uranium mining company Kazatomprom that it may not achieve targeted production levels this year or next. (Kazatomprom is the world's biggest producer of uranium with a 20% market share.) Additionally, a U.S. government effort announced earlier this week, to encourage production of high-assay low-enriched uranium (HALEU) in the U.S. with $500 million in subsidies, is helping drive prices higher.
Here's how you should play this bull market.
NYSEMKT: UEC
Key Data Points
Valuations surge
Because thanks to the rising price of uranium, uranium stocks have gotten really expensive of late.
At last report, shares of Denison, the "cheapest" of this bunch, are changing hands for more than 34 times their trailing-12-month earnings. Cameco stock is next cheapest, a relative bargain at 102 times earnings. Uranium Energy, on the other hand, a stock that was just named today the "preferred name for near term [uranium] production in North America" by uranium investing advisor Ocean Wall, costs a staggering 693 times trailing earnings -- and even 172 times the profits it's expected to earn in 2024.
On the one hand, these valuations may be justified. After all, the spot price of uranium has roughly tripled over the past three years, yielding a rough average rate of appreciation of 100% per year. If uranium prices keep growing at the rate they have been, then valuations of even 100x earnings may not actually be extreme.
Recent past performance may not be predictive of future results
But what if prices don't keep doubling year after year? As an investor, that's the worry that keeps me from wanting to glom onto this current bull run in uranium stock prices.
Consider: At a recent spot price of $92.50 per physical pound of uranium (and there have been reports of at least one spot trade that recently posted at $100 per pound), uranium prices are up more than 5x from their post-Fukushima lows, hit in late 2016. Admittedly, on the plus side (for uranium bulls), prices haven't yet returned to their all-time highs of 2007, when uranium fetched as much as $140 per pound. So there's still plenty of room for uranium prices -- and uranium stock profits -- to keep rising.
The problem is, according to data from Trading Economics, even that all-time-high price only lasted about two months before uranium prices fell steeply again. And over the past decade and a half, uranium has most often traded for something on the order of $40 a pound -- less than half the current spot price.
Long story short, the outlook for uranium looks great right now, with supply constrained and demand growing as a new generation of small modular reactors spurs demand for the glowing metal. But the general rule in uranium investing is that once prices pass $60, the prospect for profits encourages miners to mine more, boosting supplies and pulling prices back down. Uranium's way past that $60 price now, and that means it's almost certain that all around the world, miners are gearing up to mine more uranium.
All of which is to say: Enjoy this rally in uranium stocks while it lasts. Because it might last for months or years -- but it won't last forever.
