The Russian-American megatons to megawatts program just ended, taking with it around 10% of America's uranium supply. Increasing geopolitical stress means that there is little chance of the program being restarted. Economic growth in East Asia has created a nuclear renaissance, and Russia needs its nukes to maintain its power vis-a-vis China. Low uranium prices have led to constrictions in the world's mined uranium supply. Rosatom is one of the world's top three producers and it has decided to stop a number of expansion projects.
Now is the time to buy Uranium. The supply is falling and it is estimated that the total number of nuclear reactors will increase by 91 by 2022. These supply constraints will help push up prices, bringing more profits to uranium miners.
Stay away from the big mining holding companies
Investing in the big mining holding companies like BHP Billiton (BHP 0.43%) and Rio Tinto (RIO 0.38%) makes sense for a number of metals, but uranium is another story. It is just too small of a portion of production to provide any noticeable impact to their bottom lines.
In the recent quarter BHP Billiton produced 930 tonnes of uranium concentrate, worth $71.8 million using current spot prices of $35 per pound. Seeing as the company had revenue of $66 billion in fiscal year 2013, its uranium production could double and it would still be little more than a rounding error. BHP Billiton recently decided not to go ahead with a big expansion of its Olympic Dam uranium mine and it sold off the Yeelirrie project to Cameco (CCJ +1.30%) for $430 million.
Rio Tinto has a similar story to BHP Billiton. In Q3 2013 Rio produced 1.8 million pounds of uranium worth about $63.6 million at current prices. With 2012 total revenue of $50.1 billion, uranium is nothing compared to Rio Tinto's overall operations. The company is focused on measures to increase efficiency like its new $518 million automated trains, and uranium projects are simply not a priority.
Stick with uranium miners
Cameco is a different story. It is a not an iron ore-copper-coal conglomerate, but a dedicated uranium miner with global operations. Thanks to high-yield mines and long-term agreements it is able to make money even in the current environment of depressed prices.
At first glance Cameco looks expensive with its price-to-earnings ratio around 26, but this number hides the real picture. In Q4 2012 its earnings took a hit from $168.87 million in special charges. Thanks to strong future production, analysts project earnings per share of $1.09 in 2013, resulting in a forward P/E ratio around 17.4. Its profit margin of 12.1% is respectable considering the current market, but this should increase in the coming years as supply constrictions start to boost prices.
Denison Mines (DNN +0.00%) is another dedicated uranium miner with property right next to Cameco's McArthur River mine. Denison is a risky company as it needs substantial cash injections to continue its exploration programs. The company has promising high-value projects in Canada, but analysts expect it to post losses in 2013 and 2014 of $0.05 per share. Considering that as of September 2013 it only had $4.2 million in cash and $23.7 million in cash equivalents, it is best to tread lightly.
Cameco offers profits and exploration programs in growing Asian markets like Kazakhstan. If the price of uranium suddenly explodes Denison's and Cameco's share prices will head upward, but in the short term it is very difficult to predict commodity prices. To protect your capital it is best to stick with a relatively safe and profitable miner like Cameco.
The bottom line
Russia has stopped shipping its nukes over to America to be recycled into nuclear fuel. At the same time low uranium prices are making miners cut back. Cameco is in a great position to grow in the coming decade as it continues to produce uranium at a profit and develop new projects. While BHP Billiton and Rio Tinto are fretting over iron ore margins, now is the time to investigate the uranium sector.
