The spot price of uranium has been in the doldrums since the Fukushima disaster in 2011. In response to the only Level 7 event on the Nuclear Event Scale other than Chernobyl, Japan took a huge step back from its nuclear activities, idling 50 of the country's reactors and issuing statements that called into question the country's use of nuclear energy going forward.
But the nuclear taboo was not confined to Japan: Germany vowed to phase out its nuclear energy use, and several other European countries scrapped plans to build nuclear power plants. The same happened in developing countries such as Malaysia and the Philippines, which had previously seemed like fertile ground for the growth of nuclear power.
Predictably, companies involved in mining uranium for nuclear projects saw their share prices plummet. Canadian based Cameco's (NYSE:CCJ) share price was basically halved between March and October of 2011 and it still trades much closer to its low than its high of that year today.
Recovery in sight?
I've heard a good deal of chatter lately about the spot price of uranium being poised to rebound. To be sure, the long-term fundamentals of uranium remain compelling: demand growth is far expected to outpace supply growth, as this chart from Cameco's investor presentation shows:
Positive catalysts for uranium include the ending of the "Megatons to Megawatts" project that provided a considerable amount of fuel to nuclear reactors from Russian supplies of Highly Enriched Uranium used in nuclear warheads, and Japan's recent announcement that it would push to restart at least some of its nuclear reactors this year.
However, before you race to put your money on every uranium investment under the sun, there a few things to keep in mind.
Lingering issues abound
First, is that Japan's accumulated quite a stockpile of uranium since it idled its reactors, so restarts won't instantly translate into new demand on the market. Then there's the issue of the many projects that have been suspended because of poor uranium pricing.
Uranium Energy Corporation, for example, recorded no revenue from the sale of uranium over the last six months versus $4.3 million in the year earlier period, choosing to keep its uranium rather than sell it at depressed prices even while expanding its Texas mining activities. The Australian company Paladin Energy has stopped mining operations at its Kayelekera Mine in Malawi altogether. And various other miners have halted new projects or expansions in light of unfavorable pricing.These projects are capable of adding to global supply very quickly if not immediately in the event of an uptick in uranium demand.
Finally, should the spot price of uranium move up, it's not always easy to figure out how quickly uranium miners will see a benefit. While it's almost certain that higher uranium prices would stoke increased interest in the sector, which should in turn inflate share prices, the actual financial benefits may well lag behind. This is because most uranium is sold under long-term contracts rather than in the spot market.
The chart below, taken from Cameco's investor presentation, shows that long-term rates are currently considerably higher than the spot rate. Should the spot rate move to the $70 range and stay there (as I have seen some predictions for), long-term agreements will not benefit from the increased pricing until they are renewed. And that benefit is likely to be a much smaller one since the average long-term price is already much closer to the $70 mark. The companies that will benefit most from higher spot prices are those whose production is not currently under contract.
A final caution
Despite the remaining headwinds that I believe will keep a lid on uranium prices in the near term, I think that Cameco could be a good option for a patient investor. The company pays a dividend, it is profitable at current levels, and it is large and diverse in its geography and operations. However, there are a slew of junior uranium miners that are newly garnering attention that would be better spent elsewhere.
Companies like Uranium Energy Corp, UR-Energy, and Uranerz Energy Corp. are far from sure bets. They are expanding their mining operations at a time of industry weakness, generating operating losses, and very likely will need to find more financing before they can be self-sustaining -- even if uranium lifts off soon. These are high-risk investments that will need a long time to bear fruit, and the suspicion of a quick turnaround in uranium pricing is certainly not a sufficient reason for gambling on them.