Over half a year after the Tohoku earthquake that struck east Japan, uranium stocks are beginning to show signs of regeneration. Now that enough time has passed and uranium prices are so competitive to reinvigorate demand, it could be time to get back into uranium miners whose valuations have improved so dramatically.
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The Powershares Global Nuclear Energy (ARCA:PKN) is down 18% this year, but the Fukushima I Nuclear Power Plant meltdown isn't the lone reason for what's happened with uranium stocks. Uranium miners actually peaked a month before the March 11 earthquake. In fact, Cameco Corporation (NYSE:CCJ) and Denison Mines Corp. (AMEX:DNN) hit their highest levels back in February since mid-2008. Uranium miners were already in free fall when the Fukushima disaster hit. The earthquake rattled weakening nuclear stocks as fears of a global backlash against nuclear power spread.
Uranium miners are still feeling tremors from the Japanese quake. During a very difficult second quarter, Cameco - the world's largest publicly traded uranium company - realized a 23% decrease in earnings, and revenues fell 22% compared against the year-ago period. Despite the tough second quarter, Cameco expects uranium revenues to be 10 to 15% higher this year compared with 2010, and for revenue growth to pull back only slightly over the next decade. Like Cameco, Denison had a difficult second quarter, swinging to a $13.7 million loss, compared with a $16.7 million gain during the same period last year as revenues fell 38%. We'll get a better look at how the big uranium miners are managing when Denison reports third quarter results on November 4, and Cameco follows on November 8. (For related reading, see Analyzing Operating Margins.)
The uranium industry is showing signs of reversing what's been a tough year. Cameco, Denison and Uranium Energy Corp. (AMEX:UEC) are all up big since bouncing off 52-week lows in early October, potentially carving out a near-term bottom. Global mining giant Rio Tinto plc (NYSE:RIO) sees value in the beaten down uranium mining segment too, topping Cameco's hostile bid for Canadian uranium miner, Hathor Exploration Limited, with a C$578 million all-cash offer.
Part of the reason valuations have become so attractive is that uranium stocks have closely tracked the underlying price of uranium oxide. In February, when miners peaked, uranium prices topped above $70 per pound, representing a near three-year high. Prices then plunged to $49 per pound by September before rebounding to $54 per pound, preceding the October rally in miners. The recent commodity rebound and technical factors are driving prices. It looks as if there is real support for uranium just below the current levels, with about $15 of room before meeting the February resistance level. Rising uranium prices are a major catalyst for miners.
The Bottom Line
The Fukushima catastrophe helped send prices lower this year, thus far, due to less demand from Germany and Japan. It was definitely a setback for nuclear power around the world. The percentage of electrical power generated in the U.S. slipped in the first half of 2009, and India and China implemented temporary pauses to study the implications of the meltdown. However, the global transition towards clean nuclear energy technology, especially in Asia where numerous plants are already under construction, is inevitable.
Uranium miners are now positioned to reward investors. There's no dividend to get outside of Cameco's modest 1.7% yield. Yet, there's a lot of value to uncover, particularly after these stocks have been drilled down so much this year. It's important to monitor miners to see if they are meeting production requirements. If the Cigar Lake mine gets going, Cameco will be one of the better ways to play the uranium field (plus the dividend). Denison has a bigger risk profile. The return, which has more than doubled that of Cameco this month, is the bait. Uranium Energy offers a cleaner balance sheet, and the benefits of being a lower cost producer. (For related reading, see 4 Clean-Energy Alternatives To Uranium.)
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At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.