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Miners work about 600 metres below the surface at Cameco Corp.’s McArthur River uranium mine in northern Saskatchewan, in a file photo. Cameco is one of the world’s largest uranium producers. (© STRINGER Canada/REUTERS)
Miners work about 600 metres below the surface at Cameco Corp.’s McArthur River uranium mine in northern Saskatchewan, in a file photo. Cameco is one of the world’s largest uranium producers. (© STRINGER Canada/REUTERS)

mining

The (nearly) inevitable rise of the uranium sector Add to ...

The uranium market shows no signs of a looming shortage. Quite the opposite. Prices dwell near record lows while nuclear producers are in no rush to secure future supply.

But a scarcity of the green metal is on the way, many analysts say. That realization hasn’t yet dawned on investors. And until it does, uranium stocks will remain cheap.

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“We forecast a fairly large global uranium shortfall towards the end of this decade,” said David Sadowski, an analyst at Raymond James. “So there’s a ‘buy’ recommendation on the space.”

For many investors, Cameco Corp. is the uranium sector. It’s by far the largest North American producer, accounting for 14 per cent of global supply last year.

Cameco beat expectations with a third-quarter earnings spike, announced on Wednesday. The stock rose by almost 5 per cent as a result. But the pleasant surprise says nothing about a possible rebound in uranium prices, which depends largely on Japan restarting its idle reactors.

The uranium market really misses Japan. Since the country suspended its nuclear program in the aftermath of the 2011 Fukushima disaster, spot prices for the metal have plunged more than 50 per cent and now sit at about $35 (U.S.) a pound.

Prior to the Fukushima meltdown, Japan was the world’s third-largest producer of nuclear power. A big chunk of global demand for uranium disappeared when the country shuttered its 50 nuclear reactors. But Japan continued to honour its uranium contracts, which has resulted in an enormous stockpile of around 100 million pounds, Mr. Sadowski said. “Because of that overhang in Japan, many buyers have backed away from the market, thinking that supply could get dumped,” he said.

If Japan decides to abandon its nuclear quest, prices could remain depressed for a very long time. That’s an undeniable risk, given the current public opinion in Japan regarding the splitting of atoms.

Uranium stocks make sense for investors who believe that Japan will ultimately resume nuclear operations. “I think it’s worth the bet,” Mr. Sadowski said. For now, the country is meeting its energy needs by relying on fossil fuel imports, which are costing mightily under a devalued currency regime.

Recommissioned Japanese reactors would have little direct effect on global demand, however. The country already has enough uranium to last four or five years. Instead, removal of the overhang would compel nuclear producers around the world to again enter into contracts for future deliveries. Long-term buying has withered through the slump, said David Talbot, an analyst at Dundee Capital Markets.

Future requirements for uranium will go unmet, he said, until utilities resume signing long-term contracts, which should finally lift the pall from uranium prices.

“We need prices to get to at least $70 or $75 to incentivize new mines to be constructed,” Mr. Sadowski said. “It’s just a matter of time before prices get to those levels and current valuations are not suggesting the price will get there.”

At 19 times earnings, the valuation on Cameco, which attracts by far the bulk of investor attention, is not as discounted as some of its peers. But the stock is still cheap by historical standards and is certainly not valued for a full rebound in uranium prices.

Aside from Cameco, Mr. Sadowski’s other top pick is Ur-Energy Inc., which has secured a respectable amount of long-term contracts at favourable prices. “That will buffer them in the interim until spot prices recover,” he said.

That recovery, while the timing remains uncertain, seems inevitable. As Rick Rule, the chairman of Sprott US Holdings recently put it: “Either the price of uranium goes up, or the lights go off.”

 
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CCO-T Cameco Corp. 25.11 0.14
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