Willing to leap into the risky but often highly profitable world of contrarian investing?
Consider poor, beaten-down uranium, the nuclear power source that has lost nearly all its glow.
The sector has been reeling for almost two years now since the Fukushima disaster created such unfortunate misery in Japan. As we all know, the event prompted nuclear plant shutdowns and project delays all over the globe, quickly eroding demand for the radioactive metal.
Since then, numerous developments have conspired against uranium’s recovery. Utilities are holding back purchases, thinking prices may drop further. Nuclear fuel inventories are high as both Japan and Germany suspended their purchases. Natural gas prices have been low, making for a more attractive alternative power source. Chinese demand has been waning due to uncertainty surrounding its revised nuclear build schedule.
The sector did show occasional signs of recovery over the past year. But every rebound attempt failed. Prices for uranium and the stocks of explorers and producers of the resource have only fallen further. The many analysts who confidently predicted a bounce back months ago were proven wrong.
So, why buy into uranium now? I think it has the earmarks of having finally reached capitulation, the bottoming process before the real bounce back can begin. Investors have thrown in the towel. Just look at the multi-year lows of uranium and many related stocks right now. Even analysts are scaling back their rosy predictions – and yes, that could be a good sign for contrarians, too.
Uranium prices have plummeted to such low levels that many can't afford to produce it any more. And the current spot price of about $40.75 (U.S.) per pound, down from pre-recession highs of around $130, is nearly half what is needed to provide a strong incentive for future investment.
Kazakhstan, the world's biggest producer of uranium, said last week it is considering delaying an expansion of mines. The other two largest producers in the world, Canada's Cameco Corp. and France's Areva SA, last month reduced their annual production forecasts as they scaled back growth plans.
Supply has been running ahead of demand, but the need for uranium is going to pick up. China last week resumed review of its atomic power plant projects after its State Council approved a nuclear power safety plan and development schedule that would see its nuclear power capacity reach 40 million kilowatts by 2015 from 12.54 million at the end of 2011. That's going to require a lot of new reactors and loads of uranium, and the Chinese are already back to purchasing the metal in the spot market, according to trade reports.
In Japan, there have been calls for the country to phase out nuclear power by 2030. But the cabinet has refused to ratify it, and with 85 per cent of its energy coming from nuclear sources, the country is just too dependent on it to replace reactors with other energy sources. Knowing this, Japanese utilities are continuing to spend money upgrading their reactors.
Globally, there are more nuclear reactors under construction and planned right now than there were prior to Fukushima. New nuclear reactors are smaller, safer and more economic. The move towards reducing greenhouse gases will keep the power source in an enviable position long into the future.
Now, don't look for uranium to snap back overnight. It could take years. But the upside here is formidable. Full disclosure: I own shares in the Global X Uranium ETF, one of the many ways you can invest in the sector. It's been the worst investment I made of the past two years – I bought into it too soon and I gave arguments that the sector was due for a quick recovery too much credence. But, at this point, how much more downside can there be?
READERS: What do you think? Is uranium a good investment right now? Does nuclear power really have a future – and should it?