Looking at Uranium...Again

Uranium is still a “Buy”…maybe now more than ever.

The disaster in Japan slammed the uranium sector…and it still has not recovered. But this washout looks like a buying opportunity, as long as you’re not in a hurry to make a big gain.

I won’t go into the Japan-specific details, but for our purposes, it’s a safe bet that the Japan disaster means that we may not see a large-scale “nuclear renaissance” during the next generation.

Why not? Well, just consider the ability of people to mobilize opposition to large-scale energy development — especially something with the media-driven fear factor of nuclear power. Looking ahead, it’ll be hard for any new nuclear program, anywhere, to make headway. Yes, we’ll see developments here and there — more in China, say, than in the US. But we probably won’t see a global breakout into the nuclear power space.

Still, the fact is that the world has an installed base of over 400 nuclear power reactors, and these systems generate almost 20% of the world’s electricity. The problem is there’s not enough new uranium coming out of the mines and mills of the world to keep these plants running. One key source of nuclear fuel for the past decade has been decommissioned atomic warheads from the Cold War era. But that source is soon about to dry up — in 2013, to be precise.

The investment point is there’s a looming uranium shortage, within the next two years. Two years? That may as well be tomorrow in terms of finding new sources of industrial supply. Two years really means “now,” as in today. This means that the existing players have to step up the pace. It also means that there’s room for new players and growth within the primary uranium and yellowcake spaces.

In my investment letter, Oustanding Investments, I recommended Cameco Corp. (NYSE:CCJ) early in 2006. The stock is down 40% since then! You see, even the nation’s #1-rated investment letter misfires from time to time. Usually, I would suggest cutting losses long before a stock had fallen this much. But I think Cameco is an exception. It is a blue chip company that has faced some very bad luck.

Canada-based Cameco is one of the world’s largest uranium producers. Its shares were trading at over $42 each early in 2011, but crashed to below $30 after the Japan disaster in March. Then, over the past summer, Cameco shares have continued drifting lower. Today, they trade for $21.75.

Last week, Cameco launched a $520 million hostile takeover bid for a much smaller uranium firm named Hathor Exploration. Cameco wants to get hold of Hathor’s high-grade “Roughrider” deposit in Saskatchewan’s prolific Athabasca Basin. Whatever the technical merits of the transaction, this news just dropped Cameco shares to near $20.

At the current share price, Cameco has a price-earnings ratio of 18, with a dividend yield of 1.9%. Yet if uranium pricing firms up over the next year — leading up to the post-2013 looming shortage — Cameco’s earnings could and should increase strongly. So here’s a large company whose shares, on the fundamentals, are poised for a recovery.

Yes, there’s a downside with Cameco from here. But in my view, there’s a strong upside to Cameco as well. Indeed, I think the chances of Cameco going to $30 are better than the chances the share price will drift too far below $20. Cameco is a buy.


Byron King
for The Daily Reckoning