Saturday, February 7, 2015

Uranium making recent 52 week highs and the uranium stocks are making lows

This is simply a divergence that cannot and will not last. The spot price of uranium is up 30% yet the stocks are making lows. This is an excellent opportunity to buy while prices remain cheap. Raymond James seems to think so also:

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TER: In the Raymond James uranium industry analysis issued in October, it was observed that "equities and fundamentals have diverged." What opportunities are in this for investors? 

DS: We were describing the different paths in the space. The spot price was rising and supply/demand fundamentals were improving, whereas equities got pummeled after highs touched earlier in the year. This is still the case. Spot is 30% above its bottom, and yet indicator stocks like Cameco recently reset 52-week lows, and the share price of the UPC fund (Uranium Participation) is implying a discount to its NAV. 

The downdraft in oil prices has also had a dampening effect on uranium stocks, widening the divergence, despite the fact there's no relationship and very little global competition between the two commodities. Nuclear, after all, is a stable generator of emissions-free baseload power, the plants can operate reliably and inexpensively for more than 60 years, and investment decisions on new reactors are made on these criteria. 

We expect this year to benefit uranium equities, as a series of developments should support a positive story for prices in the medium term, derisking a trajectory toward the $70/lb equilibrium price level, which is the level where enough development is incentivized on new mine supply to meet long-term demand. These 2015 developments include the long-awaited restarts of Japanese reactors, a surge of new grid connections in Asia, further rationalization on the supply side and, most critically, a wave of nuclear utility buying after a long hiatus. 

Accordingly, we are quite confident in a reversal in the divergent trend. The stocks are washed out and have a limited downside risk, but the upside potential, with several tailwinds brewing on the macroeconomic level, appears very compelling. We think investors should be buying these stocks right now. 

I know I sound like a broken record on uranium but the bottom appears to be in and the price of uranium can move higher quickly. This is an excellent time to take an initial position or add to existing positions. I think the rally in uranium stocks that will take place over the next several years, if played correctly, will have the potential to add a zero or two to the back end of your net worth.


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