The revival of the dead is a basic concept in Judaism. Apparently, this idea is also true in investing, and anyone who doubts this need only look at uranium stocks. For almost a decade they were down and out, shunned, and in some circles, scorned. Recently, however, many have become Wall Street’s darlings. Why the change of heart? Recalling events that have unfolded in this industry will help explain what has happened and possibly shed light on where it is headed.
In March 2011, a major earthquake struck Fukushima, Japan, and was quickly followed by a devastating tsunami. These events destroyed the cooling system at the Fukushima Daiichi Nuclear Power Plant; all three of their cores melted down. This caused the second worst nuclear disaster in history, and by some measures, the worst one.
The meltdown sent an unprecedented amount of radiation into the Pacific, and additional leaks since then have released more hazardous material into the environment. Moreover, it is feared that radioactive cooling water continues to leak from the melted-down reactors and mix with groundwater.
The event forced more than 100,000 people to evacuate their homes. The shockwaves also impacted many businesses. The nuclear industry was among them, and shares in uranium companies drifted listlessly and/or lower for years.
Very recently, however, the convergence of several factors has generated a lot of interest in uranium stocks and many of those shares now trade at multi-year highs.
One of those factors was a compromise on the National Defense Authorization Act that allows the military to classify domestic supplies of certain minerals as vital to national security; one of these is uranium. Obviously, adding to stockpiles is bullish and could boost its price.
Another factor is ESG, a relatively new investment strategy that incorporates environmental, social and corporate responsibilities into portfolio selection. ESG is gaining popularity and has driven many stocks sharply higher; some speculate it may soon focus on uranium companies.
Surprisingly, COVID also is driving uranium stocks higher. Two cases of the virus were very recently reported at Cameco’s Cigar Lake mine. Citing increased risks and safety concerns for miners, Cameco suspended production at the mine. This is a major development because Cigar Lake is the world’s highest-grade uranium mine. Incidentally, Cameco is the world’s largest publicly traded uranium company (NYSE symbol: CCJ).
According to Zero Hedge, Cameco’s decision “will lead to a supply squeeze and potentially far higher prices.” On a related note, Cameco noted that it will need to increase purchases of uranium in the market to secure the uranium it needs to meet sales commitments.
This fact did has not gone unnoticed by investors. On Dec. 14, Cameco’s stock reached an intra-day high of $14.42, approximately 30% higher than it was just a week before and a new five-year high. In the following days, shares gave back some of those gains but remained close to that level. Uranium stocks as a group are now nearly double their lows made early in the year.
Power To The People
According to the website ig.com, the world used twice as much electricity in 2011 as it did in 1990. The amount of electricity generated by nuclear power rose 25% during this time.
Governments around the world were counting on using nuclear for much of their increasing power needs, but the meltdown at Fukushima brought an abrupt change to those plans. For example, in 2011 Japan had been getting 30% of its power needs from nuclear and was planning on growing that to 40% by 2017; now, however, nuclear supplies less than 2% of its power. Germany, which had been getting one quarter of its power from nuclear, gets only 10% today.
Despite these decreases, uranium still generates more than 10% of the world’s electricity. And going forward, it could become increasingly important, particularly if a surge in demand for power in the coming decade materializes as some analysts predict.
So what lies ahead for uranium shares? Will they continue to rally or will they give back their recent gains? Investment research boutique GLJ Research is optimistic about the industry and in a recent report, advisor Gordon Johnson suggests several reasons why the sector could continue its upward trend. One of these is a recently passed bill in the Senate that allocated $150 million toward a strategic reserve of uranium; Russian and Chinese companies would be excluded from supplying the stockpile.
In addition, there’s a reluctant but growing acceptance of nuclear power, evidenced by the Democratic Party’s including the word “nuclear” in its platform for the first time in five decades. Also the Ukraine, the ninth largest producer of uranium, has halted production at all three of its uranium mines, cutting supplies.
“With the global uranium market in a fundamental supply deficit, any curtailments - no matter how small - will help absorb the inventory overhang from years of excess supply,” says GLJ. “We see the uranium sector as well positioned to attract new funds as a ‘catch-up’ play.”
Coming Back In Favor?
Investing News reports that world uranium mine production was 53,656 tons in 2019. Kazakhstan was the top-producing country by far with nearly 23,000 tons, followed by Canada and Australia. Together, these three nations accounted for over two-thirds of uranium mining, with Kazakhstan taking a 42% share of output, Canada 13%, and Australia 12%. Many small miners contribute to the world’s total production.
With growing demand for clean and environmentally-friendly power and oil falling out of favor, industry is considering other sources. Very possibly they will consider nuclear as a source of new power.
There are numerous uranium-related companies that are publicly traded. Shares of some already are or may become high quality investments while others will become wallpaper. Still, as they say on Wall Street, a rising tide lifts all ships, and that includes those that are not seaworthy. The uranium industry has had its share of bumps in the road. Nevertheless, reports of its death are certainly premature. Meanwhile, Wall Street will be watching.
bellona.org; dw.com; ig.com;
investingnews.com; theupa.org; ussif.org