Investing in Uranium - How To Select the Shares With Potential
A Uranium Sector Strategy Report
By Garry White
First Published: 6th April 2007
I’m about to do something I never thought I would ever do. And I am not going to apologise for it either… But I need to take a deep breath first... because it’s difficult…
I might as well get it out quickly, like pulling off a plaster. So, here goes...
I think US President George W Bush has done the right thing... Yes, really I do. I give him my full support…
Don’t get me wrong, it’s only a little bit of George Bush that I am praising, not the whole package. A very, very infinitesimally tiny bit of his policy repertoire. But at least he has got one thing right. After all, statistically speaking he can’t be wrong all the time, can he?
The thing he has got right is his energy strategy. Well a part of it at least. I believe it is actually quite wise.
Whether the American people will ever curb their energy use in order to meet his targets is another matter, but he made a brave decision giving his backing to nuclear energy as the way forward, despite its detractors. The infamous oilman has even given his backing to alternative energies such as solar – because he has realised that cheap oil is no more.
Of course, it’s not just the US that has cottoned on to the fact that nuclear production is the way forward. We have started the nuclear process here too. It is also happening in Europe and in Asia. The French even produce around 80% of their electricity from nuclear already.
At the moment, there are 442 nuclear plants in operation generating around 16% of the world’s energy needs. The International Atomic Agency predicts that this will be 51% by 2030. And all that nuclear power generation needs enriched uranium.
The number of proposed new nuclear reactors appears to be growing every month. And I believe this trend will continue – for many years to come. I believe that uranium - or more specifically its oxide U3O8 - is only just starting a bull cycle… There is more to come – potential much more...
Investing in Uranium: Bush's Visit To Calvert Hills
I made my first share tip in the sector immediately after I read the speech that George Bush delivered on his energy strategy at a US nuclear power station in June 2005.
The share I recommended then has almost doubled in that time, but I still believe it is a buy. That’s how hot I think this sector really is. But back to that nuclear power station in Maryland…
This visit to Calvert Cliffs Nuclear Power Plant was extremely significant. It represented the first visit to a nuclear power station by a US President since Jimmy Carter made an emergency trip to Three Mile Island after it suffered a partial meltdown in 1979. This event, coupled with Chernobyl in 1987, put nuclear power off the agenda for a very long time.
But all that changed at Calvert Cliffs, as George Bush set out his nuclear stall to the US people…
“Nuclear power is one of America’s safest sources of energy,” he said, “It is time for this country to start building nuclear power plants again”.
In his 2007 State of The Union address delivered in January, the president called for a shift away from oil imports and towards energy independence through technology-led development, including new nuclear.
He said, “It’s in our vital interest to diversify America’s energy supply, the way forward is through technology. We must continue changing the way America generates electric power, by even greater use of clean coal technology, solar and wind energy, and clean, safe nuclear power.”
Investing in Uranium: Danger In The Sector
I honestly believe that there will be lots of money to be made in the uranium sector for the next few years and you would be utterly mad to miss this boat.
But there is a danger – and I believe it is a large one. Uranium is hot. So hot that I believe lots of people are going to get burnt.
There is a whole plethora of uranium juniors already listed on Aim, with many more in the IPO pipeline. The outlook for the uranium price is undoubtedly bullish - uranium production has fallen below reactor demands and consumption for around 20 years with the difference made up by the draw down of government stockpiles - but I am concerned about the large gains the sector has seen already.
Remember, the uranium story is a long-term story. Political decisions take a long time. It also takes years to build a reactor.
Although I view the gains in uranium juniors as overcooked at the moment, I also believe there are ways to play the sector going forward that could be extremely lucrative. You just need to look further afield than some of the overvalued, assetless propositions on Aim and PLUS Markets.
Investing in Uranium: Beware the mania
Merger mania is also entering the sector – and that could lift prices further... But not all uranium stocks are prized assets. You need to cherry pick.
After the mega uranium merger that was unveiled between SXR Uranium One and UrAsia on 13 February, speculation has been rampant over which companies will be next.
Investors have been betting which companies will be next to merge or be acquired – but this makes me very cautious. I do not believe that the quality uranium juniors will be willing to sell out at this stage. The companies which are likely targets are those that are close to actually being a producer; say within the next three years.
However, the board members of these companies are no fools. They are all bulls of the uranium price and see the potential rewards in the future as greater than what could be achieved through a short-term buyout.
Therefore, I believe the prime targets - the assets that larger companies would like to buy and own for themselves - will sit behind a board that is not willing to sell.
So, in my mind, the whole uranium consolidation story really could turn out to be an enormous white elephant.
Make sure that the uranium company you back is not just an explorer but a producer as well. And, if my argument from Wednesday’s email holds true, analysts are consistently underforecasting the uranium price just like they did with the oil price.
I believe that uranium PRODUCERS look set for a bumper few years ahead… Just be careful how you play the explorers.
Regards,
Garry White
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