I'd like to issue a mea culpa. Back in January, I thought the stars were aligned for a big upward move in the price of uranium and all of the uranium-related stocks. The radioactive metal had slumped badly in 2011, but after a solid start to 2012, it looked as if it was finally time to buy.
"A bottoming process appears to have ended, and with many shares far from their 52-week highs, these beaten-down names could offer material upside in 2012," I wrote back then.
That's wasn't a timely call. The price spike was just a head-fake and uranium prices dipped even lower, as the chart for this uranium-focused ETF shows.
I'd normally be willing to simply close the book on this losing investment idea and move on. But I remain convinced investors need to track uranium, because at some point -- perhaps soon -- investors could revisit this out-of-favor investment.
Why now?
In recent weeks, a pair of news items could help underscore the investment thesis I laid out back in January: In coming years, demand for uranium will likely be higher than many anticipate. And to understand this thesis, you need to look at Asia.
First, much has been written about Japan's desire to shut down all nuclear power plants. The country is heading into summer with plans to sharply curtail energy usage to make up for all of that lost power. Japanese industry is up in arms, predicting the country could lose many jobs as factories close.
In response, Japan has begun to restart a pair of reactors in the Ohi region. It's a small step, but Japan's Prime Minister Yoshihiko Noda has made it clear the country needs more plants because it simply can't afford to be truly nuclear-free. The country has just announced plans to invest heavily in solar power, and is also sucking in massive amounts of natural gas and crude oil.
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But that won't be enough.
Even if Japan wanted to be truly independent of nuclear power, then the government estimates it would cost the economy roughly $40 billion annually to pay for extra fossil fuel imports. That's money Japan can ill afford to bleed when it faces so many fiscal problems. That's why it appears increasingly likely Japan will have a number of nuclear plants back online by next summer, after the country's nuclear regulatory panel will have had a chance to review safety upgrades this winter.
Yet it is China that is about to become the big story in nuclear. After the nuclear crisis hit Japan last year, China decided to halt its nuclear development plans to take a fresh look at planned reactor designs. That process now appears complete. "After a thorough design safety review, China's nuclear build (largest incremental uranium demand this decade) is set to resume," wrote Merrill Lynch analysts in June 21 note to clients.
China is known as one of the world's biggest polluters, thanks to its heavy reliance on aging coal-fired power plants. The fact that China's energy demands will likely keep growing only exacerbates this problem. That's why China is keen to move forward with plans to build dozens of nuclear power plants to meet government targets of 70-80 Megawatts (MW) of electricity by 2020. If this happens, then China will single-handedly account for more than 50% of the projected global growth in uranium demand during the next decade.
Merrill Lynch has been analyzing the news out of Japan and China, and now says "it's time to start building positions in uranium equities." The firm has just upgraded its rating on Cameco (NYSE: CCJ), the world's largest uranium producer, from "neutral" to "buy." Analysts see shares rising from a recent $21 to $27. Yet this looks like a near-term target to me, and if demand for uranium plays out in the next few years as I suspect, then there's no reason shares can't move back up above $40 during the next few years -- a level seen in late 2007 and again in early 2011. That's nearly double where the stock is now.
Back in January, I suggested some micro-cap and small-cap uranium stocks that may have even more upside, including Uranium Energy Corp. (NYSE: UEC), Uranerz Energy (NYSE: URZ), Uranium Resources (Nasdaq: URRE), and GSE Systems (NYSE: GVP). These also carry higher risk, so Cameco is the safer play for investors looking to take a more conservative approach to this sector.
Risks to Consider: Any further nuclear power-related crises would set this industry back once again.
Action to Take --> Nuclear is not the solution everywhere. But for fast-growing resource-starved economies like China and India, as well as power-hungry economies such as Japan, nuclear energy still looks set to play a major role in the global energy industry. This sector has been badly bruised and now trades near decade lows, but far-sighted investors would do well to brush up on their knowledge of this industry now, because there are many stocks in this sector that could easily double or more.
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