Question: which commodity has had more false starts than a cane toad race?
Here’s another one: Which part of the mining sector has broken even more hearts than gold?
And a last one to round it up: What investment is possibly the toughest sell of 2013?
You’ve guessed it…the answer is the same for all three. But despite all these things, it could still be the biggest winner on the market over the next 24 months…
The answer is: uranium.
That’s right. Uranium is coming back.
No one will see it coming…but all the pieces are now in place for uranium to stage a big comeback – and soon.
Don’t believe me?
I know. Like I said, it’s a tough sell.
But before you disregard what I’m saying, know that Australia’s two biggest uranium stocks: Paladin (ASX: PDN) and Energy Resources of Australia (ASX: ERA) have both quietly crept up by more than 40% over the last three months.
For context, the metals and mining index (XMM) has gone nowhere in the same period.
Mining stocks have a habit of predicting the coming move for its underlying commodity. So when uranium stocks start picking up, it can be a good signal that uranium is getting ready to move.
But if you look at the uranium chart, that’s about the last thing you would expect to happen. The price has fallen for two and half years, with no bottom in sight just yet. It has broken under $40 to hit $38.25 this week.
Uranium – Now Down to $38 Per Pound
Source: Cameco
Of course, the uranium spot price is just one side of the coin. Most deals are done at long-term prices, many at prices from $72 just a few years ago to $57 where they had stayed for most of the year.
But are Things About to Change for Uranium?
Well, I think it’s quite possible, because of three things happening now that could transform the shape of the uranium market in the next twelve months.
Any of them alone could send uranium back up. But if they all come together then uranium stocks could be a simply fantastic trade over the next year or two.
Not least because uranium stocks are incredibly cheap today, and if history is our guide, they can put in enormous returns from these levels.
For example, back in 2002, ERA traded at the same price as it is today…then as uranium gained in price, the ERA share price gained 1,900% over the next five years.
Now I’m not saying it’s about to gain 1,900% again. But I am saying the possibility of uranium stocks being a good trade from here makes the sector worth watching.
The first potential trigger in the uranium market is the end of the ‘megatons to megawatts’ program. This catchy name describes the process whereby, for twenty years, old soviet warheads have been recycled to make reactor grade uranium.
At the end of this year, the program is due to expire. This will remove about 15% of global supply from the market quite suddenly. A deficit of 1% or 2% is enough to cause prices to rise in any commodity market. So a 15% deficit should see prices soar.
But this isn’t news. We have been on track to hit this iceberg for years, but like uranium itself, the collision just seems to have fallen off investors’ radars.
It now seems as though savvy investors have just been biding their time, and are only now buying stocks in preparation for the chaos ahead.
There is a second reason to expect a step-change in uranium demand that could cause a shift in the market dynamic.
Japan.
It’s been coming up to two and a half years since Japan’s nuclear reactors were switched off in the wake of the Fukushima accident.
As a major uranium user, Japan’s absence from the uranium market has been noticed.
There has been a lot of talk going back and forth about whether Japan is coming back into the market. If they do ever start buying again, the uranium price will find a new gear.
We may not have long to wait. The operators of ten Japanese reactors have just put in requests to flick the switch back on.
This is pretty big news. Assuming the process is successful, this will create a resurgent demand in the uranium market.
Why Uranium Should Be On Your Radar
There’s also a third reason unfolding right as you read this that could hit the uranium market.
Now, you may have heard that China is building a fleet of nuclear reactors. They have 15 reactors in action already and have another 30 coming on line in the next three or four years. This will add huge demand, but is not news in itself.
What’s just gone down in China, which could change the market much sooner, is the cancellation of a processing plant in Guangdong Province. Environmental protesters against its construction got their way, which is quite unusual in China, and the construction has been shelved.
So without this plant, China will have to get processed uranium from other suppliers in the future, which will have to scale up production and source more uranium to do that. This will in turn increase demand on the uranium market.
That’s unless China can divert the raw uranium to foreign plants cheaply, which is doubtful as they are not close; Areva’s Tricastin plant is halfway round the world in France for example.
Nothing stays the same in markets for long, and after being in the dog house for long enough, it looks like the situation could change for uranium before too long. Verdict: keep it on your radar.
Dr Alex Cowie+
Editor, Diggers & Drillers
From the Port Phillip Publishing Library
Special Report: The Sixth Revolution
Daily Reckoning: A Credible Threat to Gold?
Money Morning: Why Resources and Mining Stocks Could Be Your Trade of a Lifetime
Pursuit of Happiness: Freedom of Thought: Don’t Take it for Granted
