Over the last three months there have been some bullish signals in the uranium industry.
First of all, it is important to provide a little context for the recent M&A activity in uranium stocks.
In 2007 there was a huge price spike that took the spot price of uranium from about $18/pound to almost $140/pound. The bellweather uranium stock went from $8 to $50 in short order. However, the uranium bull market came to an abrupt halt after the Fukishima disaster. World leaders from Japan and Germany denounced nuclear energy and the spot price of uranium cratered to $40/pound. The current spot price is only $44/pound.
However, there are some signs that uranium might be starting a new bull market from the ashes. First of all, there has been a lot of M&A activity in the last two months. In mid-January, Uranium One (UUU.TO) was bought by ARMZ its controlling shareholder for $1.3 billion in a friendly deal. Denison (DNN) acquired Fission Energy (FIS.V) for approximately $70 million. In the summer of 2012, Rio Tinto (RIO) bought Hathor (HAT.TO) that prompted a bidding war with Cameco. It appears that the industry insiders are scooping up uranium assets that have been beaten down in the last two years.
Let’s take a look at the supply/demand situation to determine if there is a justification for all of this M&A activity.
From a demand perspective there are 64 nuclear reactors are being built all over the world. China is dealing with horrific pollution and is obviously leading the charge towards a nuclear future. Japan, under a new government has reversed course on their previous policy of shutting down all of the nuclear reactors. The government will most likely decide whether to restart 50 idle nuclear reactors in mid 2013.
From a supply perspective, there is a massive mine supply shortfall. The industry currently needs 180 million pounds yet the annual production is only 144 million pounds. For the past two decades, uranium shortages have been averted by burning through Russian stockpiles. However, the Russian supplies are expected to end in December 2013.
The safest way for investors to participate in the uranium bull market is via Uranium Participation (U.TO) which is a company that basically stockpiles uranium. Since investors cannot easily buy uranium on the futures exchange, this is the only vehicle for investing directly in uranium. Of course, there are uranium companies that might be leveraged to the price of uranium.
From a technical perspective, uranium looks to have bottomed in late 2012 and volume has been increasing in recent months.
From a longer term perspective, it appears that a 2 year base has formed in the stock.