The spot price for uranium hit a nearly 8-year low a few weeks ago falling to $34.50 per pound U308 before gaining back $1.25 last week. According to TradeTech, very few buyers are in a “have-to” purchase position and most sellers are in a “need-to” sell position. This precarious situation in the spot market exists despite the fact that “long term world energy consumption is projected to increase 56 percent by 2040, and nuclear power generation is expected to double, according to the US Energy Information Administration,” explained the industry consultancy firm.
If the long term demand picture looks price positive, why is that not reflected in the spot price? Uranium Investing News asked uranium bull and stock guru Jeb Handwerger, editor of GoldStockTrades.com to give us his insight into what the spot price really tells investors and why he’s still excited enough about this sector to stay invested in uranium mining stocks.
UIN: It seems to me the uranium spot price is more of an indicator of where the market has been, not where it is going. How should investors interpret this continuing slump in the spot price?
Jeb Handwerger: The uranium market is not like oil or copper, or even gold. Very little uranium is actually traded on the spot market. The large majority is bought and sold through long-term contracts. We’re seeing a huge spread now between the spot price and long-term price, about $20 per pound. Historically, most of the time, the spot price and the long-term price are usually closer together. When there is a spread it is usually marking an emotional time period of either unbridled euphoria or gut-wrenching pessimism. Divergences between spot and the long term price could mark the end of an extended trend.
The spot price is more of an indicator of sentiment in the current uranium market. The price divergence can show either greed or fear. For instance, in the run up of the spot price in 2007 to $138 per pound, the long-term price only reached $90. The $40 difference between the spot price and long-term price was indicative of the euphoria in the market place. Now, when you see the spot price so severely discounted compared to the long-term price it’s a sign of fear and panic. This disconnect is something investors should watch because it’s a characteristic of negative, fear-based selling. For a contrarian investor it represents opportunity. Smart money recognizes the bottom. The spot price is a lagging indicator. Whenever you see the spot overextended over the long-term, time to sell because we might be in a bubble. When you see the spot price severely discounted compared to the long-term price like we are seeing now, it’s usually a sign we’re nearing a bottom and is a much better buying opportunity.
UIN: Despite the negative press, you’ve remained a confident uranium bull. What about this sector strengthens your resolve?
JH: True, I was probably one of the only uranium bulls after the earthquake and I forecasted that there would be a short-lived, knee-jerk reaction to nuclear. We saw that in Germany and Japan as they shut down reactors. Two and a half years later, Japan is turning the reactors back on and Germany should follow suit as electricity costs have soared. Now more investors and analysts are taking my side and the sector is seeing increased interest for new discoveries and near term producers.
Post-Fukushima we saw countries going away from nuclear power; but now we’re seeing the exact opposite with countries realizing nuclear energy is an important part of any functioning world economy’s energy mix. New reactors are being built or planned all over the world, most notably in China which is far outpacing the world in planned new reactors builds. The U.S. currently obtains 20% of its cheap and clean energy from nuclear, China obtains only 2% from nuclear. Now you know why they can hardly breath there. Governments are looking for alternatives to fossil fuels, however the gap between the production capacity of fossil fuels and that of renewables is too large not to include nuclear energy in a country’s energy plan if they are serious about moving away from fossil fuels. The costs of moving away from nuclear are far too great. Governments and the smart money know this.
We see this in the growth in the development of small modular new generation nuclear reactors that are smaller, safer and cleaner than the many 40 to 50 year-old reactors that need to be replaced and updated. This is going to be a huge boon for early-stage investors in nuclear service companies. That’s why we’re seeing guys like Bill Gates and Warren Buffet moving into nuclear. Gates is one of the primary investors in a nuclear reactor design company called TerraPower. Buffet has bought into Chicago Bridge & Iron (NYSE:CBI,FRA:BDZ) which recently bought Shaw Group, one of the world’s largest nuclear service companies. The smart money understands the growth in nuclear over the next decade or two. There’s a huge revolution going on in nuclear.
UIN: Most of our readers are interested in the mining sector of the uranium market. I know you are a big believer in uranium mining stocks. How are they performing now given the beating the markets are dishing out on the commodities sector and the perception some of investors have of the ultra-low spot price?
JH: The negative price action in the spot price is really not impacting the uranium mining sector. The miners are outperforming the spot price. We’re seeing positive price action from miners like Cameco (TSX:CCO,NYSE:CCJ), up 30% per share in 2013. Since May, Fission Uranium Corp (TSXV:FCU) is up 85%; Ur-Energy Inc. (TSX:URE,NYSEMKT:URG) is up 40% and Uranerz Energy Corporation (TSX:URZ,NSYEMKT:URZ) is up 30%. All this while the spot price has been reaching new lows. What does this tell us about the spot price? The spot price is a lagging indicator. Like I mentioned earlier, whenever you see it’s overvalued, that’s a sign of euphoria and that we’re reaching a top. Whenever you see it’s undervalued, that’s a sign of fear, and a bottom. For months, I said the spot price is a lagging indicator and that we’re going to see a turnaround in miner share prices before we see spot prices bounce back up. And I believe that’s what we’re seeing now; the price action in mining shares is forecasting a bottom in the spot price decline.
UIN: For investors looking for the best way to take advantage of a turnaround in the uranium mining space, what plays offer the best potential?
JH: For exploration, we like the Athabasca Basin where we’re seeing incredible growth and a lot of investor interest. The most I’ve seen in years. There’s Denison Mines Corp. (TSX:DML,NYSEMKT:DNN) on the east side and Fission Uranium and Alpha Minerals Inc. (TSXV:AMW) together on the west side, making some of the best discoveries in decades there. The recent discoveries are creating a major push for exploration and funding into the Athabasca Basin.
One must remember many of these exploration targets are far from production and cash flow. Keep a close eye on advanced projects like the U.S. producers. The HEU agreement is to expire in the end of 2013, leaving the U.S. in a deficit of 24 million pounds. As most uranium investors know, the U.S. only mines about 4 million pounds and consumes 55 million pounds. So we think this area of the sector, the U.S. producers and near-term producers, will experience unbelievable growth including Cameco; Uranerz, which has a strategic position in the Powder River Basin right between Cameco’s two operating mines; Ur-Energy, which just commenced production at Lost Creek in Wyoming last week; Uranium Energy Corp. (NYSEMKT:UEC); and Energy Fuels Inc. (TSX:EFR), which just acquired Strathmore Minerals Corp. (TSX:STM), is going to become a major player over the long-term.
Also watch the Elliot Lake Region in Ontario, Canada which produced uranium and rare earths when uranium was below $20 per pound and rare earths were unknown. This is where Pele Mountain Resources Inc. (TSXV:GEM) is at the Feasibility Stage at its Eco Ridge Uranium-Rare Earth mine. The uranium grade is much lower, but the deposit has significant byproducts such as the scarce rare earths like neodymium and scandium which makes the mine economical.
UIN: Thanks for your insight, Jeb.
JH: Thank You.
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
Jeb Handwerger owns shares in Denison, Ur Energy, Uranerz, Pele Mountain, and Energy Fuels. His company has a financial relationship with Pele Mountain and Uranerz who are sponsors on his website http://goldstocktrades.com