Are Uranium Stocks Being Unfairly Punished?

By Henry Bonner

Uranium stocks are becoming collateral damage in the sell-off in oil over the last couple of months. Since mid-July, oil is down around 20% from $102 per barrel to $83 as of October 20¹. This has also become a problem for many uranium stocks. Uranium Energy Corp. is down around 27% in the three months ending October 20 ², Fission Uranium Corp. has lost over 30%,³and big uranium producer Cameco Corp. is off 20% in the same time frame.⁴

‘I guess the market thinks you can put oil in a nuclear reactor,’ said Steve Todoruk, who joined Sprott Global Resource Investments Ltd. in 2003.

I protested: ‘couldn’t cheap oil reduce demand for nuclear power?’

Steve explains why he doesn’t think that’s the real explanation:

During the first seven months of the year, oil stocks were the darlings of the market, and many investors were recognizing significant gains on their oil positions.

During most of that time, uranium prices continued to fall, eventually bottoming out at $28 per pound⁵, and uranium stocks were generally hated.

Right around the time that oil prices started falling, uranium spot prices started to rise. Usually, resource stocks rise in tandem with their underlying commodity, sometimes more rapidly due to their leverage to the commodity’s price.

So why did uranium stocks take a dive along with oil, when the price of uranium itself rose?

What appears to have happened is that investors dumped their energy stocks in an effort to lock in their oil stock gains when oil prices began to fall. Uranium stocks were simply caught in the sell-off.

The demand for uranium is in fact well-insulated from the price of other power sources, at least in the near and medium term.

You can’t re-fit a uranium power plant to use oil. The price of oil would have to remain low for so long that existing reactors could be taken off-line and new oil-fueled plants could be built to replace them. Because the cost of uranium is very low relative to the cost of building the plants, it’s unlikely that existing plants would simply be switched off.

In the long term, I don’t think that oil will remain so cheap that it will make sense to replace nuclear power with oil-generated power.

This irrational selling in the uranium stocks has created, in my opinion, a buying opportunity.

When oil prices level out and the panic selling has subsided, I suspect that value investors will notice that uranium stocks are oversold and undervalued, possibly buying into them and driving them back up to where they were trading prior to when oil began its decent.

I’m not expecting to see uranium stocks lift off and go to much higher share prices immediately, because I still believe that the cyclical upturn in uranium prices will be a long, slow process. Still, a reversal back to the share prices we saw earlier this year in uranium stocks may offer attractive short-term gains.

1, 2, 3, 4 Bloomberg online stock charts

5 Bloomberg online: Uranium Enters Bull Market Amid Russian Sanctions, Strike. September 16, 2014

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