Another Low-Risk/High-Reward Idea in Natural Resources
Last month, I told you that China went on a resource-buying spree of massive proportions…
In an effort to stave off a severe shortage of electrical power, two Chinese national companies went after giant uranium deposits in Africa… helping to kick off a stealth bull market in one of the world’s most hated resources: uranium.
As long time Growth Stock Wire readers know, I followed the uranium boom in 2010 and the bust in 2011, which took out the share prices of uranium miners… But after nearly a year in bust mode, the “smart” money is flooding back to the sector. That is lighting a fire under the share prices of leading producers. Let me explain…
The earthquake and tsunami that struck Japan in March 2011 destroyed several nuclear reactors at the Fukushima Daiichi power plant. As I described last month, this caused countries all over the world to halt nuclear power production. Germany’s Chancellor Angela Merkel ordered eight of the country’s 17 nuclear reactors closed by the end of 2011, with all 17 shut down by 2022.
#-ad_banner-#As a result, uranium prices fell about 45% from peak to trough… causing uranium miners’ shares to collapse.
However, it appears that the “ExxonMobil” of uranium is leading the way back…
Cameco (CCJ) produces about 16% of the world’s mined uranium. It’s by far the largest “pure play” uranium stock in the market. Its price action is an excellent proxy for the sector as a whole. As you can see from this chart, the Fukushima disaster destroyed its share price. It fell 63% from its high of $44.81 last February to its low of $16.59 10 months later…
But note the price action of the past three months or so. You’ll see that Cameco’s giant downtrend has hit a bottom in the high teens. And in the past month or so, the stock has rallied along with the rest of the mining sector. Most other uranium stocks sport very similar charts.
Today, the realities of the world’s electricity demands are overcoming the fear we felt after the Fukushima disaster. While the U.S. used 20% of the electricity produced globally in 2008, China consumed 17%… and its consumption is increasing along with its economy, which is growing at 8%-10% per year.
As longtime Growth Stock Wire readers know, China is one of the world’s most important resource consumers. It already consumes a huge amount of coal and natural gas to generate electric power. But it needs fuel from every source it can get, including uranium. That’s a big tailwind for uranium producers, who are trying to keep up with demand.
Prior to the Fukushima disaster last March, China’s government outlined an increase from 10 gigawatts (GW) of nuclear power capacity to 120 GW by 2020. Those plants use roughly 210 tons of uranium per GW per year. In other words, all 120 GW will require about 26,280 tons of uranium per year. That represents 42% of all the mined uranium in 2010.
Demand will come from other places as well. According to the Nuclear Energy Institute, there are currently 63 nuclear power plants under construction. Those plants will need over 13,100 tons of uranium per year. That means we’ll need to grow our uranium production by at least 20% to meet the new demand.
As you can see, despite all the negative headlines surrounding uranium and nuclear electricity, developing nations like China are still going “great guns” with their nuclear plans. The stocks have bottomed… which makes the uranium stock a low-risk/high-reward trade right now.