Uranium is the new metal with moxie. The key ingredient in the recipe for making nuclear energy, its price has risen 100% in the past 22 months to $20 per pound as the world has come to grips with the notion that a carbon-based economy won't last forever.
Uranium is not particularly rare. Actually, it's more commonly found in the earth than tin. But most of it is light stuff that can't be mined. Commercially viable concentrated uranium ore, however, is scarce, and it's hard to extract and convert into a usable form. About 28% of the world's supply is in Australia, another 20% is in Kazakhstan and 14% is in Canada.
That last region is getting attention from investors now, as the world's largest uranium miner and producer calls Saskatchewan home. Shares of
, a remarkably profitable mid-cap Canadian company, broke out of a half-month consolidation last Friday on four times normal volume, then hit another new high Tuesday at $92 on twice the normal volume. From a technical standpoint, it looks good to at least $100, and probably $110 or more from there.
The chart is less interesting here, though, than the fundamental story. The miner appears somewhat undervalued and underappreciated despite a 65% rise in 2004. It's covered only by Canadian analysts, and they forecast that the company can earn $3.42 per share this year and $4.41 next year. That makes the forward price-to-earnings multiple on 2005 income around 19, a good bit below estimated 28% growth.
Cameco also looks relatively underowned in the U.S. Through Sept. 30, 7.8% of the company was held by the deep-value investors at Wellington Management, 6.9% by Canadian value house McLean Budden and 2.4% by San Francisco firm Eastbourne Capital Management.
This means that if the growth story of nuclear energy and uranium becomes an important theme over the next year, a lot of growth investors are going to want to pry shares out of these long-term holders' hands, and they'll have to pay up.
Industry sources say uranium has gone through two previous hot cycles: the 1950s, when it was pushed by procurement for U.S. and Soviet strategic weapons; and the 1970s, when it was pushed by demand from new nuclear power plants. The price topped out in 1979 at $45 per pound as forecasters expected demand to grow up to 4% per year and many new mines were opened to build inventories.
The accident at the Three Mile Island nuclear plant in Pennsylvania and at Chernobyl in the Ukraine threw a cold blanket over the nuclear power industry's dreams, and global construction of new plants declined rapidly. The price plunged to $7 per pound in 1993.
Fast forward to today, when inventories are low just as production is constrained and you can see why incrementally more interest in uranium has spurred a new up cycle.
In the U.S., it appears that the Bush administration intends to fast-track nuclear energy power plant construction in the next four years. According to
newspaper in New London, Conn., the Department of Energy
two power business consortiums that the department would assume some of the cost of obtaining regulatory approval for new nuclear reactors. The paper reported that the two groups estimate that engineering and testing required by regulators to win approval would cost about $500 million apiece.
Nuclear power plants already provide 16% of the world's electricity, but rising crude oil and coal prices are juicing demand. China recently announced plans to build 30 nuclear reactors, with work starting by 2007. Elsewhere, India has said it plans to build eight reactors, taking its total to 22. Russia is building five. Finland has said it would build the first nuclear power plant in Europe in 10 years. In other parts of the world, nuclear energy is simply a way of life already: It produces 75% of the electricity in France, 50% in Taiwan and 30% in Japan.
As the world's largest producer of uranium, Cameco is really the only major pure play on this global theme. Yet right now it only generates 30% of its revenue from outside the Americas, leaving a lot of room for the company to grow overseas.
The company -- which also owns a 31% interest in a Canadian nuclear plant and has small gold mining interests as well -- reported third-quarter earnings Oct. 26 that showed improvement on all fronts. Revenue, earnings from operations and earnings per share all had strong increases (35%, 146% and 47%, respectively).
Cameco earned 87 cents per share in the quarter, up from 59 cents in the same quarter last year. For the nine months ending in September, the company had a profit of $2.65 per share, up 75% from year-ago results. The company cited higher uranium and gold prices, and significantly higher gold production. Over the past year, Cameco has reduced its long-term debt ratio to 14%, down from 21%. "This is a good time to be a growing nuclear energy company," the company's chief executive said in a statement.
With much of the future demand still a distant sparkle in the eyes of speculators, uranium demand will not have any huge increase until more plants are built -- so there is a definite near-term limit to this story. But the possible radioactive power of this tale shouldn't be underestimated.
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Jon D. Markman is publisher of
StockTactics Advisor, an independent weekly investment research service, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. At the time of publication, he had no positions in stocks mentioned. He also writes a weekly column for
CNBC on MSN Money. While Markman cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
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