Uranium: An Attractive Long-Term Contrarian Play | Hacked: Hacking Finance
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Uranium: An Attractive Long-Term Contrarian Play

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Uranium: An Attractive Long-Term Contrarian Play

Introduction

This article was posted on Sunday, 15:30, UTC.

If you are a contrarian investor, then you should have a look at Uranium. In 2011, Uranium hit a high of $73 a pound, which itself was about 50% below the highs of around $140 per pound reached in 2007. At the current levels of $20.5 per pound, Uranium is down more than 85% from the highs.

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Key Findings

  • Uranium prices are in a long-term downtrend since the Fukushima incident in 2011
  • Demand is likely to pick up in the next few years with new plants under construction
  • Supply is constrained with world’s top producer Kazakhstan reducing its output by 10%
  • Uranium has strong fundamentals, however, price realization might take some time
  • Use a staggered approach of investment. Buy only for the long-term
  • High risk – High reward investors can buy URA ETF, while the risk-averse can buy NLR ETF

So, Uranium prices are low – that’s established. But, what has changed now that qualifies Uranium as a buy? Read on.

What was the Reason for the Collapse in Prices?

The first commercial reactor in Japan was commissioned in mid-1966. Since then, Japan added around 50+ reactors by 2011 that supplied about 30% of the nation’s electricity, which was expected to increase to 41% by 2017 and 50% by 2030.

However, after the 2011 Fukushima accident, which was one of the worst nuclear disasters since the Chernobyl incident in 1986, nuclear adoption took a back seat and all nuclear reactors in Japan were shut. Post the accident, new stringent tests are undertaken before allowing any nuclear facility to start operations. The status of the Japanese reactors is shown in the image below.

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The World Nuclear Association said:

Currently, 42 reactors are operable and potentially able to restart, and 24 of these are in the process of restart approvals. The first two restarted in August and October 2015, with three more since.

However, it wasn’t Japan alone that shut its reactors. The Fukushima incident led Germany to shut eight of its 17 reactors with the remaining to be phased out by 2022. Spain, Belgium, Switzerland are also moving away from nuclear power.

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A few other nations that had planned or were in the process of constructing nuclear plants have abandoned them and others have pledged to remain nuclear free. This led to a massive drop in demand and painted a bleak picture for the future. As a result, Uranium prices nosedived.

What has Changed Since then?

The current Japanese Prime Minister Shinzo Abe is a supporter of Nuclear technology for meeting Japanese electricity requirements.

Our resource-poor country cannot do without nuclear power to secure the stability of energy supply while considering what makes economic sense and the issue of climate change..

Abe told a press conference back in 2016.

Hence, expectations that Japan will again restart at least part of its operable Nuclear plants is a positive.

Additionally, a number of developing nations like China, India, and others are turning towards Nuclear technology to feed the increasing electricity requirement of the rising middle class. Using fossil fuels has led to huge pollution problems, which can only be tackled either by nuclear technology or other clean energy resources. Hence, these nations are turning away from fossil fuels and nuclear technology is likely to be one of the major beneficiaries along with natural gas and renewables.

As of May 1st, 2017, there were 447 nuclear reactors in operation globally and 59 reactors under construction. However, World Nuclear Association says that 170 reactors are planned while 372 have been proposed. These will boost Uranium demand in the future as and when they get commissioned. Readers can read the details and the countrywide breakup here.

Demand Likely to Increase in the Next Three Years

There are various estimates by different organizations, for high, mid and low levels of demand, as shown in the chart above – sourced from the IAEA. Demand is likely to increase in the next three years, beating production during the same period, because the world’s top uranium producer Kazakhstan has planned to cut its output by 10% in 2017.

State-owned uranium company and global production leader, Kazatomprom Chairman Askar Zhumagaliyev said in a statement:

These strategic [uranium] assets are far more valuable to our shareholders and stakeholders being left in the ground for the time being, rather than adding to the current oversupply situation.

Source: Mining.com

This is a major development because Kazakhstan has been increasing its production in the last few years. Its production increased from 19451 tonnes U (tu) in 2011 to 24575 tU in 2016. A 10% cut will reduce its production by 2457 tU, which is equal to what the nation had produced way back in 2013.

In 2016, the total global production was 62027 tU. For 2017, the total demand projection according to the World Nuclear Association is about 67,867 tU. Though the demand is higher than the supply, in the last six years, there has been a huge inventory build-up due to the absence of Japanese consumption. Hence, this inventory will act as a secondary source of supply for the next few years.

Nevertheless, lower supply and higher demand will push prices higher in the next few years.

Analysts are also Getting Bullish on Uranium

We expect global uranium demand to rise roughly 40% by 2025, a staggering amount for a commodity that saw next to zero demand growth in the past 10 years…

said Morningstar analyst David Wang. He has a target of $37 a pound for this year and $65 by 2019, reports Market Watch.

From a fundamentals standpoint it’s pretty clear that demand for uranium is going to rise given what we know of nuclear power construction activity over the next 10 years,” said John Robertson, executive director at EIS Capital Management. “It might be a little while before there’s a noticeable improvement in the fundamentals of the uranium market but I think that the downside risk from an equity point of view has been greatly reduced…

reports The Australian.

Risks to our Analysis

With different options like wind, solar, natural gas, etc. available, chances are that the countries will opt for them over the riskier nuclear energy. Any untoward incident in any nuclear plant will signal the end of nuclear energy and Uranium prices will sink further.

What do the Charts Forecast?

The weekly chart shows that Uranium futures are clearly in a downtrend, however, there is a bottom formation in progress. We will get our first indication when Uranium prices breakout of the downtrend line and move above it, which should be close to 24 or 25 levels. A confirmation of a likely double bottom will be signaled when price breaks out of the recent swing high of 27.5. The pattern target of the double bottom is 37.5.

On the daily charts, we find that price has broken out of the 20-day EMA and the downtrend line and is approaching the 50-day EMA. Uranium prices are showing first signs of bottoming out.

How do we Play This uptrend in Uranium?

There are two ETFs that focus on the uranium market. The Global X Uranium ETF (NYSEARCA: URA) and the VanEck Vectors Uranium+Nuclear Energy ETF (NYSEARCA: NLR).

While URA consists of uranium mining companies, its portfolio contains a number of penny stocks, making it the riskier of the two. It has a five-year return of negative 18.67%. Also, among its top 10 holdings, it has five stocks that are quoting under a dollar and its top two holdings make up 33.54% of its assets. This ETF can be a good play when uranium prices gain momentum, as then the penny stocks will jump higher.

For now, we believe that NLR is a better and safer option for the investor. It has a five-year return of 7.39% and a year-to-date return of 7.54%. The ETF has better quality stocks in its portfolio. However, the risk involved is the low assets under management of only $31.39 million and a large bid-ask ratio. It is also skewed with companies listed in the US and Japan. It, therefore, misses out on the companies from France, Canada, and others.

Therefore, investors who want a high reward for their investment but are willing to take a higher risk should buy URA, whereas, investors who are risk averse should buy NLR. We expect a 40-50% return on investment in the next two to three years.

Featured image from Shutterstock

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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.

Comments
  • user

    AUTHOR gullyfoyle

    Posted on 4:15 pm July 2, 2017.

    Thanks for the analysis, was interested in uranium about a year ago. Thanks for bringing back to my attention.

  • user

    AUTHOR GRACE88

    Posted on 12:23 am July 3, 2017.

    Thanks for the update.

  • View Comments (2) ...
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