Cameco Corp. (CCJ) and Denison Mines Corp. (DNN)

Nuclear power’s “renaissance” is a popular long-term theme for our contributors. Shorter-term, traders can profit from the trend by investing in companies leveraged to the price of uranium, which has just begun to recover from a multi-year slump. As contributors Elliott H. Gue and Ian Wyatt explain, today’s supply and demand picture for uranium looks likely to drive prices up for the foreseeable future.

“Uranium prices are on the rise, rallying from lows under $41 a pound earlier this year to $48 a pound at the end of September, the highest levels in more than a year. There’s more upside to come. … Uranium prices surged from less than $10 a pound in late 2002 to more than $130 a pound less than five years later. (See ‘Going Nuclear’ on page 3.) Higher prices encouraged producers in countries such as Canada, Namibia and Kazakhstan to ramp up production of the other yellow metal. The jump in supplies pushed ever-volatile uranium prices sharply lower in the ensuing three years. But conditions are in place for another run-up in prices. The Chinese are buying uranium on the spot market and signing long-term supply contracts to ensure supplies for their new reactors. In June, Growth Portfolio holding Cameco Corp. (CCJ, NYSE) inked a deal to supply 10,000 metric tons of uranium to China over the next decade—a remarkable quantity when you consider that annual global demand amounts to less than 70,000 metric tons. And that contract is only one of many. Chinese uranium demand could top 20,000 metric tons per year by 2020, up from less than 3,000 metric tons today. The supply side of the equation is equally attractive. Although uranium supplies have expanded, so have mining costs; prices will need to reach $60 a pound to support the level of investment needed to boost output. Meanwhile, some sources of secondary supply are fading. For example, in 2013 Russia will stop reprocessing highly enriched uranium from weapons into fuel for nuclear power plants, removing as much as 20 million pounds from the market each year—an amount that represents roughly 10% of global demand. Cameco Corp. will profit from these trends. The firm is expanding its low-cost production base, enabling it to capitalize on rising global demand. Buy Cameco Corp. under 35.”

Elliott H. Gue, Personal Finance, 10/9/10

“Spot uranium prices have been on the rise lately, climbing from around $40.75 a pound in June to $48 today. That’s still well below long-term, fixed- price contracts of $60 prevalent today. But we expect both the spot and eventually the long-term market to strengthen, and perhaps strengthen considerably for a number of reasons. … Strong uranium demand going forward and a lack of new mines coming on line augurs for much higher uranium prices in the years ahead. … The biggest uranium producers include mining giants BHP Billiton and Rio Tinto. But because uranium comprises just a small portion of their business, rising prices for the energy source won’t have a big impact on their bottom line, so they shouldn’t be purchased for the uranium exposure alone—although we like them for other reasons as well. Among the pure uranium plays, we are particularly intrigued by Denison Mines Corp. (DNN, Amex).

“Denison is an intermediate-stage uranium producer with operations centered in North America. The Toronto-based company owns the White Mesa Mill and Mining operations in Utah. The White Mesa Mill is the only conventional uranium mill currently operating in the United States. The mill is also capable of processing vanadium, which is important in steel production. … Denison is expected to produce a modest loss for the full year, but it should be profitable in the years to follow, although like most resource stocks it will trade more on the value of its assets than its earnings. The stock has made a heck of a move since its July lows, but that doesn’t discourage us from buying here as we see significant upside in the coming years from current levels. Despite being one of the larger players in the uranium business, Denison is still rather small with a market capitalization of around $600 million. It also doesn’t have much of a following on Wall Street yet, but that’s fine with us since the shares remain undervalued as a result. With time, we expect Denison’s profile to rise, attracting more investors to the shares, giving us a boost to our returns in the process. We hesitate to put a price target on the stock, but we can say Denison is trading at about 1 times its net asset value (NAV), whereas stocks in the sector have typically traded at a decent premium to NAV. Needless to say, should its premium rise to say 1.3, along with the expected rise in uranium (and vanadium) prices, the stock will be a big winner. In the meantime, the company has a solid balance sheet, with essentially no long-term debt.”

Ian Wyatt, Global Commodity Investing , 10/1/10


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