Uranium Shortage Can't Be Ignored
07/26/2011 10:45 am EST
The world faces a long-term uranium shortage as China and India build new nuclear plants, and major buying opportunities may emerge for shares of some beaten-down uranium producers.
Uranium prices have seen the largest drop in two years following the Japanese nuclear disaster and Germany’s decision to phase out its nuclear plants, both of which hit uranium prices hard. This has hammered the stocks of the leading uranium producers, but the longer-term fundamental and technical outlook suggests a major buying opportunity may lie ahead.
Germany depends on nuclear power for 23% of its needs, and with Japan considering cutting back on its nuclear expansion plans, the entire industry has been in retreat. Though Japan is the third-largest nuclear power producer after the US and France, it’s important to take a much more global look at the prospects for nuclear power.
Currently, production does not meet the demand of the industry, and the projections for production versus demand indicate that this gap will continue to widen going into 2020. The chart above is from the World Nuclear Association, a group that promotes nuclear energy, and therefore has a vested interest. The potential gap between supply and potential demand, however, is consistent with the views of other experts.
The recent announcement from China regarding plans to boost nuclear capacity to eight times the current level by 2020 was followed by India’s plans to boost nuclear power production by thirteen times by 2030. The nuclear power industry is also flourishing in South Korea, which could add as many as ten plants by 2010.
Though there are no clear signs yet that uranium stocks have bottomed, they are approaching long-term support where a bottom is likely to be completed.
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Chart Analysis: Cameco Corp. (CCJ) is by far the dominant player in the field, as this $15 billion company is involved in all facets of finding and processing uranium, as well as in the sale of nuclear electricity. CCJ traded as high as $44.81 in February, but hit a low of $25.13 in late June.
- The weekly uptrend (line b) is currently at $21.75 with additional long-term support, line a, in the $20.85 area
- The recent rally looks like a rebound within the downtrend, suggesting a test, if not a break, of the recent lows is possible before a bottom could be formed
- The weekly relative performance, or RS analysis, has improved but does not yet suggest a bottom is in place. A move in the RS above the May highs would be a positive sign
- There are similar readings from the weekly on-balance volume (OBV), as it is still below its declining weighted moving average (WMA). The daily OBV (not shown) is positive but does not yet show formations consistent with a significant low
- There is initial resistance for CCJ at $31.25 and then the weekly gap at $32.87 to $36.80.
Uranerz Energy Corp. (URZ) is a much smaller, $233 million company that reports earnings on August 8. It had a high of $5.93 in February before dropping to a low of $2.52 in May.
- The $2.52 level corresponds to long-term support going back to 2009, line d, as well as the weekly uptrend, line e. There is additional support at $2.24 and the 2010 highs
- The weekly RS line is trying to hold its longer-term uptrend, line f, as it has turned over the past two weeks
- Weekly OBV has moved well above its flat weighted moving average, which is consistent with a bottom formation. One more pullback to the WMA is possible
- Daily OBV (not shown) does not look as strong as its weekly counterpart
- There is initial resistance at $3.53 with further resistance at $3.89. Longer-term resistance is at $4.30-$4.50
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Denison Mines Corp. (DNN) is a much larger, $1 billion company with interests in both the US and Canada. It peaked in February at $4.48 before plunging to a low of $1.70 in late June. This was a 62% decline from the highs.
- The recent lows (line a) correspond to the 2010 highs, and additional support is in the $1.30-$1.35 area
- The daily RS analysis is still negative, as it shows a pattern of lower highs and lower lows. On top of the RS, I have also plotted a 21-period weighted moving average that can help identify trends in the RS
- The daily RS dropped below its weighted moving average in February and then violated support, line b, in March. The RS now shows a similar pattern to what occurred in the summer of 2010 (see circles), which suggests the stock may be bottoming out
- Daily OBV is still negative, as there was heavy selling on the drop early in the year. Weekly OBV (not shown) could bottom in the next month
- Key resistance on the weekly chart is at $2.43, and a close above this level would be positive. Additional resistance is in the $2.90-$3.00 area
Uranium Resources, Inc. (URRE) is a small, $200 million company whose stock may have already bottomed. It peaked in February at $3.98 and then hit a low of $1.37 in March. URRE held above this low by a penny in June. This support goes back to 2009 and 2010.
- There is further support on the weekly chart in the $1.20 area
- The weekly RS analysis has tested its declining weighted moving average but does not yet indicate a bottom has been formed
- The RS completed a bottom formation last summer, moving above its WMA. Several weeks later, the RS started to rise, and URRE subsequently rose from $0.65 to its 2011 high of $3.98
- The weekly OBV has moved back above its weighted moving average, which has now flattened out. This is also a positive sign
What It Means: The prevailing outlook for the nuclear industry and uranium prices still appears to be quite negative. These four uranium stocks have dropped precipitously from the highs made earlier this year. Two of them, Uranerz Energy Corp. (URZ) and Uranium Resources, Inc. (URRE), appear to be completing weekly bottom formations. The other two, Cameco Corp. (CCJ) and Denison Mines Corp. (DNN), look vulnerable to further declines back to or below their recent lows.
See video: Is Nuclear Power Dead?
Despite the negative outlook, a small, 3%-5% commitment to uranium stocks still seems reasonable, as those economies with the largest growth potential will need to rely on nuclear power.
How to Profit: For Cameco Corp. (CCJ), given no clear signs of a bottom, I would only look to buy on a test of the recent lows. Therefore, go 50% long at $23.16 and 50% long at $22.56 with a stop at $21.14 (risk of approx. 7.5%).
The technical outlook for Uranerz Energy Corp. (URZ) is better. Go 50% long at $2.96 and 50% long at $2.78 with a stop at $2.67 (risk of approx. 6.9%).
For Denison Mines Corp. (DNN), one more drop looks likely, so the risk in buying is higher. Go 50% long at $1.76 and 50% long at $1.64 with a stop at $1.53 (risk of approx. 10%).
Finally, for Uranium Resources, Inc. (URRE), go 50% long at $1.54 and 50% long at $1.42 with a stop at $1.32 (risk of approx. 10.8%).