Uranium: Contrarian Play on a Hated Asset
02/14/2017 10:00 am EST
Contrarian investing is the purest expression of the "buy low, sell high" paradigm. It can net those brave enough to be "first in" some outsized long-term profits, asserts Peter Krauth, resource specialist for Money Morning.
That's why I'm excited to show you an asset that couldn't be more hated right now; after a years-long struggle, it's at the "point of maximum disdain." And that should be your first clue that the profits here could be huge.
There are lots of reasons for the mainstream to "hate" an asset. In this case, uranium production is too expensive. Currently, it costs more to produce a pound of uranium than it sells for.
The shortfall is so bad, almost none of the uranium companies can turn a profit at spot prices. Uranium prices were off 40% last year, hitting a 12-year low under $18 per pound. In fact, it was the worst-performing energy commodity of 2016.
The result is easy to predict. Worldwide uranium production has dropped off dramatically. A lack of profitability has caused some mines to either scale back production or shut down entirely. Despite annual global consumption around 68,000 tonnes, the sector only produces some 50,000 tonnes.
The only reason there hasn't been a supply crunch is because existing stockpiles are being drawn down — so far. That's not going to last.
Global uranium demand is ramping up, especially in Asia where China, India, South Korea, Taiwan, and China are all building new nuclear power facilities. The World Nuclear Association counts at least 60 reactors actively under construction globally. Meanwhile, Trump is not just pro-energy, he's pro-nuclear.
Meanwhile, a few weeks back, we got news that Kazakhstan, the world's largest uranium producer, would cut production by 10% in 2017 thanks to the slumping prices and inventory glut. This the move by Kazakhstan may well be the inflection point this market had needed to establish a bottom.
There's a really compelling move to make for exposure to this hot-again asset. Consider a stake in the Global X Uranium ETF (URA). The fund has $126 million in assets and holds the largest and most traded players in the space, including uranium miners, refiners, and equipment.
URA's management expense ratio is reasonable at 0.7%, and its yield is a very attractive 7.35%, handily beating inflation – official or otherwise. Naturally, it has run up in the last month, thanks to the news from Kazakhstan and a softening of the downright negative sentiment towards this asset.
But at the moment, it has gotten ahead of itself, so I'd look for a pullback into the $15 to $16 range. From there, use a 25% trailing stop, all the way down to $11.80, the level at which it bottomed in November.
But as we look forward, given an increasing supply crunch and good odds of a somewhat business-friendlier political environment, uranium is very likely to move from hated to loved, but not before it hands contrarians one of the year's biggest hard-asset paydays.