This commodity is despised – but is a stealth bull market taking shape?

Uranium mines are loss-making

This week, the good, the bad and the ugly from the world of mining make their way to Islington for the Mines and Money conference.

Stockprice-wise, there’s a heck of a lot of bad and ugly in mining, and very little good. It doesn’t matter if it’s precious or base, ferrous or rare earth. Pick your metal. The company mining it has been walloped.

But if there’s one that’s been particularly pummelled, it’s the radioactive one – uranium.

So is there any hope for the nuclear fuel?

Is this the most hated commodity of all?

I went to a very pleasant Christmas lunch yesterday held by a wealth management group, which has nothing to do with mining. “We’ve had a very good year,” said the boss is in his address. “We should be very grateful. Thanks to the US stock markets, which are up 24%…”

“Oh, blimey,” I thought. “Mines and Money’s going to be like a wake compared to this”.

It wasn’t quite as bad as I feared. It seemed quite well attended. There were plenty of people wandering about.

However, there was barely a private investor to be seen. I think there were a total of three in the whole conference centre. Mines and Money has never been that well attended by private investors, but their near-total absence is a positive sign from a contrarian point of view.

On the company front, there were notably fewer actual miners exhibiting than in previous years – they’re all conserving capital wherever they can.

But the one thing of which there was a near complete dearth? Uranium companies.

I counted two at the entire conference: Fission Uranium (TSX-V: FCU), which made one of the discoveries of 2013, if not the discovery. And the old trouper that is Laramide Resources (TSX: LAM).

“Oh, man,” said Marc Henderson, Laramide’s CEO. “Back in 2006, there were like 700 uranium companies, maybe more. Now there are 15 or 20.”

In 2006, of course, the uranium price went to $135 a pound. Now it sits at $35.

“What happened to them all?” I asked.

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“They got bought out, they consolidated, some of them are just shells, they changed business, became rare earth companies, lithium, potash, probably graphite now. One of them’s now a bitcoin miner!”

A word of advice, should you need it. If you see a uranium miner that became a rare earth miner that’s now a bitcoin miner, the only commodity that company deals in begins with a ‘B’ and an ‘S’. Avoid it.

“Yeah, it was a bubble,” Marc continued. “But when something goes from $7 to $135, that tells you there’s some kind of supply shortage too. Yet all that money that went into uranium exploration and development, so much of it got wasted. There were like four or five real discoveries. Proper greenfield discoveries. Too much was spent on brownfield – re-treading old projects that were never going to be viable. The supply problem hasn’t been solved.”

I’ve got him on a roll.

“But let me tell you something,” said Marc. “At $35 or $40 uranium, there’s nothing going on. Nothing’s viable. We need $50 or $60. $70 would be great. Fission probably needs $50, maybe more. Even Rössing’s (one of the world’s oldest and largest uranium mines in Namibia) is loss-making now. It must be costing Rio Tinto a fortune”.

“So what are you doing, then?”

“What can we do? We’re treading water and trying to stay afloat. We need to spend $20 or $25m to get all our permitting, our studies and feasibility work in place – to get the mine shovel-ready. Then we build the mine. But we can’t spend that and then not build the mine. And we can’t start building the mine, then stop because the uranium price is too low, then start again, then stop. You have to do it all in one go.”

Laramide’s situation is common across the entire mining sector – not just uranium. It has a large, legitimate deposit, but it’s impossible to make money from it at current prices.

So that deposit becomes something of a liability. Mines are loss-making. Projects that were once viable no longer are. Development has had to be halted. It’s not something that entices investment – so the sector is starved of cash.

And as a result, one day there will be another shortage of metal – and we will get another boom in mining, followed by another bust. The cycle turns.

Whisper it – but a new bull market may be coming soon for uranium

But that ‘one day’ for uranium may come sooner rather than later. Current uranium production stands at about 130 million pounds a year, while usage stands at around 180 million.

The shortfall tends to be made up by supply from old military stockpiles. In the ‘megatonnes to megawatts’ journey, some 10% of the US’s electricity for 20 years came from Russian military downblends. But that has now ended. And Russia is likely to consume its own stockpiles.

Meanwhile electricity consumption is increasing. More reactors are being built, notably in Saudi Arabia and the UAE, as well as China. Uranium demand will increase – just as new mine supply will dry up.

So sooner or later we’re looking at a shortfall and uranium’s time will come again.

The way a bull market cycle in mining tends to pan out is that the large producers lead, so you buy them first. Then you roll into the small producers, then into the development plays, and finally the explorers take off.

In early 2011, I upset a lot of people by suggesting that the bull market in uranium was over. I was about to sign off today’s article with a similar message – that we still have a while to wait before this thing turns.

But then a chart caught my eye – that of Cameco (TSX: CCO; NYSE: CCJ). It is the world’s third-largest producer, but the biggest pure play.

Cameco share price


Above we can see the price action of Cameco over the last three years. You can see on the left the huge crash after Fukushima. Then for two years or more, the stock has trundled along in a range: $16-18 has marked the lows, and $23 (the brown shaded band) the top of the range.

But over the last two months, Cameco has moved up some 15% or so from $18 to $21. And in doing so, it has bucked the trend of the rest of the sector – this is what excites me. Most other mining companies have fallen.

The red line is the one-year moving average – that has turned up. This is a sign that a positive trend is forming. The shorter-term moving averages are also sloping up.

Meanwhile, Cameco’s 2013 lows have been higher than its 2012 lows.

And nobody is talking about uranium any more. Yet the uranium spot price also appears to have moved up 15% or so over the same period.

These are all signs that a stealth trend may be forming. It’s exciting.

Now, I can see a lot of resistance at $23. But I can see good reason to drip some money into Cameco now, and buy a little more if it pulls back. If it can break above that brown band at $23, that would be a break-out and a sign to fully invest.

That brown band at $23 is key. It’s tested it some six times or more over the past couple of years. The more you test a price, the less likely it is to hold. If we break above, then $30 becomes a reasonable target.

Of course, use stop-losses and manage your risk carefully. Don’t bet more than you can afford to lose. My excitement could very easily be mis-placed. But I like what I’m seeing.

I’ll admit, when I started writing this article, I didn’t think this is how I would be ending it. But, yes, after a long, long wait, it looks as though a nice little trend in uranium might be starting. After years of headwinds, some tailwinds would be most welcome.

Life After The State by Dominic Frisby is available at Amazon. An audiobook version is available here.
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