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Uranium Has Bottomed: Two Uranium Bulls to Jump on Now

By: Andrew Mickey, Chief Investment Strategist, Q1 Publishing



-- Posted Friday, August 22 2008 | Digg This ArticleDigg It! | Discuss This Article - Comments:


By Andrew Mickey, Q1 Publishing

 

                                          

Itís been a long Ė very long Ė wait, but now it looks like itís time to jump back into uranium. In fact, uranium is looking like it could be one of the best places to have your money over the next year. And there are two trampled down stocks that should perform very well from uraniumís reboom.

 

Weíve come a long way, but as long as we donít forget the lessons of the uranium bubble bursting we should do fine. This time around, quality matters. And I think youíll find my two uranium picks in this article are very high quality and extremely cheap. But again, we canít forget the past.

 

If you recall, uranium was on everyoneís tongueÖit was everywhere. I even had a few people ask me about thorium as an alternative to uranium. It was ridiculous and we all knew it.

 

Then the Cigar Lake Disaster happened and catapulted a bull market into a bubble, a bust, and now the return of an uptrend.

 

Itís a pretty basic story. The worldís largest uranium producer, Cameco (CCJ:NYSE), was banking on pumping out uranium from its Cigar Lake mine to in 2008. That was the only way for it to capitalize on rising uranium prices.

 

Cigar Lake was going to be massive. All told, the mine was expected to provide as much as 17% of the worldís yearly uranium production. With spot uranium prices hanging around $60 a pound, it would also be a major cash cow for Cameco. The uranium bubble was set to deflate slowly.

 

The exact opposite, however, happened. A retaining wall collapsed and the entire mine flooded. Cameco confirmed a single pound of uranium wouldnít come out of Cigar Lake for at least five years. The bubble grew even larger.

 

Then the summer came. Uranium prices surged even higher to $137 a pound. Everything uranium was soaring. That is, until a liquidity crunch spurred by the first signs of problems in the subprime lending market in the United States, brought the whole uranium market crashing down.

 

Flash Forward

 

Here we are one summer later and itís finally time to buy uranium again. A couple hundred of the junior uranium companies have fallen 80% or 90% from their highs (if they even still exist).

 

The pretenders are getting sorted out from the smart money is loading up on the high potential uranium stocks. But the whole time, the fundamentals have not changed.

 

There are 40 new nuclear power plants slated to come on line within the next 10 years. Thereís an additional 30 in pre-planning stages. China and other countries are putting up billions of dollars to ensure they have enough electricity to power their growth.

 

Nuclear power will play a role helping the world keep the lights on at night. Nuclear power is clean, efficient, and, probably most importantly, proven.

 

When you decide to build a nuclear power plant, you can be pretty sure the juice will be flowing within eight years. Unlike other alternative energy sources, nuclear power will provide electricity. That has nothing to do with the time of day, whether itís windy, or itís cloudy outside (solar and wind power are highly variable).

 

Nuclear power requires uranium. There is not other near-term solution. Thorium is a pipe dream and there is no alternative. Uranium has to be used in all these new \nuclear plants as well as the old ones. Uranium prices canít drop much lower from here, the fundamentals are too strong.

 

Uraniumís Next Flash Forward

 

Thatís all why it looks like uranium prices have bottomed. At around $60 per pound, uranium could even be considered cheap. The correction (a 60% is a bit more than a correction, but it seems fitting) has wreaked havoc in on uranium stocks. Uranium exploration companies are going bust, they are more out of favor than ever, and that has got me thinking itís time to delve back in.

 

I realize that it might seem crazy to move back into uranium. Thatís even more so if you got caught up when the bubble burst last summer, but itís always best to be a buyer when everyone else is selling.

 


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Now, a few uranium stocks are set to truly outperform.

 

For instance, Hathor Exploration (HAT:TSXV) appears to be an absolute steal at a little over $3 per share. This company has struck it big in the Athabasca Basin.

 

The Athabasca Basin in Saskatchewan, Canada is home to the largest and highest-grade uranium deposits in the world. A single strike can easily be worth as much as $40 billion. In fact, the smallest deposit in the Athabasca Basin is worth $4 billion.

 

Itís that kind of high return potential that has attracted so much exploration activity. Picture the California Gold Rush. Prospectors knew the odds were against them in there heads. But it was their heart and emotions that brought them there anyway. The same is true in Athabasca. Itís just uranium instead of gold.

 

But Hathor is not like a prospector with wet feet and a pan. Hathor has found its gold nugget (a bit more than a nugget though). It could be worth as much as $40 billion and as little as $4 billion. Thatís the range.

 

With a market cap of just $200 million, the upside is there. Hathor is technically an exploration company, but the only question that remains is how much uranium does it have. But if itís in the Athabasca Basin, itís a lot.

 

Hathor should be valued much higher. As Hathor continues to prove how much uranium it has, the stock will be valued much higher. At less than $3 per share, Hathor is on its way to the $6 to $10 per share range within next two years.

 

More Nuclear Fallout

 

Hathorís not the only undervalued play in the uranium sector. Denison Mines (DML:TSX or DNN:AMEX) is one too.

 

Denison is set to be another top performer in the uranium rebound. After peaking at more than $15 per share in 2007, Denison has watched its share price get more than cut in half.

 

Denison is one of the few uranium producers in the world. It is not out drilling holes in the ground and is value on hope and odds. Denison is a uranium mining company. It has operations in the Athabasca Basin as well as the United States.

 

Densisonís position as a uranium producer will allow it to directly benefit from the next rise in uranium prices. Denisonís profits go up with each dollar uranium rises in price. Growing profits will attract more investors willing to pay a higher price for Densionís shares.

 

This one is just too undervalued. Urnaium is way out of favor and Denison will be one of the biggest bounceback winners in the sector. Its size, a market value of $1.3 billion, will limit the upside.

 

Regardless, Denison is already back on the rise from its lows a few months ago. From here, Iíd still expect between a return between 50% and 100% from Denison over the next two years.

 

Big Risks Donít Always Equal Big Rewards

 

I realize the upside potential of Denison and Hathor may not get too many investors focused on uranium stocks excited. After all, uranium stock traders have been used to chasing that 20 cent uranium explorer that could soar five-fold overnight.

 

Regrettably, thatís just not going to happen in the next leg of the uranium bull market. There might be the occasional huge winner, but chances of choosing that one needle in the haystack of more than a hundred are pretty slim. The odds are against you.

 

However, when it comes to a high quality exploration company like Hathor or beaten down producer like Denison, the odds of success are much greater and the potential rewards are pretty good.

 

I expect returns on these between 50% and 200% over the next two years. Youíd be hard pressed to find that kind of upside with as little risk as these stocks carry. These two are further proof that you donít need to take big risks to earn a big return.

 

Right now, with uranium still out of favor, thereís still an opportunity to buy. With rampant speculation a thing of the past, itís best to stick to quality to catch the next leg of the uranium run which is still just getting started.

 

Good investing,

 

 

Andrew Mickey

Chief Investment Strategist, Q1 Publishing

 

P.S. Uranium is not the only sector to be a leader as we begin to emerge from the recent commodity correction. I think there is an even bigger one in agriculture.

 

Iíve got to warn you, itís probably not in the agriculture stocks that have already had a big run. Thereís plenty of value in the agriculture stocks and this bull market is set to last at least another five years.

 

Learn how to profit from it all in my latest research report: Fields of Gold: 5 Agriculture Gems that Havenít RunÖYet. Claim your free report here.


-- Posted Friday, August 22 2008 | Digg This ArticleDigg It! | Discuss This Article - Comments:



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