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This Could Be the Start of Another Triple-Digit RunBy
Wednesday, December 19, 2012
When uranium booms, it booms big...
For most of the 1990s, uranium traded for less than $15 per pound. In the early 2000s, it finally began to rise... and then it began to soar. From January 2005, when uranium traded for $20.50 per pound, the resource shot up to about $135 a pound in mid-2007 – a more than 550% run-up.
Uranium producers saw even larger gains. For example, in 2002, uranium miner Cameco traded for around $3.50 per share (when you take its stock splits into account). Its shares peaked at $52 per share in June 2007. That's a 1,300% return in just five years.
As always happens with commodities, the boom turned to bust. But after four years of lackluster price action... I think another boom is on the way.
Last week, I showed you two factors that will drive a new uranium bull market: First, the world can't live without nuclear power. Second, demand is outstripping supply.
But even if the geopolitics weren't working in uranium's favor, the price would still have to rise.
You see, uranium miners are losing money.
Rick Rule is the founder of Sprott Global Resource Investments and a serially successful resource investor. According to Rick, it costs miners about $85 to produce a pound of uranium. If you look at the "cost of revenue," the numbers are even higher...
Areva, for example, is one of the largest uranium producers in the world. In 2011, it produced 23 million pounds of uranium... and spent almost $163 per pound doing so. That was, by far, the highest price I found among major uranium producers. But none of the numbers looked good.
Cameco (NYSE: CCJ) produced more than 22 million pounds of uranium last year at a cost of almost $73 per pound. Paladin Resources mined 5.7 million pounds of uranium at a cost of almost $90 per pound. Uranium One (TSE: UUU)was the most efficient producer. It mined over 10 million pounds of uranium in 2011 at a cost of $58 per pound.
The volume-weighted average cost of uranium for the group I mentioned above – which represents 43% of the uranium mined in 2011 – came to nearly $106 per pound.
Here's the thing: According to Rick, the "term price" of uranium – the price paid for long-term supply contracts – is $65-$70 per pound. The "spot" price – the price paid on the open market – is less than $50 per pound.
In other words, most miners are losing money producing uranium. In the worst case, the loss exceeds $100 per pound. This situation can't last.
As Rick likes to say, when it comes to commodities, the cure for low prices is low prices. If you can't make money mining uranium, you'll stop mining uranium. Supplies will shrink... and prices will rise.
How far is impossible to say. But as I already told you, the 2005-2008 run-up was spectacular. And it began with prices so low, uranium miners were losing money on every pound. Things had to change... and they did.
That's going to happen again this time around. That's why it's a good idea to buy Cameco and its smaller peers. If uranium's boom is anything like the last one, the gains could be extraordinary.
Good investing,
Matt Badiali
Further Reading:
"If you're going to accept the bunk you read in the mainstream media about nuclear energy, you're going to miss out on a big opportunity," Matt says. Over the last week, he has shown readers how to sift through the hysteria and government misinformation to understand the prominent role nuclear power is sure to play in what could be the biggest energy trades of the decade.
Market NotesAFTER BOTTOMING IN 2011, AIRLINE STOCKS ARE SURGING As we speculated late last year, the airline sector is now booming... and that's a good sign for America.
Back in September 2011, we noted the trouble with airline stocks. Airlines sport razor-thin profit margins, they're subjected to wild swings in fuel costs, and they require lots of capital expenditures to keep the businesses running. This makes them horrible long-term investments. But from a trading viewpoint, it's worth noting that airlines go through big "boom and bust" cycles. These cycles can be traded for big profits.
In our write-up, we noted how airlines had just experienced a big bust. Many airline names, like Southwest Airlines, had lost 30%-40% of their value in just a few months. Sentiment toward the sector was awful. This, we speculated, offered a tradable bottom for contrarians.
As you can see from the two-year chart below, our call was well-timed. The airline fund bottomed late last year... started rising... and just this week, surged to a new yearly high. Some individual names have climbed 33%-50%. It's a sign America is doing plenty of flying for business trips and vacations... which, in our opinion, is a good thing.
– Brian Hunt
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