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Three Uranium Stocks Are Up in 2012 After a Hard Fall Post-Fukushima

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Overall, the sector faces near- to mid-term uncertainty.

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MINYANVILLE ORIGINAL Although things seemed to be looking up for the uranium sector in early 2012 as stocks posted significant gains after a tumultuous 2011, ongoing uncertainty continues to plague the sector in the second quarter.

The March 2011 Fukushima nuclear disaster, earthquake, and tsunami plus the subsequent fallout (Japan has reportedly taken all of its 50 nuclear reactors offline as of May 5, for example) have had a significant impact on the sector. Uranium prices tumbled 25% from February to December 2011. So far in 2012, the uranium spot price remains largely unchanged from its mid to late 2011 levels, currently sitting at $52.00 per pound.

Meanwhile, the Global X Uranium ETF (URA), of which uranium stocks Cameco (CCJ), Uranium One (UUU.TO) and Paladin Energy (PDN.TO) make up nearly 50% of its total assets, is down 13.5% so far this year, after a 59% drop in 2011.

Individually, after a more than 50% fall in 2011, Cameco climbed 16.3% in the first quarter and is up 7.6% in the year to May 24. Uranium One, which also tumbled 50% in 2011 is up 12.5% this year, but saw a 28.2% gain in the first quarter. Paladin Energy climbed 34.5% in Q1, but is now in the red year-to-date, down 14.8%.

"Uranium and lithium equities both began this year strongly out of the gate, but broader market concerns and sovereign debt issues have brought them back into red territory. Investors appear to be waiting for uranium prices to rise, which might in turn be dependent on Japanese nuclear reactor restarts," according to a recent update note on the uranium sector by the analyst team at Dundee Capital Markets, released in late April.

Dundee analysts have decreased uranium price assumptions for the short-term, as a result of "the incredibly flat uranium prices that we see in this post-Fukushima environment," reducing their spot uranium price forecast for 2012 from US$65/lb to US$60/lb.

In its first quarter results released earlier this month, Cameco also confirmed that near to medium-term uncertainty remains in the market as a result of the Fukushima nuclear disaster.

Essentially, much of the uranium market continues to be in a wait-and-see mode with limited long-term contracting occurring, according to the uranium producer.

"The world is watching while Japan decides what level of nuclear power it will depend on in the future," said the company.

Despite the shorter-term uncertainty, Cameco says it sees a "strong and promising" growth profile for the nuclear industry, long-term.

"Countries around the world, with very few exceptions, have reconfirmed their commitment to nuclear energy. China, India, France, Russia, South Korea, the United Kingdom, Canada, the United States, and almost every other country with a nuclear program are maintaining nuclear as a part of their energy mix," says the company.

Indeed, the Financial Post reported that JPMorgan analyst Tyler Langton recently said in a note to clients that in terms of demand, most countries "remain committed to nuclear power post the Fukushima disaster," with JPMorgan forecasting annual demand growth of 4% from 2010 to 2020.

At the beginning of the year, Cameco said it expected 96 net new reactors (defined as either greenfield projects or those that are designed to extend the operation of current plants) to be built over the next decade, 63 of which were under construction, representing an expected annual growth rate of around 3% for global uranium consumption. [Editor's note: See International Atomic Energy Agency for global nuclear capacity by country, and World Nuclear for a list of nuclear power reactors under construction.]

As the industry is reliant on finite secondary supplies to fulfill around 15% of 2012 consumption requirements, Cameco says it is also clear that new production will be needed as a major source of this supply -- the Russian Highly Enriched Uranium commercial agreement ends after 2013.

"We are positive on the uranium sector given our view that current spot prices are too low to incent the new supply growth needed to fill growing demand (particularly from China and India) and offset looming reductions in secondary supply," says Langton.

Dundee says there are no clear winners or losers at the moment between producers, developers, and explorers in the sector. However, consolidation has been considerable this year, they say.

The analysts at Dundee say they favor Paladin Energy as the top pick of the established producers "and are looking forward to pending M&A activity that could give clarity to its pipeline development strategy, improve its balance sheet, and remove project financing risk." Earlier this month, Cameco announced its acquisition of Germany's NUKEM Energy, a trader and broker of nuclear fuel products and services, for $136 million.
No positions in stocks mentioned.
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