The Uranium Miner Sector Has Bottomed
Friday January 20, 2017 15:41After six years of a brutal bear market and numerous “bottom” calls, the Uranium Miners have finally made what appears to be a long-term bottom as we begin the new year. As President Elect Donald J. Trump is about to take the helm of the largest economy in the world (I still have a hard time getting used to saying that!), his nuclear friendly rhetoric has been largely responsible for the optimism that has propelled the sector higher since he won the US Election last November. This has happened while the spot price of U308 is still at a more than decade low of $20 per pound, far below the industry’s average production cost.
Negative sentiment really went into overdrive after the Fukushima disaster in March, 2011 and skewed the fundamentals for years as the selling has most likely climaxed below $20 per pound. However, the spot price is not what investors should focus on as 90% of the market is sold at long-term contract prices. Some contracts are being written at more than $40 per pound as major American and European nuclear reactors are depleting supplies in 2017 & 2018, and will be looking for more long-term contracts. These contracts can vary between 15-30 years in duration and can have prices that float or change as the percentage of the spot price. The spot price simply acts as the basis for contract negotiations when new contracts are set up rather than the "market" price for uranium the way it does for oil, or coal. Most of world production is not profitable at the current spot price as many of these long-term contracts are set to expire.
Much of the uranium mined comes from Kazakhstan. On Jan. 10, Kazatomprom Chairman, Askar Zhumagaliyev, announced that due to the prolonged recovery in the uranium market, planned 2017 production from Republic of Kazakhstan will be reduced by approximately 10%. This provided more fuel to the nascent uptrend as even a few micro-cap Uranium miners have more than doubled since this announcement.
The ETF to follow in the space is the URA, which holds over twenty Uranium miners with Cameco being the largest holding and sector leader. It is basically what the GDX and GDXJ are to the precious metal miner sector all in one ETF. The ETF began trading at the peak of the last Uranium boom and reached an all-time split-adjusted high less than four months later at over $134 per share. If you thought the precious metal miner bear was bad, during the last six years, URA lost over 90% including two roll-backs! A 1 for 3 reverse split in May of 2013, as well as a 1 for 2 roll-back in November of 2015. This magnifies the potential of buying a basket of U308 miners here with only a small portion of your miner portfolio if the sector has indeed bottomed. I believe the quality miners are still trading at perpetual warrant prices and should be held for long term gains. Uranium is a vital commodity as we head into a rush towards a clean energy revolution.
The URA reached the $17 area on Jan. 12 and has had a 50% move off a double bottom reached at the end of October last year. However, I believe we could possibly see the $30 level before beginning a long-term consolidation so weakness should be bought here. A back-test of the break-out of an 18 month base around the $15 level could happen quickly, so be ready to enter the sector if this area is indeed tested. The GDX had a 179% move in six months off the major bottom reached last January, so this move in the Uranium miners has a chance to be equally explosive. The precious metal miner bear lasted just four years and lost 85%. A comparable move in the URA would take the ETF to the $30 level by May before we see a meaningful correction and consolidation!
Last week, I mentioned in my weekly missive that I started to take positions in a few of my favorite U308 miners in late December of last year. Here is the list of six in which I have accumulated and hope to hold for long-term gains. I strongly believe this sector has made a firm bottom precisely one year after the precious metals miner sector made a long-term bottom in January of 2016. I am focused on US and Canadian production and exploration, as I believe they have the most upside with the safest jurisdictions. As a personal preference, in order for me to have the fortitude to hold positions for long-term gains in a very volatile sector, I find it best to concentrate on the quality miners in North America.
- Denison Mines: Exploration and development in the Athabasca Basin region of Northern Saskatchewan, Canada. Latest presentation: http://www.denisonmines.com/i/pdf/presentations/2016-11-01-DML-Investor-Update-vFinal.pdf
- Energy Fuels: The dominant uranium producer in the US which also has the most reserves. Latest presentation: http://www.energyfuels.com/wp-content/uploads/2016/12/2016-12-Energy-Fuels-CorpPres-FINAL.pdf
- Uranium Energy Corp: US producer and developer with one of the largest databases of historic uranium exploration and development in the country. Latest Presentation: http://www.uraniumenergy.com/_resources/presentations/UEC_Presentation.pdf
- UEX Corp: Exploration and development in the Athabasca Basin. Cameco owns 17% of the outstanding shares. Latest Presentation: https://www.uex-corporation.com/assets/pdf/Corporate-Presentation-Dec-29-2016.pdf
- CanAlaska Uranium Ltd: This 26 year Project generator holds interests in over 500,000 hectares of land in the Athabasca Basin and also has a very tight share structure with just a little over 27 million shares outstanding. Latest Presentation: http://www.canalaska.com/i/slides/CVVslideshow.pdf
- Skyharbour Resources: Uranium and Thorium exploration with 5 projects in the Athabasca Basin. “Radioactive Rick” Kusmirski is one of the best U308 Geos in the business. Latest Presentation: http://skyharbourltd.com/_resources/presentations/corporate-presentation.pdf
Gold Miner Update: On Jan. 11, President Elect, Donald Trump held his first press conference after being elected. The GDX was selling off towards the 50-day moving average before the conference started while the gold price was also backing off of the $1180 level. By the time it was over, the GDX had hammered just above the 50-day moving average and settled back above the $22.50 area, which is now trying to become support for the sector as the 50-day moving average begins to flatten. We already have a “golden cross” of the 50-week moving average crossing above the 200-week moving average which we have not seen in the GDX since 2012. As I pen this missive, the gold price is trying to break strong resistance at the $1200 level along with the GDX trying to maintain support at the $22.50 area.
I am looking for a weekly close above the $25 area on strong volume for more confirmation of a major low being struck in the sector last December. I believe a weekly close above $1225 in the gold price may get us there. However, what I would really like to see is a monthly close above $26 in the GDX, accompanied by a $1250 monthly close in gold to help further solidify my call last week of a major bottom being in place for the miners.
By David Erfle Contributor to Kitco News
newsfeedback@kitco.com
Follow @KitcoNewsNOW
David Erfle is a 52 year old self-taught mining sector investor. He stumbled upon the mining sector in 2003 as he was looking to invest into a growing sector of the market. After researching the gains made from the 2001 bottom in the tiny gold and silver sector he became fascinated with this niche market. So much so that in 2005 he decided to sell his home and invest the entire proceeds from the sale into junior mining companies. When his account had tripled by September, 2007, he decided to quit his job as the Telecommunications Equipment Buyer at UCLA and make investing in this sector his full time job. He personally survived two bear markets, witnessed incredible sector changes and had to alter his investment philosophy numerous times in order to adapt to changing market conditions."
 |
