3 Reasons This Precious Metal Is Positioned For A Rally
By Sean Brodrick | February 25, 2015 |

Just as many energy markets are looking very unhealthy, one is coming back from the dead. And that market is uranium. The green-glowing power source is ramping up, catching the bears with their fur down as it sets its sights on higher prices.

And that should mean an even BIGGER move for uranium miners.

Let’s look at a weekly chart of the Global X Uranium ETF (NYSE: URA), and I’ll show you what I mean.

The URA tracks an underlying index of uranium-focused stocks. Let me tell you what you’re seeing here.

First, you can see that uranium fell hard since peaking early last year. At the beginning of this year it fell again, this time through support.

However, momentum did not confirm the breakdown. I’ve put an indicator of momentum (MACD) on the bottom of the chart in histogram form. You can see MACD did not dip nearly as much as the price of URA when it swooned.

In technical analysis, this is called a “disconnect.” It’s a sign that a trend may be about to reverse. And sure enough, very quickly, URA bounced back.

Bears who gambled on lower prices are now finding themselves trapped. They have to cover any short positions they’ve taken. This, along with some fundamentals I’ll tell you about, should drive URA to $14 - a 25% move from recent prices.

And it could go much higher. Let me give you three reasons why...

Reason No. 1: Trouble at the Mine

And not just one mine, either. Two mines that account for 8% of global uranium production have suffered serious setbacks.

BHP Billiton (NYSE: BHP) owns the Olympic Dam mega copper-gold-uranium mine in Australia. There are three mills at the property, and the largest of them was recently damaged by an electrical fault that should shut the mill down for six months.

Uranium production, as a result, could drop as much as 30% from a previously anticipated 8.7 million pounds.

Then there’s the Rossing mine in Namibia, owned by Rio Tinto (NYSE: RIO). A little over a week ago, a fire broke out where uranium oxide is packed for export.

At the moment, it is unknown when Rio can ship the final product out of the mine and into the market - or how much production will be affected. They don’t even know what caused the fire in the first place.

Now, before these two accidents, global mine production was running at 148 million pounds per year, less than global demand of 175 million pounds. The difference was made up by selling out of stockpiles - particularly from Japanese reactors shut down after the Fukushima earthquake/tsunami.

That brings me to my second point.

Reason No. 2: Japan Is Restarting Its Nuclear Plants

Japan shut down its entire fleet of nuclear reactors after Fukushima. For a country that is the world’s fifth-largest user of electricity, that’s a crippling move.

Since the plants were shut down, Japan deferred planned deliveries of uranium and sold excess uranium into the global market. That depressed prices.

But now, the country is slowly, almost painfully, restarting its nuclear plants. We should see four restarts this year - Sendai 1 and 2 and Takahama 3 and 4. And there is the potential for even more restarts by year’s end.

The fact that Japan is no longer deferring uranium deliveries indicates it sees nuclear restarts as inevitable. That should send prices higher.

And finally...

Reason No. 3: The Next Nuclear Ramp-up Is Here

China, the world’s No. 1 energy consumer, plans to expand its nuclear power capacity threefold by 2020.

Other nations are busy building new nuclear plants as well. Those include Russia, India, Brazil, England, Romania, South Korea, Saudi Arabia and the United Arab Emirates.

These newer plants should be much safer than the old ones. They’ll certainly be hungry for uranium.

But, as I just showed you, the supply isn’t there. It takes time to build a mine. And even with the recent rally, the price of uranium - which languished at $35 a pound for a long time - is just breaking $40 a pound.

Meanwhile, the long-term all-in sustaining cost of mining uranium is around $80 a pound.

Who in their right mind would want to build a new mine at these prices? Before we see any new construction, uranium is going to have to move significantly higher.

It’s frustrating for those of us watching the space who know how long it takes to bring projects like these online. But the longer the price rally is delayed, the bigger the final move will probably be.

How You Can Play It

To take advantage of an eventual rally, you can buy individual miners. I also think the Global X Uranium ETF is a fine choice. Just know that it charges 69 basis points annually and is quite liquid. It has volume of 244,000 shares a day.

There is also the Market Vectors Uranium & Nuclear Energy ETF (NYSE: NLR), but that’s mostly focused on utilities that use nuclear power. It’s probably not the best choice to ride the rally.

Likewise, the Uranium Participation Corporation (OTC: URPTF), which holds physical uranium hexafluoride, is far too illiquid. You’ll get hosed going in and out of that fund.

So, I recommend you stick with individual stocks or URA. Miners are leveraged to the metal, so they should outperform anyway.

Additional Note: Uranium is just one of many commodities offering big opportunities for investors. If you're interested in profiting from other commodity cycles, a new report is revealing how the biggest oil boom in U.S. history could turn your $500 into an early retirement in as little as 12 months. To get all the details on how this boom could make you a fortune in the next year -- plus the top six oil and gas plays right now -- click here.

This article originally appeared on InvestmentU.com: 3 Reasons Why Uranium Is on the Launch Pad

 

Outbrain

 

Outbrain