Email of the day 3
Comment of the Day

February 12 2014

Commentary by David Fuller

Email of the day 3

On the uranium industry

“Appreciate your daily audios, which I listen to every morning while I commutate in the bus to work. I wanted to get your opinion on the Uranium industry, I have been observing uranium miners and explorers all along since the Japan nuclear disaster and as everybody knows, they have become extremely cheap, for a reason. Everyone knows as well the headwinds: - Sentiment towards nuclear power - Supply overhaul (and recent articles on GS and DB to sell their uranium trading desk) - Japan's delay in re-opening the first nuclear stations (even though Masuzoe San recent election as Tokyo governor might be a small step forward to re-open the first power stations) My question is: - Do you believe that all of these negative factors are priced in the mining share prices, as well as Uranium price? In other words, how much further can they increase? - Isn't this a typical contrarian value investor play? Industry hated by everyone, but many nuclear reactors are still being built in China, India, South Korea, Emirates, just to name a few). The Megatons to Megawatts Program between Russia and the United States has ended in December 2013 after 20 years, but the market has not replied with a strong reaction. Is 2014 the year for a uranium comeback? Apologies for bombarding you with so many questions.”

David Fuller's view

No need for apologies, not least because you have provided us with more information than questions.  You clearly do your homework, just like many other subscribers, and we are all wiser for it. 

I would say that uranium shares are extremely depressed but not necessarily cheap because earnings are weak.  While I have long felt that contrarian thinking was a useful discipline - not least because markets reflect fashion in addition to fundamentals and liquidity - would Warren Buffett describe uranium miners as a typical contrarian investor play?  He might but I doubt it because the book value is far from obvious.  The best I can say is that a few uranium miners are sitting on a considerable supply of a currently undervalued resource.  

I also think chart action will improve before the fundamentals, as major buyers eventually move in.  I would watch for this although there can be a number of false dawns before a significant recovery commences.  This chart of the World Uranium Total Return Index shows what I describe as ‘sleeper’ base formation characteristics but there is little interest in the form of big upward dynamics, which you can see during the 4Q 2008 bottoming process.  Cameco has plenty of uranium in one of the most stable and democratic countries.  Its chart also shows Type-3 (ranging, time and size) base formation development, as taught at The Chart Seminar.  It also makes money and has a yield of 1.7% but is not cheap with an estimated p/e of 26.3.

In conclusion, I think it may be too soon to buy uranium shares, but if I did, I would favour those with earning and dividends as they would offer some consolation for patience.  I do maintain that miners are normally highly cyclical performers capable of late runs in tiring bull markets.  However, value investors are more likely to opt for the better current values of shares like Rio Tinto which has a current yield of 3.63 and an estimated p/e of 11.

In the interests of full disclosure, both Rio Tinto and Cameco are in my personal long-term investment portfolio.

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