Uranium Deals Set to Rebound on Japan Nuclear Restart
Comment of the Day

February 20 2014

Commentary by David Fuller

Uranium Deals Set to Rebound on Japan Nuclear Restart

Here is the opening from this upbeat article from Bloomberg:

Feb. 21 (Bloomberg) -- Uranium takeovers are on the verge of a comeback that would put companies from Denison Mines Corp.

to Fission Uranium Corp. in play.

     Prices of the radioactive metal are forecast to climb more than 40 percent by the end of the year as Japanese power plants restart nuclear reactors that have been shut down since the March 2011 earthquake and tsunami in Fukushima. The rebound in uranium demand may fuel takeovers as buyers try to get ahead of rising prices, Bank of Nova Scotia said. The median price-book ratio for uranium stocks is almost half the level it was before the disaster, according to data compiled by Bloomberg.

     “Now is a great time for cherry-picking good assets,” Rob Chang, a Toronto-based analyst at Cantor Fitzgerald LP, said in a phone interview. “We think 2014 is going to be really the kick-off year for the uranium space. The timeframe for cheap acquisitions may be running out.”

     As the owner of undeveloped deposits and a processing mill in Canada’s uranium-rich Athabasca Basin, Denison is a prime takeover candidate, according to Dundee Securities Ltd. Fission, which has signed non-disclosure agreements with potential buyers, has a promising discovery in that area and will probably be acquired within two years, Raymond James Financial Inc. said.

Bids for the two would mark a turning point after last year’s

$2.3 billion of uranium deals was the lowest since 2008, data compiled by Bloomberg show.

David Fuller's view

The entire mining sector is back in play.  It is a classic, highly cyclical recovery candidate at the latter stages of global bull markets.  Investors buy the miners and metals because they are cheap relative to everything else, not least those vertigo inducing trendy tech favourites.  There is some fundamental justification for buying the miners because oversupply has been curbed by declining production and producers have cut costs.  Some takeovers will also occur because the strong can buyout the weak… cheaply.   

The first three years after Fukushima were very discouraging for investors who saw their highflying uranium shares smashed by that disaster.  However, charts for the World Uranium Total Return Index and the Uranium 3rd month NYME price show clear evidence of base formation development, although upside breakouts have yet to occur.  

Therefore, the article above may be somewhat ahead of the game.  Japan’s much discussed partial nuclear restart is necessary and probably inevitable, but it is also a delicate subject for Shinzo Abe.  He wants to take the public with him but that is certainly not the case at the moment.  Even if some restarts commence this year, they will be gradual.

Nevertheless, the next three years, commencing with 2014, should see a partial recovery in both uranium and the shares which mine it.  They can reward patient investors.  However, the sector’s recovery is only as secure as the old nuclear reactors that are still operating.  Another serious meltdown would knock back a nuclear recovery for a few more years.  Those old reactors really should be replaced or at least modernised where possible.   

 In the interests of disclosure, both Dennison and Cameco mentioned in the article above are in my personal long-term investment portfolio.

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