Sprott Global Resource Investments

Sprott's Thoughts

Henry Bonner

Are Uranium Stocks Being Unfairly Punished?

Uranium stocks are becoming collateral damage in the sell-off in oil over the last couple of months. Since mid-July, oil is down around 20% from $102 per barrel to $83 as of October 201. This has also become a problem for many uranium stocks. Uranium Energy Corp. is down around 27% in the three months ending October 20,2 Fission Uranium Corp. has lost over 30%,3 and big uranium producer Cameco Corp. is off 20% in the same time frame.4

‘I guess the market thinks you can put oil in a nuclear reactor,’ said Steve Todoruk, who joined Sprott Global Resource Investments Ltd. in 2003.

I protested: ‘couldn’t cheap oil reduce demand for nuclear power?’

Steve explains why he doesn’t think that’s the real explanation:

During the first seven months of the year, oil stocks were the darlings of the market, and many investors were recognizing significant gains on their oil positions.

During most of that time, uranium prices continued to fall, eventually bottoming out at $28 per pound5, and uranium stocks were generally hated.

Right around the time that oil prices started falling, uranium spot prices started to rise.  Usually, resource stocks rise in tandem with their underlying commodity, sometimes more rapidly due to their leverage to the commodity’s price.

So why did uranium stocks take a dive along with oil, when the price of uranium itself rose?

What appears to have happened is that investors dumped their energy stocks in an effort to lock in their oil stock gains when oil prices began to fall. Uranium stocks were simply caught in the sell-off.

The demand for uranium is in fact well-insulated from the price of other power sources, at least in the near and medium term.

You can’t re-fit a uranium power plant to use oil. The price of oil would have to remain low for so long that existing reactors could be taken off-line and new oil-fueled plants could be built to replace them. Because the cost of uranium is very low relative to the cost of building the plants, it’s unlikely that existing plants would simply be switched off.

In the long term, I don’t think that oil will remain so cheap that it will make sense to replace nuclear power with oil-generated power.

This irrational selling in the uranium stocks has created, in my opinion, a buying opportunity.

When oil prices level out and the panic selling has subsided, I suspect that value investors will notice that uranium stocks are oversold and undervalued, possibly buying into them and driving them back up to where they were trading prior to when oil began its decent.

I’m not expecting to see uranium stocks lift off and go to much higher share prices immediately, because I still believe that the cyclical upturn in uranium prices will be a long, slow process. Still, a reversal back to the share prices we saw earlier this year in uranium stocks may offer attractive short-term gains.

If you would like Steve to review your junior mining portfolio, please call him at 1.800.477.7853 or e-mail him at stodoruk@sprottglobal.com.

Steve sees a long-term opportunity in mining and exploration stocks that resembles what we saw in the bear market of the late 1990’s. In 1997, the Wall Street Journal6 reported that:

“Gold companies are hunkering down, struggling to weather one of the most prolonged slumps in gold prices in years.

“Mining companies are slashing costs and tearing up plans for new mines as the price of the precious metal slides to three-year lows.”

Sound familiar? Read more from Steve and from Rick Rule on why today’s market looks a lot like the last great bear market for resources in the late 90’s.

Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive.

Companies discussed above are used for examples only and do not constitute an endorsement or recommendation.  If you would like more information, please contact a Sprott Global Resource Investments Ltd. broker.

1, 2, 3, 4 Bloomberg online stock charts

5 Bloomberg online: Uranium Enters Bull Market Amid Russian Sanctions, Strike. September 16, 2014

6 The Wall Street Journal: Mining Firms Losing Weight In Gold. April 13, 1997.

 

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

Subscribe to Sprott's Thoughts

First Name  
Last Name  
Email Address     
Country  
I am:

 
RECENT ARTICLES

The page you are about to view is not affiliated with Sprott Global Resource Investments Ltd. or any of its related companies.

Investors should carefully consider the investment objectives, risks, time horizon and liquidity needs before making an investment. Past performance is no guarantee of future returns.

Continue