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When speculative bulls collide with speculative bears, investors stand a good chance of getting crushed.
I think that's what's happening in the market for uranium stocks right now. On the hype, a big uranium stock such as Cameco (CCJ, news, msgs) soared 38% from Dec. 29 to June 15, and a more-speculative uranium miner such as First Uranium (FURAF, news, msgs) rocketed ahead by 81% from Jan. 10, its first day of trading, to May 22.
But recently, the bears have counterattacked. As of Aug. 15, Cameco had fallen 33% from its high, and First Uranium had fallen 34%.
I like to stand back in a battle like this to avoid being painfully trampled by one side or the other. And then when both are exhausted, I like to step in and buy on the fundamentals, maybe even at a bargain price. I think we'll get the opportunity to do that in uranium stocks later this year.
In the meantime, we've got some time to brush up on the fundamentals of the case.
Why nuclear is coming back
The bulls began running with what's being called the renaissance of nuclear power. Because of soaring prices for fossil fuels and calls for an immediate reduction in carbon emissions to fight global warming, the world is building nuclear power plants again:- In August 2005, Finland began construction on the first nuclear plant to be built in Europe since 1991.
- China has started construction on four nuclear plants, begun planning on 23 others and announced proposals for 54 more.
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- Globally, as of May 2007, 30 nuclear plants are under construction, an additional 70 are planned and 150 more are proposed.
- Even the United States is edging into the game. The Nuclear Regulatory Commission has granted two early site permits to U.S. utilities, and it looks like the Tennessee Valley Authority will complete its Watts Bar Unit 2, which was 80% finished when construction was halted in 1985, and become the first to bring new nuclear generating capacity on line in the United States.
Uranium bulls said, "Do the math." The world's 437 nuclear power reactors use about 67,000 metric tons of uranium each year. Uranium mines produced only 42,000 metric tons of uranium in 2005, with the rest of global demand being met from utility stockpiles or from decommissioned nuclear weapons.
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Jubak's Journal: Mining a bonusThere's almost no such thing as a pure mineral play, MSN Money's Jim Jubak says, and investors should keep that in mind when looking at mining stocks. One example: A company that primarily mines uranium may also unearth gold, which could add value when uranium prices fall.
Add the 30 plants under construction to the total, a 7% increase, immediately, and then add 220 not too far down the road, for a total increase of 250 reactors, or 57%, and even with the increased fuel efficiency of new reactors, you're looking at a huge shortfall in uranium production.
The shortfall gets even bigger when you take into account the projected decline in the amount of uranium available from decommissioned nuclear weapons over the next 20 years.
Frustration in Finland
No wonder that the price of uranium for immediate delivery -- the spot price -- had doubled in the 12 months that ended in July 2006 and doubled again, to $136 a pound, by late June 2007.Or that uranium stock prices soared with it.
And then the bears bit back. Using, specifically, the horror stories surrounding the construction of the Olkiluoto 3 reactor in Finland, the very reactor that started the bulls running when it was first announced.
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