Throughout China, more than two dozen nuclear plants are being built at a furious pace. To help fuel all those plants, China recently signed a new contract with U.S.-based Cameco (CCJ), the world's largest publicly-traded producer of uranium. The contract, like everything in China, is on a grand scale.
China anticipates buying 5,000 tons of uranium this year. That's twice as much as it consumes annually. Yet looked at another way, it's the amount that China will eventually consume every year once these plants come on line. So this is no one-time deal. China's state-owned China National Nuclear Corporation (CNNC) signed a deal with Cameco in late June to buy 23 million pounds of uranium by 2020.
And all that buying should start to have an impact on uranium prices. The radioactive material sold for roughly $55 a year ago, but has recently slumped to $41, according to UX Consulting. But analysts at RBCCapital Markets think we're heading back to those 2009 prices. And down the road, uranium may fetch more than $100 a pound, as it did in 2007.
And investors are finally starting to re-focus on this commodity: shares of Cameco, which bottomed out on July 2, have since been slowly rising and were up +4.4% today at $23.85 per share.
Yet shares remain more than -60% below 2007 levels. What would it take to get the stock back up toward those past highs? An increasing perception that demand for uranium will eventually overtake supply. Back in 2007, in the face of rising demand, too many new mines were opened, creating a glut. It will take a year or two to eliminate that glut, but it appears the necessary supply and demand trends have finally started to move in that direction.
Action to Take --> Shares of Cameco appear to have +20% to +30% upside if uranium prices move back into the $50s. Shares could double if uranium prices start to cross the $100 threshold. (Prices briefly touched $136 in 2007). Investors may also want to check out smaller producers such as Uranium Energy Corp. (UEC), which owns several mines in the Western United States.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two decades. Most recently, he served as Managing Editor of RealMoney.com, the premium website of TheStreet.com. David has made numerous media appearances over the years, primarily on CNBC and Bloomberg TV, and has a master's degree in management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.