From the February 01, 2011 issue of Futures Magazine • Subscribe!

Using uranium stocks to exploit the metal

Getting in

With the futures market currently illiquid, options non-existent and the spot market out of reach, there is another way to get exposure to uranium: nuclear industry companies and their stocks.

One company that has close ties to the uranium market is Cameco (CCJ). CCJ (market cap $15.9 billion) is a top uranium producer with roughly 16% of the world’s production from its mine in North America (see "Uranium players"). The company has 480 million pounds of proven and probable reserves and extensive resources.

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CCJ has a memorandum of understanding to pursue a long-term uranium deal with China’s Guang-Dong Nuclear Power Holding Company. There also is the potential of joint development opportunities. This is a utility that currently is managing one of the largest reactor construction programs in the world.

Although there are risks in investing in all stocks, CCJ is a relatively conservative bet. There are more speculative alternatives. The small micro-cap uranium stocks likely would experience stronger upside in the case of a surge in the market.Here is a roundup.

Strathmore Minerals: Strathmore Minerals (STM on TSX Venture Exchange; market cap $107 million) is a consulting client of Blue Phoenix Inc. Additionally, STM recently was listed on the OTCQX under STHJF. STM operates in Wyoming, the largest U.S. state for uranium production. At its Gas Hills property, STM has advanced efforts with a 100-hole development drill program supported by a uranium exploration data library acquired from CCJ (STM’s acreage is close to uranium giant AREVA’s Lucky Property).

Japan’s Sumitomo Corp. is a 40% partner in STM’s Roca Honda mine in the Grants Mineral District of New Mexico. That Sumitomo has retained its alliance with STM amid its well-publicized FOCUS ‘10 initiative during which it has re-committed itself to core fundamentals should give investors confidence that this is a long-term growth relationship. Perhaps the company agrees. In September, STM put in place a 12-month, 4.39 million share buyback program.

STM has an experienced management team in place with former ties to AREVA, as well as the International Atomic Energy Agency (IAEA). That STM is a name to watch is amplified by STM’s Roca Honda project having higher grade uranium, and possibly could be larger, than URI’s Church Rock, Uranerz’s Nichols Ranch and UR Energy’s Lost Creek projects combined. However, STM’s market cap is the lowest in the group.

USEC Inc: USEC Inc. (USU; market cap $675 million) received a cash infusion of $75 million from Babcock & Wilcox and Toshiba, which owns Westinghouse Nuclear. Babcock & Wilcox and Toshiba, relatively new board members of USU, agreed to purchase $50 million in convertible preferred shares in USU if the company can secure a loan guarantee promise from the Energy Department and another $75 million if USU can actually close the loan guarantee, a figure which would be for $2 billion.

Uranerz Energy Corp.: In late August 2010, Uranerz Energy Corp. (URZ; market cap $233 million) saw its board of directors implement a share rights plan set at $8.75 to protect its shareholders from what it believes would be any unfair takeover attempt.

Uranium Energy Corp.: Uranium Energy Corp. (UEC; market cap $417 million), a company with no debt, announced its first qualified resource at Palangana in South Texas Fall (2010) with deliveries expected in early November. UEC is close to major near-term uranium output. Shares of UEC are held 11.2% short.

Ur-Energy: Ur-Energy (URG; market cap $288 million) is completing permitting activities to bring its 2 million pound Lost Creek, Wyo. uranium deposit to production in early 2011. URG, which has more than 65,000 acres in mining-friendly Wyoming, has no debt and more than $30 million in cash. URG should be able to produce more than 1 million pounds of uranium per year once production begins for a minimum of 6.5 years. The company uses In-Situ Recovery (ISR) mining, which is cost effective and has a low environmental impact.

Paladin Energy: Paladin Energy (PALAF on OTCBB; PDN on TSX) has uranium projects currently in Australia and two operating mines in Africa. The company is ramping up production at its flagship Namibia project from 3.7 million pounds to 10 million pounds by 2014. The Kayelekera Mine in Malawi is producing 3.3 million pounds of uranium. There are some concerns about the safety of investing in areas that could see some nationalization of certain mining assets. Additionally, Paladin Energy is in the process of acquiring all the uranium assets from Frontier Gold (FRG; market cap $1.76 billion). Assets include Frontier Gold’s 100% owned interest in Aurora, located in Labrador, Canada. Aurora may be able to produce 5.7 million pounds of uranium per year.

Denison Mines: Denison Mines (DNN; market cap $1.248 billion) produced 1.4 million pounds of uranium and was slated to ramp up production to 1.6 million pounds at the end of 2010. Its goal is to boost that figure to 10 million pounds over the next five years. DNN is debt free and one of the more diversified names in the industry in terms of projects and geography (Canada, Mongolia, Zambia and three locations in the United States). In Canada, DNN operates the Wheeler River project (DNN owns 60%, CCJ owns 30% and JCU owns 10%).

Uranium Resources: Uranium Resources (URRE; market cap $316 million) recently was given the green light to move forward with development of its Churchrock/Crown Point project in New Mexico after years of delay.

In addition, those who would prefer exposure via a fund may consider PowerShares Global Nuclear Energy (PKN), the Market Vectors Nuclear Energy (NLR), Barclays iShares Global Nuclear Energy (NUCL) or Global X Uranium ETF (URA).

The longevity of uranium is more appealing vs. gas and coal finds. The need of major reactor turnarounds over the next 20 years is real and will no doubt outpace supplies. This suggests that going nuclear will be a popular future investing hot topic that smart investors should prepare for today.

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