Last year, sentiment on First Solar, Inc. (NASDAQ:FSLR), and solar stocks in general was awful. In looking at analyst reports from the first half of 2012, there were several with price targets of $12-$18 per share.
Here are some of the reasons given for the company’s anticipated demise….
A natural gas price under $2 per mcf (one thousand cubic feet) early last year was to be the death of solar. Conventional wisdom said that natural gas prices would remain quite low for an extended period.
Fast forward a year, natural gas is above $4 per mcf and some think it will hit $5 per mcf this summer. Other factors weighing heavily on the solar story included too much industry capacity, lack of pricing power and possible curtailment of subsidies.
The surprise reversal in sentiment and in the stock price of First Solar, Inc. (NASDAQ:FSLR) suggests that other out of favor sectors and companies could be poised for a similar re-rating.
Investor Sentiment Can Change Fairly Rapidly
Could sentiment change so profoundly that the stocks of uranium companies like Cameco Corporation (USA) (NYSE:CCJ), Denison Mines Corp (NYSEMKT:DNN), Uranium Energy and Energy Fuels could double, or dare I say, triple?
Yes, it’s certainly possible. Separate and distinct from the stock market recovery after the great recession of 2008-9, uranium stocks have had two explosive rallies. Energy Fuels traded from $0.14 per share in July 2010 to $1.58 in February, 2011. Paladin Energy spiked from $1.60 per share in September, 2006 to over $9 in April, 2007. These examples are by no means isolated events.
For uranium stocks to stage another big rally, underlying uranium prices need to move higher. Frequently, uranium prices move in lockstep with oil and natural gas prices. However, with the Japanese nuclear fleet offline and several countries wavering on nuclear power in the wake of Fukushima, uranium prices have been stuck at depressed levels.
A big move in uranium prices is highly likely
A 100% increase in the spot uranium price would put it about 10% above where it was just before the Fukushima accident in March, 2011. Hardly an aggressive assumption. In fact, there are several bullish factors that suggest a move of this magnitude is not only possible, but likely.
At today’s depressed uranium prices, several mega-projects are on indefinite standby. Most of the largest uranium producers in the world, including Cameco Corporation (USA) (NYSE:CCJ), Rio Tinto plc (ADR) (NYSE:RIO) , Areva and Palladin, have stated that long-term uranium prices of $70-$90 per pound is required for their projects to be brought online. The current long-term price is $57 per pound. In the weeks before Fukushima, the long-term price was $73 per pound.
Existing large projects have been put on standby. Both Areva and Rio Tinto plc (ADR) (NYSE:RIO) have curtailed production in Africa. Rio Tinto plc (ADR) (NYSE:RIO)’s giant Rossing mine in Namibia is not economic at current prices. Rössing is the world’s longest-running open pit uranium mine. Operating since 1976, Rössing has produced the most uranium of any single mine.
The coming uranium stock bull market
Lately, sell-side analysts, investment newsletter writers and industry consultants are coming to the same conclusion. I’m highly confident that the long-term uranium price will rebound to above $70 per pound. It could happen in six months or in two years. Importantly though, uranium stocks will start to move long before the long-term price reaches $70.
Massive supply/demand imbalance for uranium in the U.S.
“Security of Supply,” these are not just words when it comes to uranium. Global geopolitics mean that uranium supply could literally be fought over in coming years. Casey Research believes that Russia is making an aggressive grab for as much uranium production, processing and enriching business that it can.
The U.S. is highly vulnerable to uranium supply disruptions from Russia and Kazakhstan. That’s a fact, not an opinion. Very few realize that Kazakhstan is by far the largest producer of uranium. It should come as no surprise that Putin’s Russia has A LOT of influence in Kazakhstan!
The U.S. consumes between 50-55 million pounds of uranium in its 104 nuclear reactors, yet produces only 4 million lbs. The U.S. is far LESS energy independent in uranium than it is in oil. Denison Mines Corp (NYSEMKT:DNN) and Cameco are just two examples of pure-play uranium companies that stand to benefit in coming years.
Denison Mines Corp (USA) (NYSEMKT:DNN) is an emerging star in Canada. Having sold its U.S. assets to Energy Fuels, Denison is the top exploration play in and around the Athabasca region. The Company is frequently mentioned as a takeout target with Rio Tinto plc (ADR) (NYSE:RIO), Areva and Cameco Corporation (USA) (NYSE:CCJ) cited as likely suitors. Denison recently finalized the acquisition Fission Energy Corp. The company now has a range of early-stage to later-stage exploration / development projects. The Athabasca region has the highest grade uranium ores in the world.
Cameco Corporation (USA) (NYSE:CCJ), Cameco is a world leader in low-cost uranium production. Its operations provide about 14% of world mine production and it has approximately 465 million pounds of proven and probable reserves and extensive mineral resources. Cameco is the largest U.S. producer with in-situ recovery operations in Wyoming and Nebraska. The company also has operations In Kazakhstan.
Conclusion
Investors hate a sector one month and love it the next. Just like with First Solar, Inc. (NASDAQ:FSLR), sentiment could change substantially within a relatively short period of time. Uranium stocks remain out of favor, but for how much longer? I don’t know. However, if uranium prices start to move higher, uranium stocks like Denison Mines Corp (USA) (NYSEMKT:DNN) and Cameco could move sooner rather than later.
The article First Solar Up Over 300%, Will Uranium Stocks Follow? originally appeared on Fool.com.
Peter Epstein has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Peter is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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