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The Uranium Merger Mania Pending
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The Stealth Rally in Mining Mergers
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The Paradigm Shift of Sky-High Oil
The Uranium Merger Mania Pending
By George Bell
With Uranium Resources plunging over 80% in 2008, the company's $7 billion worth of uranium is now in high demand for nuclear energy value hunters. The whole industry could begin to see a significant wave of mergers too.
On Tuesday, shares of Uranium Resources (Nasdaq: URRE) hit a 52-week low of $2.19, after investors seemingly dumped the stock throughout 2008 on uncertain future prices for uranium prices. However, as Wall Street noticed the company’s proven 100 million pounds of uranium oxide (U3O8) reserves are more than that of any other U.S. competitor, the stock began to see volume…and rumors of a potential acquisition from Canadian uranium producers like Cameco (NYSE: CCJ). While there absolutely no certainty that Cameco will make a bid for the company, there are a few notable points to take notice of here.
First, while the price of uranium has been falling over the past year (as noted in the price chart showing a steep decline, since the early summer of 2007) supply statistics within the industry are actually pointing towards higher prices ahead.
Second, with the buzz surrounding Uranium Resources, the event may actually kick off a larger sector wide merger/acquisition era of "rollup."
Point #1: Supply Constrained
Looking forward, supply within uranium markets will likely be constrained until 2010, or later. At the end of the day, global supply for uranium in 2007 was about 107 million pounds, roughly about what the world's nuclear reactors consume in one year. However, in 2008, total production should barely top about 114 million pounds, with another 33 million pounds coming from secondary (above ground sources). However, according to a 2007 Goldman Sachs JBWere Uranium Market Outlook, the supply from secondary sources is expected to start waning in 2009. It will be up to producers and mining exploration companies to step up the pace to meet the increasing demand for nuclear fuel from the entire world.
According to the World Nuclear Association -- as of September 1, 2008 -- there are 439 nuclear reactors operating in the world right now, with another 36 under construction, 97 on order and 221 more proposed. It could take up to two to three decades for all of the reactors above to come online; however, if all of those under construction, ordered and proposed do become a reality, the situation would require 64,615 million tons of uranium a year to operate, or 142 million pounds. What we're talking about is an almost 25% needed increase in production to meet future demand. Clearly the recent decline in uranium prices has more to do with the average investing public not understanding the reality of the situation at hand, than any true fundamentals from within the uranium mining industry.
Point #2: Uranium Sector Rollup Ahead
Here's where the story gets interesting, at present prices, Uranium Resources' proven reserves are worth about $7 billion, while the stock was trading with a market cap of $178 million, as of close of trading on Wednesday. Obviously, the market completely forgot about fundamentals when it discarded the stock throughout 2008. Really though, that's been the case for many uranium stocks throughout the year. To reiterate the same point from the previous paragraph, Wall Street simply doesn't understand the sector, while the general public is simply "spooked" by the larger nuclear power paradigm.
Funny thing though, even the founder of Greenpeace, Patrick Moore, supports nuclear power, as witnessed in his 2006 Washington Post article titled, "Going Nuclear." In the article, Moore stated, "Thirty years on, my views have changed, and the rest of the environmental movement needs to update its views, too, because nuclear energy may just be the energy source that can save our planet from another possible disaster: catastrophic climate change.
Look at it this way: More than 600 coal-fired electric plants in the United States produce 36 percent of U.S. emissions -- or nearly 10 percent of global emissions -- of CO2, the primary greenhouse gas responsible for climate change. Nuclear energy is the only large-scale, cost-effective energy source that can reduce these emissions while continuing to satisfy a growing demand for power. And these days it can do so safely."
With the Uranium Resources story though, Wall Street and the general public may finally get the nudge needed to realize just how much of a better alternative energy source (carbon free too!) nuclear is to dirty coal.
At the same time, because of the complete apathy to uranium-related stocks that the market has shown over the past year, investors could begin to see a torrid rollup within the industry, as larger energy players scramble to snap up present undervalued, cheap mining and exploration stocks.
Really then, savvy investors who understand that the Uranium Resources news is really a looking glass into a larger -- and potentially greater -- opportunity, they will also know that brilliant prospects are truly abundant throughout the entire sector in the current market.
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