Disruptive Discoveries Journal

Profit Taking in Uranium

Chris Berry

By Chris Berry

 

There's no denying it - uranium companies are off to a solid start in 2014. An equally weighted basket of uranium names I am tracking is up over 22% YTD easily outpacing the TSX and TSXV indices which are up 4.82% and 9.36% respectively. Consolidation continues apace with the most recent example being the proposed Denison Mines (DNN:NYSE, DML:TSX) take out of International Enexco (IEC:TSXV, IEXCF:OTCBB) for its share of the Mann Lake Deposit in the Athabasca Basin. Exploration success is also evident with Fission Uranium's (FCU:TSXV, FCUUF:OTCBB) continued impressive off scale results at its Patterson Lake South property.

For all the positives, the spot price of U3O8 still hasn't "turned". In fact, the price seems relatively directionless. I have written before that the reasons for the stalled uranium renaissance include the delay of the Japanese reactor re-starts as well as other lesser-known factors like the U.S. Department of Energy slowly releasing its stockpile of uranium into the US domestic market, keeping a lid on prices.

This lack of a turn has only been reinforced when you consider that the recent spot price of U3O8 has now fallen to $34.63 per pound well below the price necessary to incentivize further exploration or project expansion.

Source: ICAP

Source: ICAP

It's for all of these reasons that I continue to believe the next bull run for uranium won't occur until 2016. There are, in addition to the factors mentioned above, several reasons to be cautious not just with uranium, but with the entire junior sector overall.

 

Nervous Market

The global macroeconomic picture remains mixed at best. Emerging and developing economies are slowing and sluggish growth in the Developed world has combined to paint a picture of a directionless growth profile predisposed to disinflationary tendencies. Copper, arguably one of the best bellwethers of global economic health, has fallen below the psychologically important $3.00 per pound level in the wake of a rapidly slowing China and unwinding of financing deals where copper has been used as collateral.

US Federal Reserve Chairwoman Janet Yellen's first press conference last week helped to sow further uncertainty into the mix as several methods the Fed was using to jawbone the markets including a 6.5% unemployment rate threshold and forward guidance were called into question. Tapering of asset purchases continues unabated and many market participants do not believe that the US economy is healthy enough to stand on its own. We shall see. It is the Fed's inability to come close to its 2% inflation target and this overall confusion is a reason that has sent bond yields higher.

In light of this uncertainty (and in line with our stated goal of more aggressive trading in 2014), profit taking in sectors which have shown substantial gains year to date is called for. This includes uranium. I still believe that uranium's best days are ahead of it as the fundamental investment proposition is intact. However, locking in a portion of gains and instituting stop loss orders is a tactic I am employing to protect against the increased volatility across markets globally.

One of my mentors in the investment business once told me, "You can make a lot of money by selling too soon." It may be that I'm being too cautious at this stage of the investment cycle with uranium and could be leaving some gains on the table. That said I think the uncertainty which pervades the markets has some participants with their finger on the trigger and I would rather maintain liquidity to take advantage of opportunities as they arise. I wrote in a note earlier this month that I would take a portion of profits in my position in Uranerz (URZ:NYSE, URZ:TSX). I intend to implement a stop loss at $1.60 as protection 24 hours after dissemination of this note. To be clear, there is nothing wrong here - I just want to lock in gains while I can.

 

Focus on Low Cost Producers

I still believe that low cost near-term producers are your best bet vis-à-vis uranium "investments" and higher cost, but exciting stories in the Athabasca are better "trade" ideas. My thinking here hasn't changed and I own both types of stories in my personal portfolio. The reason for this note is to make sure you protect your gains in a shaky and uncertain market predisposed to a risk off mentality.   

 

 

 

 

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