How uranium stocks could make you rich

If the uranium price doubles, these 6 companies could see their share prices rebound strongly.

| More on:

The prolonged drop in uranium prices to around 40 US dollars per pound has contrarian investors salivating. They argue that the price for the radioactive fuel will rebound to around $80 per pound. If this scenario does play out, pure-play uranium company Paladin Energy Ltd (ASX: PDN) is sure to see its share price recover (it’s down almost 90% in the last five years). Investors who want exposure to the uranium price without exposure to a speculative company can invest in mega-miners Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP), who are likely to be able to afford the considerable development and clean-up costs of uranium mines.

But punters willing to risk it all to make massive returns have a vast array of hopeful resource companies with exposure to uranium prices, including (but not limited to) Deep Yellow Limited (ASX: DYL),  Energy Resources of Australia (ASX: ERA)Toro Energy Limited (ASX: TOE)Rum Jungle Resources Ltd (ASX: RUM), and Summit Resources Ltd (Australia) (ASX: SMM). If the uranium price doubles, these companies (as a group) will see their share prices soar. Indeed, Perth Now reports that: “Uranium industry legend Alan Eggers says mining companies should prepare for a rebound in uranium prices by 2014 when there will be a massive global demand for nuclear power.” Sounds like a sure thing! Here I am, worrying about long-term business prospects while the savvy traders are loading up on uranium stocks.

However, the uranium play makes one big assumption: that demand for uranium is growing or remaining constant. Fortunately, that is not necessarily the case. For example, Germany is closing down its nuclear reactors, with giant utility E.On recently reported to be interested in closing down reactors ahead of schedule. There was a catastrophic nuclear accident at Fukushima, Japan a few years ago, and that has lead the Japanese to cool some of their enthusiasm for nuclear power.

Will the demise of coal save uranium investors? Dick Warburton made the case (in a 2011 article for the conservative Quadrant magazine) that: “The only current viable alternative to burning fossil fuels is to go nuclear.” However he also wrote that: “Energy demand is “pretty inelastic” because people will not choose other goods or services to substitute for energy that keeps them warm or cool, cooks their food and provides transportation.”

This could not be further from the truth, of course. Not only is energy demand very elastic (it is constantly changing) the general trend is that demand is dropping as power use becomes more efficient (think insulation) and negative load is added to the grid (think rooftop solar). However, while energy demand peaks are reducing, there is significant seasonal variation, as well as significant variation within each day. In no way is electricity demand inelastic – although nuclear power generation certainly is! Even coal powered plants can power up and down more easily, and they’re far better for the environment (CO2 is nowhere near as dangerous as radioactive waste – and uranium mines are far more toxic to workers and nearby towns than coal mines are.)

Is nuclear power driven by good economics?

The graph below depicts the cost of power generated from a variety of power plants that have been recently built or (in the case of the nuclear plant) will be built in the future. As you can see, nuclear is the costly option. It would be far cheaper and more flexible to build renewable energy generation in most markets, as long as there is adequate natural gas back-up capacity (which there often is). I believe nuclear plants will continue to be built (from time to time) because some governments want to maintain nuclear expertise in order to remain capable of producing nuclear weapons. However, it certainly cannot be said that nuclear power is the frontrunner to replace coal.

Source: German Study Published 2014
Source: German Study Published 2014

Foolish takeaway

So how can you make money from speculative uranium stocks? Simple: by selling the shares at a profit if the uranium price goes up. However, except for BHP and Rio, none of the companies mentioned in this article are profitable, and buying shares is a risky gamble. I doubt that current shareholders in those companies intend to hold their shares until they receive a dividend. In fact, most investors in these companies are waiting for a “greater fool” to come along and buy them out for a higher price. Long-term value investors would never invest in such a risky proposition: there are plenty of profitable and less risky resource companies available on the ASX.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

The share price of ASX infant products retailer Baby Bunting Group Ltd (ASX:BBN) has been a solid performer so far …

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

A new landmark report by the Intergovernmental Panel on Climate Change (IPCC) was released earlier this week. It provided a …

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest …

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos Limited (ASX: AMS) share price has been on a tear this past week, rising 15% on the back …

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

Online furniture retailer Temple & Webster Group Ltd (ASX: TPW) had a breakout year in 2020, moving from relative obscurity …

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

Shares in ASX healthcare company Polynovo Limited (ASX: PNV) almost doubled in price last year. And, despite a shaky start …

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

Investing in other geographic markets has become a popular way to diversify a portfolio. The risks associated with being exposed …

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

Despite the News Corporation (ASX: NWS) share price getting a 31% bump between November last year and today, News Corp …

Read more »