Are long-unloved commodities going to find a new lease on life in 2017? Recently interviewed by Investor’s Digest of Canada, analyst Chris Marchese certainly feels that way about uranium. He also is bullish on other base metals—particularly zinc—based on U.S. President Donald Trump’s stimulus plans.
After years in the doldrums, uranium and uranium mines seem ready to explode (not literally, of course) anew, says Chris Marchese, senior equity and economic analyst for The Morgan Report, a popular U.S. investing service. “Uranium has a lot going for it,” he says. “The cure for low prices is low prices, and the prices have been low for a while now.”
Last fall, the commodity hit lows of about US$18 per pound. Since then, the spot price has gone up to around US$23 a pound. “The incentivized [sic] price is US$50 a pound for when companies want to start up projects,” notes Mr. Marchese. In the meantime, however, the fundamentals for the uranium market are good.
Demand for uranium to power nuclear reactors in Japan, China, and the United States is expected to rise.
Saskatoon-based Cameco Corporation (TSX—CCO; NYSE—CCJ) is the world’s largest publicly-traded uranium company. (Uranium does not trade on an open market like other commodities. Buyers and sellers negotiate contracts privately.)
Meanwhile, Kazakhstan, the world’s largest uranium producer, has decided to cut production by five per cent, Mr. Marchese points out.
Near-term uranium demand depends on Japan
The analyst asserts that the major catalyst for uranium in the short term is the Japanese reactivation of nuclear reactors, which were shut down after the Fukushima Daiichi incident of 2011. “(The moratorium) could continue longer and the price of uranium could probably stay down another year . . . if this doesn’t happen.”
[Ed. Note: Tokyo Electric Power Company (Tepco) recently tried to terminate a contract with Cameco Corp. citing a ‘force majeure’ (or an act of God). Cameco will contest the attempt at cancellation as being without merit.]
China is also pursuing widespread adoption of nuclear energy. It has already secured many contracts with large uranium producers and continues to build more reactors.
And U.S. President Donald Trump has expressed support for nuclear power as well. Even before his term began, Mr. Marchese says, “we had our first reactor come online in the U.S. last year, the first one in quite a few years”.
Bullish on zinc; bearish on copper
Examining the potential effects of the new administration more generally, the analyst predicts that inflation will ramp up as the president unveils and initiates specific stimulus policies and spending. “The things he’s talking about will basically create helicopter money,” says the analyst, referring to the concept of distributing money randomly to consumers to encourage spending.
Similarly, the U.S. Federal Reserve’s planned interest rate hikes should bolster inflation, although he predicts that the benchmark rate is unlikely to rise above 1.5 per cent to two per cent by 2019. “Things are still very fragile, I mean, the economy’s not looking great,” he says.
Inflation resulting from President Trump’s stimulus plans bodes well for short-term base metals prices. The analyst is particularly bullish on zinc because supply is already limited and many mines are dying out. By contrast, copper “probably has the worst outlook of all the base metals” because several massive mines will begin production between 2018 and 2020, and many smaller projects are in the works.
This is an edited version of an article that was originally published for subscribers in the February 10, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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