Small Cap Uranium E & P Stocks

The move up in uranium stocks can make the average investor fell like he has missed the boat with respect to buying into this market. For example, stock A has a good earnings release and then sees a pop of say 12%. Your average investor sees this move and buys the stock. This average investor does not know that he or she has bought the stock at a very expensive number and wakes up to see that the stock has pulled back 5% in the open the next day. This usually what leads to the buy and hold philosophy. It is not that the person doesnt want to trade, but does not understand the principles involved and when to sell, not just when to buy. Uranium exploration and production companies have seen a rather large move recently. It is very possible that this run could be long and very abrupt as the rally seen in 2006 and 2007. Although nothing is concrete, but there may be reasons to buy here. First and foremost is the runup in uranium prices over the past couple of months. The runup is also bolstered by China possibly increasing nuclear power plants much more than thought. Uranium is generally sold under long term contracts (to see an example of this, check CCJ Cameco website for info on their legacy contracts). Any noncontracted uranium is sold via the spot market. This spot market has to do with supply and demand and most of the smaller companies will sell all of the uranium at the spot price, depending on the current bid (what someone will pay) of the country/electricity producer. Uranium is very interesting as most of the money used to produce electricity is building the nuclear reactor. Not only are these expensive, but there is no way going back as they cannot be converted to a coal fired or natural gas plant. Once the plant is built, the uranium is very cheap with respect to the amount of energy it produces. Right now the spot price is about $75 a pound, give or take a little. It is guessed that the market could easily absorb a price increase to $300 without causing a major problem for nuclear power. One thing to remember is that it is also very difficult for a company to start mining as it is a different process than say mining copper. Uranium is found all over the world. Canada and Australia have very large amounts, but many places not only are hard to mine or impossible (Australia has strict rules on this and has even outlawed it), but formations are very dense and not very easy to find, kind of a needle in a hay stack. The example copper, will usally be in an area for miles, so if the center of the formation is missed you can still mine it. Uranium is over a smaller area, so if the miner misses the center, he may miss it all together and be out the money it took to dig the mine. Secondly, it is radioactive, and there are very strict rules with respect to mining it. The training is very specific and the mines are generally placed in very cold temperatures to mine it. Also, no one wants a mine in their backyard, so getting the permits to dig could be impossible. Could you imagine a uranium mine just south of Los Angeles?
All said, there are quite a few smaller upstarts to consider. The first is a company I own. DNN has a market cap of around $1 billion. This company is fairly large, but is much smaller than CCJ. DNN has sizeable uranium mines and positions and is much larger than some of the others on this list. URZ, URRE, URG, and UEC are from $200 million to a half billion in size. URRE has had the largest run, and that has been about 300% over the last month. The other companies are up 100% to 200% within that time frame. USU is the last company which I also own. It doesnt mine uranium, but breaks down nuclear weapons from the cold war era between Russia and the US. They convert this and also can convert tails already used in power plants. If one is risk averse I would tell them to go with CCJ, or even move into SHAW. SHAW builds the nuclear power plants and is currently building quite a few in China. Long term any of these stocks are good. The current environment in the US leads to the belief that there may be some inflation around the corner. Huge amounts of liquity from QE 1 and 2, plus very low interest rates could push all commodities higher. Remember if you drop it on your foot and it hurts, it is probably something you should invest in. I own USU, DNN, UEC.