Uranium stocks are soaring. Here's why and what's next

Uranium stocks have come roaring back to life as prices for the commodity hit US$70/lb in September, the highest level since the Fukushima disaster in 2011.

Uranium officially entered into a bull market (well at least the textbook definition of a bull market) earlier this month after rallying to US$60/lb from US$50/lb at the beginning of the year.

The revival has been more than a decade in the making, after the Fukushima Daiichi disaster of March 2011 triggered an abrupt drop in uranium consumption and changes in pro-nuclear energy policies. 

Uranium price chart (Source: TradingEconomics)

When Not If

The uranium trade has been both validating and frustrating for ASX investors.

Uranium prices first moved out back in late 2021 from US$30/lb to US$50/lb. Shares in names like Paladin Energy (ASX: PDN) more than doubled in the month of September 2021.

But both uranium prices and stocks like Paladin Energy would then trade sideways for more than two years.

Paladin Energy breaks out to a 10-year high after trading sideways for almost two years (Source: TradingView)

It wasn’t until August that prices started to push the US$50/lb level, compounded by factors such as Niger (~4% of global supply) disruptions, Sprott’s Physical Uranium Trust back in action and taking physical supply off the market, a guidance downgrade from Cameco and a renewed focus on energy security. It didn’t take long for prices to push past the peak from two years ago.

The breakout sent uranium stocks on a roll. Here’s how the six largest ASX-listed uranium stocks have performed in the past month:

• Paladin Energy (ASX: PDN) +30.0%

• Boss Energy (ASX: BOE) +44.1%

• Deep Yellow (ASX: DYL) +43.9%

• Bannerman Energy (ASX: BMN) +48.5%

• Lotus Resources (ASX: LOT) +21.6%

• Aura Energy (ASX: AEE) +25.9%

Uranium stocks have moved in a near vertical fashion in the past month. Given this, what’s the state of play for the sector and what should investors look out for?

Canaccord's State of Play

“In our view, the market remains in a structural deficit, and with secondary supplies on the decline and inventory levels near recent lows (or immobile), we remain fundamentally bullish on the sector,” Canaccord analysts including Katie Lachapelle and James Bullen said in a note earlier this week.

The key takeaways from the note include:

• Upgrading demand expectations: The analysts raised their base case demand forecast to a CAGR of 3.6% through 2023 and 3.2% through 2035. “This equates to a 30% increase in annual uranium demand through 2030 and 46% through 2035.” 

• Supply faces downside risks: Current mine supply continues to be challenged via recent developments such as a military coup in Niger (~4% of global supply), restart delays and lower production guidance from Cameco’s Athabasca projects

• Contracts outpacing volumes: UxC reported that 121 million pounds of uranium have been put under long-term contract year-to-date vs. a total of 114 million pounds in 2022.

• Inventories are depleting: Nuclear demand is growing, placing pressure on existing inventory levels. The US, for example, held 104 million pounds at the end of 2022, down 4% year-on-year or approximately 2 years of forward coverage, according to the EIA. 

• Funds return: Physical funds (who buy uranium and store it away) are back in action. “We believe physical funds are set to return to the market and compete with utilities for pounds in what is already an extremely tight market.”

A Closer Look at Valuations

The fundamentals are evidently bullish. But let’s take a closer look at valuations and how brokers are pricing things. 

In this case, we’re looking at Macquarie’s late August note on Paladin Energy – Where its Outperform rated with a $1.10 target price. (Paladin Energy shares closed at $1.10 on Wednesday, 27 September)

The valuation is derived from a few interesting assumptions including:

• FY24 uranium price forecast of US$68.8/lb

• FY25 uranium price forecast of US$90/lb

• FY24 Langer Heinrich production of 1.19Mlb

• FY25 Langer Heinrich production of 3.81Mlb

Would Paladin's recent run into Macquarie's price target suggest the stock is already priced in for US$90/lb?

Refusing to Pull Back

Uranium stocks are getting a little frothy after the recent run. But the move reminds me of when the lithium sector emerged from a 2-year bear market back in late 2020. And as long as spot prices keep on climbing, so do the stocks.

A name like Pilbara Minerals (ASX: PLS) climbed more than 1,300% between October 2020 and November 2022. During this time, spodumene prices rallied from last little as US$500 a tonne to a peak of almost US$8,000 a tonne in November 2022.

But when spot prices started to run out of momentum, the stocks were soon to follow.

For now, uranium has momentum in its favour. And for stocks, they’re refusing to show any signs of weakness.

Take Boss Energy (ASX: BOE) for example, it hasn’t had a pullback of more than 5% since August. It's also had several sessions where it opened lower, only to push back towards breakeven or positive territory.

Boss Energy daily price chart (Source: TradingView)