Futures & Commodities

Why now is the time to buy uranium stocks

The Sendai nuclear power plant in Satsumasendai, Kagoshima Prefecture.
Tomohiro Ohsumi | Bloomberg | Getty Images

Investors may want to keep an eye on uranium stocks as Japan restarts nuclear reactors, giving the metal a well-needed boost.

Spot prices jumped 5 percent over the weekend following news on Friday that two nuclear reactors in the southern Japanese prefecture of Kagoshima will be restarted next year.

"We believe this approval could provide a significant positive catalyst for uranium equities and the industry as a whole," Joe Reagar, analyst at Roth Capital, wrote in a research note published Friday.

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The two reactors at the Sendai nuclear plant will be the first to go online since the deadly Fukushima nuclear disaster in March 2011, which closed all 48 plants in the country.

Nuclear power plants use uranium fuel to generate electricity through a process called fission. A kilogram of uranium-235 has the capacity to produce three million times the energy equivalent of oil or coal, according to the European Nuclear Society.

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In Australia, producers Paladin Energy and Deep Yellow surged 12 and 20 percent, respectively, on Monday, while the New York-listed Global X Uranium ETF, an index that tracks some of the world's largest listed companies in the uranium mining industry, rose over 13 percent on Friday.

On Reagar's buy list is Toronto-listed Energy Fuels and fellow U.S. producers Uranium Resources and Ur-Energy, with the latter expected to benefit immediately from the price surge.

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Meanwhile, Evan Lucas, market strategist at IG, recommends investors to look at Australian producers such as Paladin Energy and Energy Resources of Australia (ERA).

Where prices are headed

Uranium prices have been in a sharp downtrend over the last three years, but preemptive buying in anticipation of nuclear restarts in Japan has seen prices increase over 30 percent since July.

"Although we expect uranium prices to see a slow and steady recovery over the next 24 months, uranium producers could see their equity valuations benefit in the near term," Reagar said.

Japan - The key catalyst for the uranium sector

IG's Lucas echoed those views, warning that more reactors need to be restarted in Japan in order for the rally to continue.

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While Reagar acknowledges that the restart of two reactors is not enough to correct a supply/demand imbalance in the market, he says the approval indicates that nuclear power is part of Japan's long-term energy plan and anticipates three additional restarts by the end of 2015. By 2020, 30 to 35 of Japan's idled plants could restart, he added.

Why is Japan so important?

The country is the Asia's largest user of uranium and thus has a direct impact on the market, Lucas notes. The metal's popularity elsewhere in the world remains low due to its harmful environmental impact.

While China reportedly has 28 nuclear plants under construction, all uranium-fuelled reactors, Beijing is also looking to build uranium-free plants in an effort to reduce air pollution.

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Meanwhile, the United States is placing heavy focus on renewable energy and most of Europe despises uranium, Lucas added, ever since the Chernobyl disaster in 1986, with several countries expressing no desire to build reactors.