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Message: Radioactive stocks for the contrarian

Radioactive stocks for the contrarian

Investors eyeing uranium stocks that have been battered by Japan's nuclear crisis might want to consider the beleaguered sector as a contrarian play.

Shares of uranium companies have been hammered as a result of Germany's announcement last month that it would shut down its nuclear reactors by 2022, and reports that Japan may close its 54 reactors by next spring because of safety concerns.

While investors' nervousness about the future of nuclear power will likely weigh on the sector over the next few months, uranium prices and their stocks should head higher in the longer term, market observers suggest.

"Making money in minerals requires a contrarian attitude," says Rick Rule, chairman of Sprott Inc.'s U.S. brokerage subsidiary Global Resource Investments Ltd. "When things are out of favour, they are cheap. When they return to favour, you have to sell them …

"I think that there is a chance to make an awful lot of money in a three- to five-year time frame," Mr. Rule added. "Uranium is highly unpopular and becoming more so, but I don't think that the political will exists worldwide to have the lights go out."

Mr. Rule is skeptical that Germany and Japan will be able to follow through on their proposals to shutter plants, because it is not clear how either would be able to replace nuclear sources of power.

And the global supply of the uranium remains tight, he said. "In the near term, the world is using about 30 per cent more uranium than it supplies. The rest is coming from the stockpiles of weapons-grade and fuel-grade uranium."

Mr. Rule said he favours stocks of hard-hit junior uranium companies focused on the Athabasca Basin in Western Canada, especially those with projects that are large enough to be takeover targets by major mining companies or state-owned resource companies in China and India.

Rob Lauzon, a Calgary-based portfolio manager with Middlefield Capital Corp., is also skeptical that Germany will be able to follow through on its no-nuclear proposals, and is still bullish on the uranium sector for the long term.

"This is a poor political move … which will make them less competitive in the world in 10 years because their costs of generating power, electricity and business costs will be higher," said Mr. Lauzon, who runs a mutual fund largely focused on uranium. "I am skeptical that it will actually come to fruition."

Raymond James analyst Bart Jaworski said it will be tough for uranium stocks to move higher this year, but suggests the outlook will improve in 2012.

By then the situation at Japan's Fukushima nuclear plant, which has been crippled by the earthquake, should be "under control and we [will be able to] see past the crisis," Mr. Jaworski said.

Utilities, which have slowed uranium purchases by using up inventory, are expected to ramp up buying again, while Kazakhstan, the world's biggest uranium producers, is expected to have flat production going forward, Mr. Jaworski added. "That is going to be huge plus [for uranium prices]."

He doubts that Japan will close its reactors because the cost of using alternative energy sources could top $37-billion (U.S.) a year. That's a hefty price to pay given the country's high debt load, he said.

Saudi Arabia is looking to build 16 reactors by 2030 with the first two intended to be active by 2020, Mr. Jaworski said. "If built, Saudi Arabia's proposed units would more than offset last month's German phase-out decision."

Uranium prices will "probably stay bouncing in that $50- to $60-a-pound range for the remainder of the year, and it's looking like it will be closer to $50," while the price is expected to rise to $70 by 2015, he said.

He likes Hathor Exploration Ltd. , an advanced uranium exploration play in the Athabasca Basin and his "highest-conviction name." He also recommends uranium producer Cameco Corp. "We see that as the safest play," he said.

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