This contrarian play could have millionaire-making potential

Could an 11-year bear market for this commodity be close to ending? Paul Summers takes a closer look.

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What’s the ultimate contrarian play right now? High street retailers? Gold stocks? Emerging markets? There’s another candidate…

Now in the 11th year of a bear market, uranium remains one of the most detested metals around. Having hit $137 back in 2007, its price tag drifted below $20 per pound in 2017. Things have got so bad that many of the biggest players in the industry have struggled to generate a profit — leading them to either cut production or suspend it completely.

Although it may take a period for the full impact of this to be felt, knowledge that the supply of any commodity is being constrained can often be a great time to consider taking a position. And while demand hasn’t soared just yet, things are beginning to look favourable.

Fifty-nine nuclear reactors are currently under construction (with many of these in China) and 170 are planned for the next decade. Having ceased using the metal following the disaster at Fukushima back in 2011, Japan is also restarting its plants.

Moreover, new mines take many years to be approved and built — a positive for those companies are already several stages into the process. If demand follows the same curve it took from 2004 to the middle of 2007, the rise in the price of uranium could be simply breathtaking. 

So how can I get involved?

As far as specific stocks are concerned, there are two ways a private investor can get exposure.

The first is via Spain-focused miner Berekely Energia (LSE: BKY). Construction of its Salamanca project is expected to begin later this year and should, according to the company, reach production when the “unavoidable” supply-demand deficit really kicks in.

In addition to July’s announcement of a potential €9m in cost savings associated with building the mine, Berkeley has recently joined the main market and listed in Spain. This listing should serve to raise its profile and encourage new institutional investors to climb on board.

Unfortunately, this progress hasn’t been reflected in the share price. Having hit a high of 69p back in January 2017, the stock now trades a little below 43p.

The second — and arguably less risky option — would be to buy shares in Yellow Cake (LSE: YCA).  Named after the appearance of powdered uranium oxide, the business plan is hardly complex: buy uranium at the bargain basement prices, hoard it, and wait for a recovery.

Based on recent performance, it would seem at least some market participants appreciate the simplicity of this strategy. Yellow Cake’s stock is already up 26% since its IPO in early July.

Buyer beware

Clearly, anyone considering investing in an uranium-focused stock needs to be aware of the risks involved. An obvious drawback is that no one knows when its price will recover. In the meantime, there’s no guarantee it won’t drop even further.

A related consideration, particularly for those with shorter investing horizons, is the fact that neither Berkeley or Yellow Cake pay dividends, which in this context could be regarded as a reward for being patient. Like any mining project, there’s also the possibility of the former encountering a host of setbacks between now and its target date for commencing production.

Nevertheless, should you be comfortable devoting a proportion of your capital to speculating on an eventual sustained recovery, I suspect uranium could prove a very rewarding investment in time.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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