The Bull Case for Uranium

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After the fierce decline in 2007 and the smaller sell-off this year, I am certain that uranium is forming a bottom here. The potential increases in supply have already been priced into the market, while many risks to production are being discounted. The current lull in the market has allowed the spot price to drift lower. Uranium only needs a buyer to step in to turn the trend around.

When it bottomed at $7 per pound in 2001, uranium was one of the most derided commodities on Earth. The most common associations with uranium were Chernobyl and bombs. Environmental protesters were calling for the shuttering of nuclear reactors, and plants continued to be mothballed.

What a difference six years has made. Uranium rocketed from less than the cost of a pizza to $138 per pound in June 2007. Articles appeared in financial publications like MoneyWeek and Forbes on investing in this "white-hot" market. Dr. Patrick Moore, a co-founder of Greenpeace, started supporting nuclear plants as a clean and safe fuel. Even oil producers such as Egypt and Saudi Arabia have expressed interest in nuclear power.

Then the uranium price crashed over the summer of 2007, bottoming at $75 per pound in September. It rallied over the winter to $93, before dropping again. Although the spot price seems to be stabilizing at $71, some uranium producers are still down over 70%, and some juniors like Alberta Star have lost four-fifths of their market caps in the past year. Many investors who were so bullish on the sector when the market made continual new highs are now distrusting the sustainability of the market at this lower level. The current sentiment is extremely negative, which is very exciting to a contrarian like myself.

While some former uranium bulls are despairing, the correction was long overdue. In fact, I sent a warning to my Yahoo Group newsletter in early May that I expected a drop in stocks in the near future. I suspected that a new uranium contract on NYMEX would lead to more price volatility - especially to the downside - for uranium mining stocks.

Some uranium bears believe the highs are behind us, as additional supply from large corporations like Areva will hit the market by 2011. Hedge funds and governments could sell some of their stockpiles to raise money as well. The bears admit that demand will increase, but they believe it will not disrupt the market.

After the fierce decline in 2007 and the smaller sell-off this year, I am certain that uranium is forming a bottom here. The potential increases in supply have already been priced into the market, while many risks to production are being discounted. The current lull in the market has allowed the spot price to drift lower. Uranium only needs a buyer to step in to turn the trend around.

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