Chart of the week: is this uranium share about to go nuclear?
21st March 2022 11:45
by John Burford from interactive investor
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As oil prices boom, technical analyst John Burford believes there could be greater focus on nuclear power. This is favourite way to play the theme.
Finally, after energy markets have exploded and politicians can no longer ignore the obvious benefits of nuclear energy as a 'clean' domestic component to 'solving' the current energy crunch, momentum is clearly gathering for a switch to nuclear.
Memories of the very rare nuclear disasters are suddenly fading in light of the doubling of crude oil prices in two months as, once again, it is the markets that are driving the politics. Ideology dominates when all seems fair. But come a crisis, that is when political U-turns suddenly pop up.
Uranium oxide prices have been depressed for years as politicians have gone all-in on wind and solar with vast subsidies provided. In the UK, we are finding (to no-one's great surprise) that both are extremely unreliable as base load sources. Sometimes, the wind does not blow nor the sun shines. Hmm.
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The rather obvious alternative to fossil for base load is nuclear as the technology is very well developed, with Rolls-Royce Holdings (LSE:RR.) standing ready to supply their 'mini-nukes' in specialist situations.
In terms of security, Russia produces only around 12% of the global supply of uranium, with Australia dominating. But with vast deposits in Canada waiting to be exploited (when the ore price rises), the West appears to be self-sufficient in supplies.
That places Cameco Corp (NYSE:CCJ) – the largest Canadian miner – in an interesting light. Here is the long-term chart:
In the early 2000s, there was a flurry of activity, with the shares advancing as US crude oil spiked from sub-$20 to the famous high at $147 at the height of the financial crash in 2008.
But then crude began a lengthy decline and the case for nuclear went cold. The shares have been on a downtrend ever since as investor interest in uranium vanished from the radar.
Note that the decline has taken the form of an 'a-b-c' to the March 2020 Credit Crunch low of $5.30 – and on a very strong momentum divergence. Along with many other sectors, March 2020 saw major lows from which many shares have advanced.
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Remember, a ‘three down’ to a strong momentum divergence is often a setup for a strong reversal – particularly following a very lengthy decline (at least 10 years in this case).
And that is indeed what we are seeing, with the shares currently trading at the $27 region. I believe these shares are a buy. My first target is the old high at around $60.
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