An End to Uranium's Slide?

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Furthermore, the Fed has come to the rescue of falling equity prices every time. In 2008 they first jumped strongly into the market. Then, with the economy slowing, they pushed it with QE2. As soon as the market began dropping recently, Bernanke promised two years of near-zero rates. Bailouts are the new norm, and moral hazard is a very real problem for US markets.

2. The financial sector is a complete mess. Each year the rules get tighter and tighter. Whether it's credit-card regulations or debit-card fee limits, the banks are becoming overregulated on multiple fronts. Let's not even get into the implementation of Dodd-Frank coming down the pipeline. Furthermore, there could be still more punishment ahead. It's not over yet.

The government's logic regarding this sector is absolutely perverse. First, the government encouraged the financials to jump into the deep end. When they started to drown, the government threw them a life preserver. Then, as soon as they were dragged back on deck, the crew bludgeoned them with baseball bats. The government spent billions to bail out the banks... only to regulate them to death. Unfortunately for us, the financials are an important part of the economy. A drag here will slow things down everywhere.

3. The national debt. During the crisis, US debt swelled to historic proportions, and it's not going down anytime soon. Even by Keynesian standards, the money spent was a waste, as the stimulus barely produced any growth or jobs. We haven't paid the piper on the debt yet, but that time is growing increasingly close. The decisions of Congress have placed a permanent scar on our fiscal situation.

Yes, some of our problems are transitory - though perhaps not immediately short term. Unemployment can go back down and growth can speed up, but the items above are here to stay. How can the bailout mentality be reversed? I just don't see that scenario happening, unless the government allows a couple of Lehman Brothers to fail the next time around. The banking regulations aren't going anywhere either. Consider that something like the Glass-Steagall Act took over 60 years to repeal. Though deregulation is the favorite bogeyman of the left, it almost never happens. The past hundred years of American history have been a march toward more regulation and bigger government - not deregulation.

The other problem is of course the Fed's and the government's short-term actions. Though the long-term fundamentals are mostly intact, that won't matter much if the Fed continues operating in emergency mode, and the federal government creates a business environment of uncertainty at the same time.

With gold cooling off a bit today, we'll take another look at a sector possibly ready to heat up again, uranium. While the stuff might have been off your radar, it could be the moment to start paying attention again.

By the Casey Research Energy Team

One of the world's largest uranium producers - Canada's Cameco (T.CCO) - has launched a C$520-million hostile takeover bid for Hathor Exploration (T.HAT) in order to get its hands on Hathor's high-grade Roughrider deposit in Saskatchewan's prolific Athabasca Basin.

The offer of C$3.75 a share represents a 40% premium to Hathor's closing price of C$2.67 on Thursday August 25, and it sent the company's share price more than 46% higher on Friday. Cameco made the offer after talks with Hathor's board failed. Hathor has not responded publicly to the news. The bid implies an enterprise value of US$8.70 per pound of contained uranium.

The Roughrider deposit is an exciting, high-grade discovery that sits just 25 km northwest of Cameco's Rabbit Lake mill. Since first hitting strong mineralization there in 2008, Hathor has delineated almost 58 million pounds of uranium at the site.

In announcing the offer, Cameco CEO Tim Gitzel noted the "exceptional job Hathor has done with the Roughrider deposit." He also pointed out that Cameco's financial strength, development expertise, and existing infrastructure and experience in the Athabasca region put his company in a unique position to turn the exploration project into a mine.

This is a move the Casey energy team has been awaiting for some time now. We first recommended Hathor to our subscribers in 2006, before the Roughrider discovery, when it was trading at C$0.69. In 2008 and early 2009 we gradually told our subscribers to recoup their initial investments and hold on to the remaining shares, to maintain risk-free exposure to the remaining upside. Later in 2009, Hathor's share price fell back down to our bid; we bought in again and then took profits for a second time in 2010. And we have repeatedly described the company as a prime takeover target - in our last Casey Energy Report (released one day before Cameco announced its offer) we told investors who didn't own Hathor to pick up some shares of this "acquisition candidate."

Cameco's offer for Hathor might have another important ramification, aside from validating our prediction: It might convince investors that we've reached the uranium bottom and thereby help to kick-start a recovery. The uranium market has been in the dumps since the Fukushima disaster in March, which reignited global anxiety over the safety of nuclear energy and prompted some countries, notably Germany, to back away from nuclear power. Since the earthquake-tsunami combo slammed the Fukushima nuclear plant, the price of a pound of U3O8 has essentially slid from US$70 to its current hover just below US$50.

One positive aspect of slumping commodity prices, however, is that company valuations fall in concert, and those cheaper valuations catalyze merger and acquisition activity. Companies on the hunt for acquisitions always seek the best price, which means they try to time their takeovers with the bottom of the market. As such, news of major M&A activity signifies that some of the biggest players in the industry think the bottom is nigh, and that information can help start a rally.

Uranium is certainly primed for a rally. It matters not that Germany is phasing out nuclear power, nor that Italy and Switzerland cancelled plans to build new reactors, because the industrialized world is pretty unimportant when it comes to uranium demand growth. That growth is coming from the developing world, with China leading the charge. There are 26 reactors under construction in China, with another 52 planned and a further 102 proposed. China suspended approvals of new plants in the wake of Fukushima, but at the beginning of August the China Nuclear Energy Association completed a nationwide safety inspection and observers expect the Chinese to resume new approvals shortly.

China is not alone in developing significant new nuclear power capacity. India has six nuclear plants under construction and 57 planned or proposed, while in Russia there are 10 reactors being built and another 44 planned or proposed. In fact, there are now a total of 558 reactors under construction around the world, up from 540 at the start of the year.