Uranium Energy bet aggressively on the price of uranium, and while it paid off, it's still a very risky investment choice.
Stock investors usually have some kind of financial goal in mind. The most common thing is to become a millionaire. Sometimes these investors get so caught up in the idea of finding a stock that will make them “rich”, preferably as quickly as possible, that they lose sight of the risks inherent in their investments.
If you're watching uranium energy's (University of Electro-Communications -1.22%) If you think a new millionaire could be created (including yours) because big stocks have gone up in value over the past year, you should stop. Selling uranium has a long history and has been a difficult business.
Uranium Energy Makes a Wise Choice
Uranium Energy sells uranium. It is worth noting that the company is not currently mining nuclear fuel. Instead, management made a genius move, at least in hindsight, by entering into a deal to buy uranium at near historic lows. The company now has a large stockpile of fuel that it can sell for a profit, as uranium prices have risen significantly since it began purchasing.
Image source: Getty Images.
The decision to buy uranium while other companies are essentially selling it looks like a very good one on the part of Uranium Energy's management. Profits from this activity can be used to fund capital investments in actual uranium mines. In the bigger picture, the company has found a way to self-fund its growth. The company hopes to restart the mine in August, at which time it will be its only mining asset in operation. However, bigger development opportunities await with several mining projects across North and South America. If Uranium Energy can bring all these mines online, it will become a big player in the uranium field.
Against this backdrop, it's understandable that some investors might view Uranium Energy as a diamond in the rough, a stock that can turn a small investment into a large investment. In fact, the stock price has increased a massive 151% over the past year. But before you jump into dreams of becoming a millionaire, just take a second and take a step back.
What happened to uranium?
The first big issue to consider is that uranium is a commodity. Like any other product, its price can be highly volatile. There are many reasons to like the outlook for the uranium market, most notably that nuclear power does not emit carbon. In other words, it can provide clean baseload electricity to supplement variable renewable energy sources such as solar and wind. The context is fascinating in a world transitioning away from carbon-based fuels.
The problem is the negative image of nuclear power plants. It is often considered dangerous. First, anything related to radiation bothers people. But the really big problem is that accidents at nuclear power plants are usually large-scale, newsworthy events. Think of Chernobyl, or more recently Fukushima. The Fukushima disaster is a good example of what can happen to the uranium market after bad news hits the headlines.
Uranium prices, which had begun to rise, plummeted after the 2011 incident and fell towards an all-time low. Countries around the world began to question whether nuclear power was worth the risk. In fact, Germany has decided to start shutting down its nuclear reactors. It took more than a decade for uranium prices to recover to their 2011 levels. Meanwhile, the stock prices of uranium mining companies followed the decline in nuclear fuel prices.
UEC data by YCharts
To be fair, the drop in uranium prices was used by Uranium Energy to build low-cost uranium stockpiles. But investors shouldn't buy stocks thinking that their prices will only rise in the future. I don't think history can be a guide. And, frankly, it won't take another nuclear disaster to bring uranium prices down. As mentioned above, since uranium is a commodity, the price of nuclear fuel may continue to fluctuate due to supply and demand alone. As a result, the share price of uranium stocks such as Uranium Energy will be volatile.
Is Uranium Energy a billionaire manufacturer?
All in all, Uranium Energy's story is interesting. Perhaps even appealing to those who want to try their hand at more aggressive investing. But you shouldn't see this as a get-rich-quick method or the only way to reach the seven-figure nest egg. The inherent volatility of the commodity and the increased risks associated with the uranium market suggest that uranium energy is a high-risk investment with stock prices subject to significant fluctuations. Perhaps as part of a more diversified portfolio, it could help you become a millionaire, but there's also a very real risk that using it alone could bankrupt you.
