Uranium investing can be very profitable—but you need to be aware of its unique challenges

Uranium investing might not be the first thing you think of when you think about energy investing, but we think the right stocks could add diversification to the Resources component of your portfolio.

Uranium investing doesn’t have to include just uranium mines, either. There are many industries that serve the uranium mining industry. This includes processors and suppliers of enriched uranium fuel for commercial nuclear power plants.

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But like all investments, there are negative factors to take into account. Uranium investing does pose a unique challenge for investors who are a looking to diversify their natural resource holdings. Apart from supply and demand issues that affect the price of uranium, the metal’s use in nuclear power plants makes it a somewhat controversial energy source.

Anti-nuclear sentiment remains high ever since the earthquake and tsunami that led to a release of radiation at the nuclear plant in Fukushima, Japan, in 2011. This sentiment has curtailed plans for some new nuclear plants around the world. At the same time, U.S. regulators are moving toward a less stringent limit on radiation risk, which could eventually revive nuclear plant construction and uranium demand. But this nuclear revival, if it comes at all, will be a slow process.

Here are our top factors we research when uranium investing

1. Focus on proven regions for exploration

   There is a long lead time from exploration and discovery to production. When we’re researching a uranium mining stock, we look for ones that operate in an area with geology that is similar to that of nearby producing mines. For example, this includes the Athabasca Basin in Saskatchewan where Cameco (symbol CCO on Toronto) has large, high-grade reserves, low-cost operations, significant market share and many mines. Cameco is the world’s largest uranium producer.

2. Location of the uranium mine

   The most politically stable countries for uranium production are Canada and the United States.

   Several other countries have significant uranium resources, like Niger, Namibia, Ukraine, Uzbekistan and Mongolia. However, we generally stay away from mining companies that operate in insecure and politically unstable regions like these.

   When looking at uranium stocks, we also avoid those in countries with little respect for property rights and the rule of law such as Russia or Mongolia.

   Mining is particularly vulnerable to political instability. You can’t move the mine to another country, and local citizens may sometimes get the impression that a foreign mining company is robbing them of their birthright, even though the foreign company’s capital and expertise would appear to be the best way to get any value out of the ground.

3. The environmental constraints of uranium investing

   Uranium by its very nature is radioactive. This increases the environmental constraints that will come into play when mining this metal. Uranium mining is subject to unique regulations and a particularly stringent mine permitting process.

4. Strong fundamentals overall

   To cut risk in uranium investing—like all mining investment—you should look for companies with strong fundamentals. We look for low debt, because debt can be a problem for any mining company. When we recommend uranium mining stocks, we like to see positive cash flow, preferably even when uranium prices are low.

   Even better, we like to see mining companies that have cash flow from an existing mine that is sufficient for, or at least contributes to, the cost of developing a second mine.

   Strong fundamentals also carry over to the management team. We like to see uranium miners that have operators and managers who have been around the industry for a while. We prefer teams that have a history of mine development and have financed similar projects in the past

5. Take special care when picking junior uranium miners

   If you are interested in undertaking your uranium investing through junior or penny stocks, we recommend well-financed junior mines with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best junior mines have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property. We also prefer those that operate in an area with geology that is similar to that of nearby producing mines.

What do you think about uranium investing? Have you had profitable experience with uranium stocks in the past? Share your experience with us in the comments.

This post was originally published in 2016 and is regularly updated.