The three-year bear market in uranium may have ended on Monday, Feb. 10. Late on the prior Friday, the big Canadian uranium miner Cameco (NYSE: CCJ) reported a quarterly profit reduced by the relentless slide in spot uranium prices, announced a year-over-year decline of 35 to 40 percent in the exploration budget for 2014, and abandoned its oft-stated long-term production growth target for good measure.

“…We don’t believe the fog in the market, as we call it, is going to lift anytime soon,” said Cameco’s CEO on the earnings conference call. “There has been little to no improvement on the issues needed to help clear the oversupply and the uncertainty the industry continues to face.”

Uranium oversupply has been a market constant ever since Japan idled all 50 of its nuclear reactors in the wake of the Fukushima accident. The resulting imbalance drove the spot price of uranium nuclear reactor fuel from some $70 per pound in early 2011 to $35 as of last month.

Source: Cameco

At this price, many of the projects needed to meet the likelihood of long-term demand growth have become unattractive as investments. Cameco’s capex retrenchment is one recent result, as was the news that another miner, Paladin Energy (ASE: PDN), has mothballed its big mine in Malawi.

Cameco’s rangebound stock traded down as much as 7 percent on its glum news, before finishing the session 3 percent lower. It has now rallied 15 percent since in a clear signal that investors are finally prioritizing profits over growth. They may also have started viewing recent spot pricing, at less than a quarter of uranium’s 2007 peak, as unsustainable.

Cameco and other uranium stocks got a boost this week after the Japanese government published a policy document affirming plans to restart at least some of the country’s idled nuclear plants, while also hinting at a willingness to consider new ones. Any restarts this year wouldn’t meaningfully affect the uranium supply/demand balance, especially in light of the plentiful uranium stockpiles that Japanese plants continue to hold. But given the scale of Japan’s idled capacity and the popular distaste for nuclear energy that persists there, a restart of the first reactor figures to provide a major psychological boost to the uranium market.

While Japan dithers and runs up a huge bill for imported fossil fuels, China continues on its reactor building spree, with 20 reactors in operation, 28 more under construction, four more near the construction stage and another 177 in the development pipeline. For China, nuclear power is a cost-efficient alternative to air-polluting and atmosphere-warming coal.

In all, 72 reactors are under construction around the globe, with China accounting for more than the next four countries combined.  (Russia is runner-up with 10 reactors under construction, followed by India with six, and the US and South Korea with five apiece.)

Even as this capacity buildout increases the likely future fuel needs, one source of additional uranium supply has run out. The last shipment of nuclear fuel derived from ex-Soviet nuclear warheads under a deal sponsored by the US and Russia was delivered late last year.

So between the new reactors, Japan’s return to the nuclear fold and the mothballed mines as well as or delayed prospecting the long-term market outlook for uranium is brighter than it’s been in years, and producers’ shares appear to be signaling as much. A reversal in sentiment in certainly possible and the spot market remains oversupplied, but the psychology has shifted, perhaps decisively, away from today’s lousy conditions and toward the potential for a long-term revival.

We think this is a good time to gain exposure to uranium and the nuclear renaissance via two Canadian miners.

Cameco is one. It is the largest publicly-traded company focused on uranium, and the dominant producer in the Athabasca Basin of Saskatchewan, which is to uranium ore what Saudi Arabia is to crude oil. Athabasca holds the richest ores and the most advanced milling infrastructure, giving Canadian producers a big edge on costs over their global rivals.

Cameco’s 2013 production costs at less than $28 (Canadian) per pound of uranium are low enough to make it a going concern even at the recent miserly spot pricing. Yet it realized more than $54 (US) per pound last year, thanks to long-term contracts that provide a partial shield from spot pricing.    

Cash costs per pound declined 8 percent last year, while production rose 8 percent. And Cameco has plenty of leverage to higher uranium prices via Athabasca projects that are the world’s most lucrative, including the world’s largest high-grade mine at McArthur River and the largest high-grade mill at nearby Key Lake. The Cigar Lake mine, set to begin producing belatedly this quarter, gives Cameco a 50-percent stake in the world’s second-largest high-grade deposit.

Cameco is currently valued at an unimpressive 17 times trailing EBITDA based on enterprise value, but mining valuations often look worst near bottoms and best near tops. And there’s no question that uranium is much closer to a bottom than a top. We’re adding Cameco to the Aggressive Portfolio. Buy CCJ below $27.    

We also like the much smaller and more speculative Athabasca uranium developer Denison Mines (NYSE: DNN), despite the fact that its shares are up more than 60 percent from mid-October lows. Denison was a $4 stock briefly in 2011 and a $25 one in 2006, so it’s clearly been through the wringer. But it has used the recent bear-market to roll up some joint venture partners in the Athabasca, and is widely seen as an attractive takeover candidate in the industry given its portfolio of high-return prospects.

Denison holds minority stakes in an Athabasca ore mill and several adjacent deposits operated by the French nuclear giant Areva (OTC: ARVCY) and a majority stake (with Cameco as a minority partner) in the Phoenix/Wheeler River prospect, which promises to yield some of Athabasca’s richest uranium ore. An update on drilling results from this prospect appears to have imparted some extra momentum to Denison’s shares this week. The company’s stated plan to spin off its overseas assets to focus exclusively on the Athabasca may provide another catalyst. We’re adding Denison to the Aggressive Portfolio. Buy DNN below $1.90.

Source: Denison Mines presentation