What’s one of the hottest micro-cap stocks of the last three months? I’ll give you a clue: it’s a mining company that’s stock tripled in value since mid-August. But instead of mining gold, silver or platinum, this company digs something else entirely different out of the earth.

If you guessed lithium, it’s a good guess, but you’d be wrong. [Although StreetAuthority’s Nathan Slaughter sang lithium’s praises in this article.]

The company in question, Uranium Resources (Nasdaq: URRE), actually mines uranium, as you might guess. Uranium Resources’ surging shares have company. Shares of Uranerz Energy (AMEX: URZ) and UR Energy (NYSE: URG) have roughly doubled, while most other uranium plays have also tacked on strong gains in recent months. 

The surging stocks are the result of rising prices for uranium on the spot market. In late October, the radioactive metal tacked on a +10% gain in just one week to around $52 per pound. The question now is whether the rally can continue, or is a pullback the next move?

To understand the road ahead, you need to look back. When I wrote about the sector back in June I noted that uranium had slumped to a multi-year low of $40 per pound. The key culprit for weak prices: Kazakhstan, which single-handedly altered the supply/demand equation for uranium by boosting production from 19 million pounds in 2008 to estimates of more than 40 million pounds this year. Much of that Kazakh production went straight to China, which has been stockpiling uranium in anticipation of a massive build out of its nuclear power sector, and the rest went to the open market, pushing supply ahead of demand.

China also explains why prices are rising now. The China-Kazakh long-term supply deal is winding down, and China has allegedly returned to the open market to buy even more uranium. Yet two factors will conspire for uranium prices to hit a ceiling in the near-term. First, China is building a backlog for future needs and is unlikely to pay much higher prices if it can simply wait for the supply/demand equation to change. Industry analysts think that’s about to happen. Many high-cost mines were shuttered when uranium fell to $40 a pound, but would be brought back on line as uranium moves toward $60 a pound.

At this point, with few-near-term catalysts, uranium prices could be hit by profit-taking, likely creating a better entry point for near-term gains. You can track uranium spot prices at this web site.

A solid long-term play
But uranium looks like it has much more room to run over the long haul as demand will keep rising. In a recent report, Morgan Stanley’s analysts noted that 147 new nuclear power plants will be built over the next decade. That figure rises to 330 if you account for all of the proposed but yet-to-be-approved plants. China leads the way with 159 proposed plants, while India (60), Russia (44) and the United States (31) account for the bulk of the remaining planned sites. 

As the rising role of nuclear power starts to become more evident, industry players will have increasing confidence in the strong long-term demand for uranium.  And that could push uranium toward the $65 to $70 mark in a few years — that’s a +25% to +35% spike from current levels. Moreover, share prices of key players could rise at an even faster clip, thanks to high operating leverage at uranium mines.

Safe vs. speculative
Investors can look to protect their downside while seeking reasonable upside by investing in the industry’s blue-chip player Cameco (NYSE: CCJ), which I profiled back in July. [Read the article here]

Shares have already risen +30% since then, but they could be hit by profit-taking if uranium prices cool. But longer-term, you’re likely looking at +50% upside from here if uranium surges toward the $70 mark.

Another relatively safe play for investors is Uranium Participation Corp. (TSX: U), which holds uranium in inventory and thus its shares closely track the underlying commodity. (Note: This is a Canadian company that trades on the Toronto Stock Exchange. Buying and selling stocks in this exchange is relatively easy for most individual investors, but call your broker for more information if you’re interested.)

Action to Take –> Uranium ran to $136 a pound in 2007. That was based on pure fevered speculation, and most industry players quickly realized that such prices were unsupported by any underlying fundamentals. Still, a rebound to just half that peak would be great news for the stocks in this sector. And with the nuclear renaissance taking shape in coming years, we may get there sooner than many think.

As noted earlier, Uranium Resources, Uranerz Energy and UR Energy are all highly leveraged to uranium prices, moving three to five times faster than the underlying commodity’s price. But I’m averse to chasing speculative names after a strong run, and would suggest closely watching the names for a hoped-for pullback. Other stocks that have potentially significant upside include Paladin Energy (PALAF.PK), which trades on the pink sheets, and Bannerman Resources (TSX: BAN).

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