Some sectors are just naturally prone to multi-year, boom-and-bust cycles. Higher demand boosts prices and sets forth a rush in exploration or production. Profits soar and investors book market-beating gains until supply starts to overwhelm demand.

#-ad_banner-#When the bust begins, prices sink and weaker stock prices can persist for years. Companies all but stop spending on capital investments in their haste to protect cash flows.

The years of underperformance can end abruptly when the cycle resets. It’s easy to miss out on the initial rebound as stock prices surge.

Industrial metals and miners are currently in the middle of such a comeback, staging what could be part of a multi-year boom in 2016. And many players have already zoomed higher. Stocks are being priced on the continued rebound in profits and it’s becoming difficult to find value left in the space.

But one market leader hasn’t participated in the rally. It benefits from some of the lowest production costs in its industry and could soon be getting a boost from government policy.

Are Miners Due For A Multi-Year Run?
Metals and mining stocks have been one of the best performers this year after trailing for nearly five years. The SPDR S&P Metals and Miners ETF (NYSE: XME) fell more than 80% from the 2011 high to start the year.

The decline in prices for industrial metals led to a 43% plunge in investment spending for growth through 2015. Even maintenance spending was cut by 34% as miners sought to protect cash flow and dividends.

Dividend yields in the space have also fallen as companies moved to protect cash flows over the last few years, with the average yield touching a five-year low of 1.4% this year, well below the 2% yield on the broader market. XME’s dividends have been falling since 2014.

That cut in exploration and investment has started to bring the supply-demand relationship for metals back in balance, causing prices to soar. Futures prices for metals have jumped this year with the Bloomberg Industrial Metals sub-index of futures prices higher by 27% through November. Iron ore is up 80% and coking coal has surged three-fold.

Earnings at companies in the basic materials sector rose 4.9% in the third quarter against a 1% drop in sales compared to the same period last year. Higher prices are expected to flow through to sales and earnings next year with estimates for 15.1% earnings growth on a 4.2% growth in revenue. The SPDR ETF has rebounded 130% this year on faster economic growth in the U.S. and the prospect for higher inflation to prop up prices of real assets.

This Leader Has Hidden Value And Political Upside
The dilemma for investors is that many miners in the space may already be trading on expectations for next year’s profits. The rebound in the SPDR ETF has taken the price-to-earnings up to 33 times trailing earnings, a premium of nearly 30% to the broader market.

Cameco Corporation (NYSE: CCJ) is one of the few value plays left in the miner space and one of the world’s largest uranium producers by volume. Public support for nuclear energy fell after Japan’s 2011 Fukushima disaster and energy generation has shifted to natural gas on cheaper prices. Spot uranium prices were down nearly 50% year-to-date through November, an unsustainable decrease that will help to shake out higher-cost producers and restore balance to the market.

However, the nuclear industry is recovering, with nine reactors opening this year and 58 under construction, including 20 new reactors in China. That is significant growth on the 407 reactors currently in operation and could lead to a surge in uranium demand. Management expects to increase production significantly for its high-grade mines in Canada that benefit from relatively cheap cash operating costs. The company has managed to remain cash flow positive throughout the weakness in uranium prices and trades for just 1.0 times book value.

Dividends of the Canadian producer have been under pressure in dollar terms but investors could enjoy an increase on the stronger outlook. Higher energy prices could help boost the Canadian economy, breathing life into the Canadian dollar and boosting dividends in USD terms. Earnings are expected 67% higher to $0.86 per share over the next four quarters and could send shares to my $14 price target, a gain of 40% on top of the 2.9% dividend yield.

While President-elect Trump will likely not carry forward many of President Obama’s programs for clean energy, it looks like he may be nuclear energy’s best friend. The Trump transition team asked the Energy Department recently how the administration could help nuclear reactors “operating as part of the nation’s infrastructure” and what it could do to prevent the shutdown of plants against competition from low natural gas prices. Trump has been a vocal supporter of the industry since at least 2011 when he told Fox News he was, “strongly in favor of nuclear energy.”

Risks To Consider: The uranium market is still oversupplied on recent reactor shutdowns, meaning it could take a year or two for demand to catch up with supply.

Action To Take: Position in Cameco Corporation, one of the few value plays left in the metal and miners space, ahead of a rebound in uranium prices.

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