Where does uranium go now? (April 25, 2011)

While the environmental and social consequences of the Fukushima Daiichi nuclear power plant disaster rightfully remain the focus of most onlookers, its effect on uranium prices has not gone unnoticed either.

In the wake of such a calamity investors may be wondering whether the severe hit to uranium miners’ market caps represents a buying opportunity, or alternatively, the beginning of a long downwards drift.

The most recent news out of Japan was that the magnitude of the disaster had reached the same level as Chernobyl – with the International Atomic Energy Agency giving both disasters a crisis grade of 7.

Given that the level of the two crisis are comparable, it may be instructive to see what exactly did happen to uranium prices in the wake of the disaster in the Ukraine almost 25 years ago.

To begin with, Chernobyl occurred in a different price environment.

Despite warnings in the late 1970s that increased demand for uranium and constrained supply would lead to a surge in prices, the situation never materialized.

Instead prices began to decline in 1980 and by 1985 uranium demand was being met by supply. The Cold War was also beginning to wind down, and uranium production was scaled back due to less demand from the military sector.

Prices were however, finding support around the US$20 per lb. mark and were stabilizing through 1985 and into 1986… until the events at Chernobyl. After the disaster, the spot uranium price set off on a new and long downward movement.

Its price continued to fall until the early 1990s, when it finally stabilized in the US$10 per lb. range. Despite a brief move back up to US$20 in 1996, the price resumed its downward trend and bottomed at US$7.10 per lb. on Dec. 25, 2000.

A significant price movement wasn’t in the cards for another three years, when in 2003, as talk of building new reactors began to heat up, investors finally woke up to the fact that mine production had all but dried up while prices were depressed.

It was a story that lifted uranium prices to all-time highs before the financial crash of 2008. After the crash, it was one of the last metals to catch a ride on the renewed commodity bandwagon, but by late 2010 the metal was hot again, climbing from below the US$50 per lb. mark, almost uninterrupted, to more than US$70 per lb.

That all changed, however, with Fukushima as uranium prices collapsed below the US$55 mark.

The first step in assessing whether Fukushima Daiichi could re-kindle the drawn out price depression that Chernobyl did, is measuring the severity of the accident. It can be reasoned that the more severe the fallout from the disaster is, the more likely it will be that governments will rein in plans to develop new reactors or refurbish old ones.

Despite both disasters sharing the same crisis grade of 7, experts estimate that the level of radiation released at Fukushima is 10% of that at Chernobyl. The release of radioactive material, however, hasn’t yet abided and if leaks continue, experts warn that it may eventually exceed the amount emitted by Chernobyl.

That doesn’t bode well for prices if the Chernobyl effect holds true today.

The current situation

Currently, there are a total of 443 reactors in the world, with another 58 under construction, 152 in the planned state and a further 347 that have been proposed.

In terms of which countries have the most reactors now, the list is topped by the U.S. with 104 reactors, France with 58 reactors and Japan with 55. France leads in terms of percentage of total energy supplied by nuclear reactors with over 75% of its power being generated by nuclear plants.

But the world is changing and the bulk of future development will come from new players.

At the time of Chernobyl, countries like China and India were not pushing to become the world’s next great economic giants. Now they are, and along with Russia, the three countries were set to develop the majority of new nuclear reactors before Fukushima happened.

First in terms of future nuclear prominence is China, which currently has 12 operational reactors, but has plans to build 187 more, 27 of which are under construction.

Next is India, with 20 reactors and 64 more planned, four of which are under construction.

Third on the list is Russia, which currently has 32 reactors, 54 more planned, 10 of which are under construction.

Despite concerns raised by Fukushima and popular sentiment turning against reactors, especially in India, all three countries plan to push ahead on development, with only China saying it would delay some projects for further studies on issues of public safety.

Indeed, Russia has taken on a defiant tone as it reaffirmed commitment to fast track expanding nuclear capacity in the wake of Fukushima.

President Dmitry Medvedev asserted that nuclear power “can be and is safe, provided correct decisions are taken about the location of the plant, about the design and the operator.”

As for Japan, the country that is still grappling with the fallout, none of its planned reactor constructions have been cancelled. It has merely delayed construction on some projects but is continuing as scheduled at others.

Last year Japan said it would build nine new reactors by 2020 and at least 14 new reactors by 2030.

That is not to say that the other governments haven’t changed their view on nuclear power after Fukushima.

Germany’s Chancellor Angela Merkel has reversed her support of nuclear plants in the country and now plans to close down seven old reactors and freeze plans to modernize others.

Venezuela, which was planning to build its first reactor with the help of Russia, has frozen plans in the wake of the disaster as well.

Italy and Switzerland have placed plans for new reactors on hold, while Britain, Bulgaria and Finland have all called for reviews of the technology.

But all in all, the reaction has been far more muted than that which followed Chernobyl.

The reason is simple. There are now more countries in dire need of more energy, and there simply aren’t many alternatives to nuclear power when it comes to generating a base-load power supply that is clean – at least in terms of carbon emissions.

And then there is the price argument. Should emerging economies cancel their plans to build new reactors, the prices of fossil fuels would sky-rocket, vastly increasing the cost of new coal or natural gas fired plants.

Patricia Mohr, Scotiabank’s vice-president, economics and commodity market specialist, issued a report shortly after Fukushima which argued as much.

“Perhaps the most lasting impact of the incident at the Fukushima-Daiichi nuclear power plant, a 40-year-old facility with some outdated technology, will be to trigger a re-examination of nuclear safety procedures and reactor technologies around the world and to slow the development of nuclear power,” she wrote.

“Overall, the Fukushima-Daiichi event will likely delay rather than derail the nuclear renaissance.”

Investment ideas

For investors believing that the market over sold uranium stocks, it becomes a matter of determining which stocks would most fully participate in a re-balancing of equity valuation.

One approach is to consider companies that sold off more than their peers after the crisis.

Smaller scale producers and junior explorers sold off much more significantly than established uranium producers like Cameco (CCO-T, CCJ-N) or Paladin Energy (PDN-T, PDN-A), and could rebound strongly.

Comparing closing price highs from February with closing price lows after the Japan disaster; Cameco’s market cap was cut by 36% as shares fell to $27.73 from $43.14 in February. It shares are currently trading for $27.70.

By comparison Bannerman Resources (BAN-T) fell from 90¢ on Feb. 1 to 37¢ on March 16, or a drop of 59%.
It is currently trading for 39¢.

Mega Uranium (MGA-T) was trading at $1.09 on Feb. 2 but fell to 46¢, a loss of 58%. It is currently trading for 51¢.

Uranerz Energy (URZ-T) fell 50% from $5.68 on Feb. 4 down to $2.84. Its shares are currently trading for $2.78.

Denison Mines‘ (DML-T, DNN-X) shares closed at $4.39 on Feb. 14, and then fell to $2.28 after the disaster, a loss of 48%. It is currently trading for $2.22.