For Uranium, an Exit From the Doghouse?

by Aaron Levitt | July 30, 2012 7:00 am

The nuclear power industry took a huge hit last year when Japan suffered the double disaster of earthquake and tsunami. The tragic duo caused one of the worst nuclear catastrophes, and the resulting meltdown at TEPCO’s Fukushima reactor sparked unprecedented changes in the nuclear sector worldwide.

Japan began phasing out the fuel source and in May, the nation shut down its last nuclear reactor. That marked the first time since the 1970s that the island nation had no nuclear power. Likewise, Germany has announced a complete phase-out of its nuclear plants by 2022. Other developed nations have been following suit.

Producing nuclear power became taboo, and many analysts and investors considered the sector “dead money.” These phase-outs surely had a negative impact on both uranium prices and nuclear sector equities.

Now, though, things may be looking up for the sector. Rising nuclear plant construction across emerging markets and in Southeast Asia is adding a new dimension to the supply-demand situation. And perhaps more important in the near term, Japan’s sleeping reactors are starting to wake.

For long-term investors, these events could point to a nuclear renaissance.

Severe Power Shortages

Unlike many of its Asian neighbors[1], Japan has no known fossil-fuel reserves of its own. So, after the global oil shocks of the 1970s, it began strenuously pursuing nuclear power. Until the crisis at Fukushima, Japan was getting more than 30% of its electricity from nuclear power. Since then, it has been ramping up liquefied natural gas imports, aggressively promoting energy efficiency[2], and expanding production from renewable sources such as solar.

Yet, these efforts have been falling short. The prospect of a hot, humid summer without air conditioning has the country’s policymakers doing the unthinkable just a few short months ago — restarting the reactors.

As the cleanup efforts[3] at Fukushima continue, the fear of a national energy crisis has grown. Already, Japan has endured rolling blackouts and a strained electricity grid. The Japanese government estimates that Kansai Electric, the main power company that provides electricity to Japan’s second-most populous region, faces a shortage of nearly 15% this summer as all its nuclear plants remain idle.

Other regions face similar power shortfalls, some up to 30%. With that in mind, Prime Minister Yoshihiko Noda has decided to restart two of Japan’s 54 idled nuclear reactors[4].

Despite rising public protests, this could open the door to more restarts. Japan certainly needs all the help it can get. The added cost of additional fossil fuel imports will be about $40 billion per year, or about $333 per person. The World Economic Forum predicts that nuclear energy will continue to play an important role in Japan’s energy mix for the foreseeable future.

For the nuclear sector, Japan’s restarts are another bullish piece in what’s shaping up as long-term puzzle. The nation is already one the largest importers of uranium, and restarting these plants will put additional pressures on already strained supplies.

Outside of Japan, 435 nuclear reactors are operating across the globe. They consume roughly 190 million pounds of uranium each year. Yet, worldwide uranium production is currently only around 150 million pounds. The remainder comes from the U.S.-Russian Highly Enriched Uranium (HEU) Purchase Agreement. That program is designed to dismantle Cold War-era nuclear missiles and use the warheads for reactor fuel[5].

However, the HEU program is scheduled to end in 2013. At the same time, the World Nuclear Energy Association shows that more than 60 new reactors are currently under construction, 150 are in planning stages and an additional 330 have been proposed.

Given its size, Japan’s return to the nuclear game will only drive prices higher.

Adding a Slice of Yellow Cake

Nevertheless, uranium prices and stocks in the sector remain in the doghouse. Overall, uranium could offer one of the deepest bargains in commodities, and with prices set to potentially double over the next few years, investors may want to dig into the opportunities among miners.

No one does that job better than industry leader Cameco (NYSE:CCJ[6]). The firm controls roughly 16% of the world’s uranium reserves and remains a beaten-down value. Since InvestorPlace profiled Cameco back in January[7], its story has only gotten better.

Canada’s recently signed deal to begin exporting uranium ore to China[8] will allow Cameco to deliver more than 50 million pounds of uranium to China by 2025. The company estimates it will make as much as $3 billion from the agreement. Likewise, Japan’s rekindled love affair with atomic power will have it knocking on Cameco’s door as well.

The firm’s recent bidding war with Rio Tinto () for Hathor Exploration also highlights the continued need for new sources of supply[9]. Given its vast reserves, Cameco is in a good position as the world builds and fuels more reactors. Those reserves will only get more valuable as time goes on.

Finally, when it comes to metrics, Cameco has become a better value throughout 2012. Shares can currently be had for a forward P/E of under 14 — much less than the 17 P/E at the start of the year. Plus, CCJ has a 1.8% dividend yield. Earnings have improved since January, and given its leadership position and any nuclear-related bullishness coming from Japan, that P/E looks like a great bargain.

For investors, Cameco represents one of the best ways to play the resurgence in nuclear energy.

As of this writing, Aaron Levitt doesn’t own any securities mentioned here.

Endnotes:
  1. Asian neighbors: http://investorplace.com/2012/05/talisman-best-play-on-vietnams-energy-riches/
  2. promoting energy efficiency: http://investorplace.com/2012/07/energy-independence-the-efficiency-payoff/
  3. cleanup efforts: http://investorplace.com/2012/06/energy-independence-frackings-downside/
  4. restart two of Japan’s 54 idled nuclear reactors: http://in.reuters.com/article/2012/06/16/japan-nuclear-idINL3E8HG02R20120616
  5. use the warheads for reactor fuel: http://www.usec.com/russian-contracts/megatons-megawatts
  6. CCJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=CCJ
  7. profiled Cameco back in January: http://investorplace.com/2012/02/nuclear-energy-big-win-so-nlr-ccj/
  8. exporting uranium ore to China: http://www.cbc.ca/news/canada/saskatchewan/story/2012/07/20/sk-canada-china-uranium-deal-1207.html
  9. new sources of supply: http://investorplace.com/2012/07/chinas-energy-buying-binge-is-just-starting/

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