Almost two years after the Fukushima nuclear disaster, uranium miners are still struggling. Spot prices for uranium are less than a third of their 2007 highs while volumes have been dismal. Power generators have sufficient near-term inventories and a jump in the spot price can't be anticipated any time soon. Reaction to Fukushima has sparked a backlash against nuclear power, with Germany planning to phase out all of its nuclear generators by 2022, and France debating a measure to close 24 reactors by 2025. But even in this environment, the future of uranium is not all bleak and opportunities exist for long-term growth.
The World Nuclear Association reports that 65 reactors worldwide are presently under construction, with an additional 485 either planned or proposed. Most of that development is from China, India and Russia, which combined are building 46 new reactors with a staggering 273 plants planned or proposed. China alone is constructing 29 plants.
Fabrication of a nuclear facility is a long-term venture. In India, for example, laws assign liability to plant builders, rather than to reactor vendors. This anomaly to the international standard has made some contractors reluctant to engage in India and the pace of construction has slowed. But this has not deterred the development of trade agreements, as Canada and India are close to a long-term accord which would allow Canadian companies to sell nuclear materials to India.
In the meantime, supplies can be expected to contract, as uranium miners, notably Cameco (CCJ), slow greenfield development. Companies have indicated that new expansion will be dictated by spot price. In addition to scale-backs and lowered production estimates from the miners, there is the winding down of the Highly Enriched Uranium (HEU)agreement, which provided for Russian weapons-grade uranium to be recycled into fuel-grade uranium. Cameco's CEO Tim Gitzel noted that Russian withdrawal from the agreement by the end of 2013 will remove 24 million pounds from global supply annually.
So when will projected decreasing supplies of uranium clash with increasing demand from new plants coming on-line? Dennis da Silva, fund manager at Middlefield Capital, thinks the price could strengthen in late 2013 or early 2014. He pointed out that Australian-based Paladin Energy (PALAF.PK) signed a large supply contract in 2012 that begins in 2019, perhaps an indication of when it believes the uranium market will be flourishing.
Surprising the world, Japan's new prime minister Shinzo Abe has signaled a reversal of the previous government's policy of facilitating a phase-out of nuclear power. While his views might not represent those of the average Japanese, it is interesting to note how quickly his support for new plants could be voiced without universal condemnation. Perhaps Abe and his supporters anticipate higher fossil-fuel prices as a result of his party's bid to devalue the yen.
While it is not advisable to hold uranium in one's physical portfolio, several equities exist from which to launch a long-term uranium strategy, safely and legally. Established pure uranium producers, Cameco, Paladin and Uranium One (SXRZF.PK), all have expanded beyond the traditional U.S.-Canada-Australia matrices, with Paladin establishing a share of African mines, while Cameco and Uranium One have developed in-situ leaching operations in Kazakhstan. Attention should be given to these jurisdictions during any analysis, with Kazakhstan recently listed by Maplecroft as possessing a high-risk potential for "resource nationalism". Paladin and Uranium One are lightly traded in U.S. OTC markets and are not optionable. For those who are more comfortable with ETF diversification, there is the Global X Uranium ETF (URA), which includes all of the above companies in its holdings. Unfortunately for options traders, this instrument is not very liquid and has wide spreads.
Assuming there will be no abatement in developing countries' commitments to building nuclear plants, and barring another Fukushima or Chernobyl, it is clear that anticipated lower supplies of uranium will eventually collide with a surge in demand once new facilities are online. Sharp and prolonged increases in fossil-fuel costs, particularly of coal and natural gas, could hasten this outcome. In a world with limited options for mass power generation, uranium has been written off too soon.
