In the aftermath of Japan’s tsunami-induced meltdown at the Fukushima nuke plants, investors have shied away from nuclear-related investments. Bbut it was just a matter of time before the sector was revisited, and that time is fast approaching, writes Michael Smedley of Investor’s Digest of Canada.
My prediction for December has been borne out. Investors are once again making money in depressed resources stocks.
Now, because I like to be one of the first to take advantage of new trends, I’ve cottoned on to the blighted uranium sector. I’ve concluded that uranium recently formed a price base of roughly $52 a pound—$26 below where it was before the tsunami hit Japan’s Fukushima nuclear power plant last March.
Moreover, the metal has already been buoyed by better prices on both the spot and contract markets. That uranium has been on the upswing became clearer when I heard Nick Carter speak late last year at a Toronto conference organized by Scotia Capital.
Carter, a top official with a US mining consulting firm, is a laid-back type of guy, not given to heavy-duty promotions. But his comments made me realize that the metal with the least downside risk—short of another nuclear accident—is uranium.
For starters, uranium now supplies 14% of the power base load worldwide—something it should continue to do. And although politicians everywhere have jumped on the anti-uranium bandwagon over the last few months, Carter thinks few will likely remain on board.
Instead, he sees more countries joining the “nuclear family,” in spite of such challenges as capital costs, safety concerns, and the problem of nuclear waste. Indeed, roughly 60 nuclear power plants are now being built around the world.
In the interim, global uranium demand continues to outstrip supply. Although 141 million pounds were produced in 2011, this was still 37 million pounds, or 26.2%, below what was needed. And the situation won’t get better anytime soon, given that the expiry of a Russian supply contract in 2013 will take down global inventories by 24 million pounds.
It’s hard to predict how metals will fare. But with uranium—unlike most metals—long-term power needs, rather than short-term market cycles, will likely be the most important pricing determinant.
As usual, other investors beat me to the draw in giving uranium miner Cameco (CCJ) a renewed vote of confidence following Fukushima. And Cameco, the world’s only big-cap pure play, looks special as we move into 2012, given improved conditions at its Cigar Lake project in northern Saskatchewan.
In fact, we can now say with some certainty that the project, the only new major uranium mine to be developed in decades, could be up and running in 2014. And that’s no small feat. After all, Cigar Lake is the biggest undeveloped high-grade uranium project anywhere in the world.
In fact, the targeted output—18 million pounds a year—would come close to doubling Cameco’s annual production. Although the project has been plagued with delays, I now think it’s unlikely that it will once again succumb to flooding.
After Cameco, publicly traded uranium miners not only plunge in size, but in number, although the industry itself is getting a lift. The lift started in the last quarter of 2011 when Cameco and Rio Tinto (RIO), the global mining giant, duked it out in northern Saskatchewan for control of Hathor Exploration—a battle Rio ultimately won.
But Rio Tinto can hardly rest on its laurels, given the challenges it now faces at Rossing, its uranium mine in Namibia, as well as the production problems it must contend with at Ranger, its uranium mine in northern Australia.
Although the company is too big an outfit to spend much time on uranium, its toe-dipping in northern Saskatchewan might lead it to reveal whether it plans to broaden its footprint in that uranium-rich part of the province.
In the meantime, there’s speculation that Areva, the French industrial conglomerate, might sell some of its uranium assets in Saskatchewan. After Cameco and Rio Tinto, there are only a few other uranium producers to consider.
One is Uranium One Inc. (Toronto: UUU), a Toronto-based outfit with operations on four continents, more of whose shares I recently bought. The company has grown rapidly, having recently produced ten million pounds of the metal—a record.
And if you overlook Areva, which is thinly traded, Uranium One becomes the second-biggest publicly listed uranium company in the world. ARMZ Uranium Holding Co., the Russian owner of Uranium One, is a strong influential partner in Kazakhstan, Uranium One’s main production base.
Meanwhile, thanks in part to ruble-denominated financing, Uranium One has been able to buy 13.9% of Mantra, a promising uranium asset in Tanzania that’s now being developed. Uranium One won’t have to pay for the other 86.1% share of Mantra until 2013.
Back in Saskatchewan, interest is building in Fission Energy Corp. (Toronto: FIS), an early-stage uranium play next door to Hathor’s Rough Rider deposit. Admittedly, Fission has so far logged lower grades, but its territory has potential. It also has a drill program elsewhere in the Athabasca Basin, as well as assets in Quebec and Peru.
Across the world, Australia’s Paladin Energy Ltd. (Toronto: PDN) is now the world’s third-biggest uranium play, right behind Uranium One. Having posted a record output of 1.8 million pounds in the latest quarter, Paladin has greatly improved its throughput, as well as its ore grade, at its mine in Namibia.
In the interim, Paladin—which has long term projects in Australia, the US, and Canada—has started production in Malawi. Another way to capture further upside in the metal is through Uranium Participation (Toronto: U), a commodity fund managed by Denison.
As of December 31, Uranium Participation had a reported net asset value of $6.94 a unit, although it touched $10 before the Fukushima accident and $18 when prices soared in 2007.