Nuclear Sunset as New Gas Era Dawns

03/29/2011 3:42 pm EST

Focus: COMMODITIES

George Wolff

Author, The Biotech Investor's Bible

The nuclear disaster in Japan will haunt the world for years to come, making natural gas the energy source of choice, writes George Wolff of China Stock Digest.

We're already hearing that uranium stocks are oversold. This is a cycle that happens every time a stock (or a market sector) gets slapped down. Pundits emerge to declare that an out-of-favor sector has been sold down to bargain levels. It's time to buy in again, they chirp.

Sure enough, in the wake of the Japanese nuclear disaster, it certainly hasn't taken long for the “oversold” voices to chime in. As one wrote, “The fire sale in uranium stocks may be providing an excellent opportunity to enter this market or to add to positions.” Really?

Perhaps we should wait until the reactor fires are extinguished before considering such a rash move.

Jerry Grandey, the CEO of leading uranium miner Cameco (CCJ), minimizes the damage to his company. He says Japan's nuclear crisis will probably cut Cameco's uranium sales by as little as 3% to 5%, and this should be offset by greater Japanese consumption during the coming rebuild.

"There are 54 reactors in Japan, 11 are currently down, and some are likely to be brought back over time," Grandey told a conference call. "Even if 11 units remained down, it wouldn't be all that [economically] significant to Cameco." Grandey also pledged to continue the expansion of Cameco's uranium operations around the world.

Optimists point out that the world is on a global reactor-building binge. [Wolff’s colleague Jim Trippon is among them—Editor.]

China is critical to global expansion of uranium markets during this decade. But China has suspended approvals of new nuclear reactors pending a review of industry safety. Many other countries have done the same, including India and Germany.

Emerging markets like China and India have an urgent need for more clean energy. There seems to be little doubt that current industry "reviews" will result in stricter safety standards and the construction of existing projects will likely continue.

Cameco's Grandey was buoyant, saying, "I don't think you're going to see any material reduction globally in uranium demand, and I really don't believe that some 60 plants that are under construction, and those that are planned, are going to be delayed in any significant way, whether they're in China or India or the United Arab Emirates, or wherever they might be."

Good luck with that prediction.

In the wake of the Japanese crisis, the optimists touting a rebound in the nuclear industry are premature at best. At worst, they may be flogging a dead horse.

Nuclear Fears Have Long Half-Life
It is difficult to overstate the gravity of the situation in Japan. As I write, food supplies in Japan have been found to be radioactively contaminated.
 
And if you think this is just the tail end of the story, think again. As the cleanup begins, we will certainly hear more alarm over the spread of radioactive contamination. It seems most unlikely that Japan will ever build another reactor.

Japanese fear of the nuclear industry will certainly spread to the US. Approvals for future reactor construction will be difficult―if not impossible―to obtain here because of renewed public opposition. New "safer" reactor designs won't calm fears about an energy source that will continue to reel from Japanese fallout for years to come.

Even more ominous in this new environment is the fact that storage pools for spent uranium rods are now recognized as a threat. Every reactor has one of these glowing pools, specifically because the world has not found a way to dispose of nuclear waste.

The political bickering which has derailed the Yucca mountain nuclear waste project in Nevada will come no closer to a solution in the current environment.

Next: NatGas Is the Answer

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NatGas Is the Answer
Without a doubt, the world needs a new source of clean energy. But, importantly, vast new deposits of natural gas have been discovered in the US, and natural-gas prices are falling.

This raises the prospect of turning to natural gas instead of nuclear. Building a gas-fired electricity station is much quicker and cheaper than any nuclear installation. (Gas-powered stations produce electricity at less than one-tenth the cost of nuclear installations, according to an estimate by Gerson Lehrman Group.)

I expect we will be hearing disturbing reports of incompetence and serious after-effects from Japan for years after the Fukushima reactors have been entombed.

No matter how good the earnings reports of uranium miners will be in years to come, stock valuations will be pummeled by negative news. Yes, the reactor construction projects already underway worldwide will likely be completed. They will consume existing supplies of uranium and a great deal of supply from future projects in emerging markets. But earnings multiples will continue to be pummeled.

I believe the developed world will eventually turn very sharply away from nuclear energy and towards cheap and abundant natural gas.

Even China has reached out to the United States for help in developing its own shale gas reserves. PetroChina (PTR) has also declared its intention to acquire even more gas resources worldwide in the wake of Japan's earthquake.

The biggest consumer of liquefied natural gas in the world is Japan. In the aftermath of the nuclear disaster it seems a certainty that gas demand will rise exponentially in Japan and the rest of the world.

The smart money will likely take a position in natural gas resources. [The First Trust ISE-Revere Natural Gas Index (FCG), an ETF containing the largest and most attractive natural-gas producers, is up 17% year-to-date and almost 8% since the Japan earthquake. In contrast, the Market Vectors Uranium and Nuclear Energy ETF (NLR) is down 10% since disaster struck—Editor.]  

Despite calls for a rebound in uranium stocks, I believe many investors will treat them as if they were radioactive.

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