Bullish On Uranium Despite Fukushima

Uranium prices tumbled since a tsunami battered Japan’s coasts and caused the worst nuclear accident since Chernobyl at Tepco’s Fukushima Daiichi plant.  Prices, though, overreacted, much like public opinion, and have fallen below what underlying supply-demand fundamentals suggest, according to research by RBC Capital Markets.  With supplies continuing to fall and demand swelling on growing reactor-counts worldwide, the market will begin to tighten in the medium-run as deficits grow and become substantial, providing upside for uranium producers.

Spot uranium prices rose steeply from mid July last year from under $45 per pound to almost $75 by early February this year.  As market participants debated whether a bubble was being formed, a protracted nuclear crisis in Japan sent them tumbling again, with prices dropping below $55 by the week of June 27. (Read Uranium And Nuclear Stocks Feel The Shock Waves of Fukushima Meltdown).

This precipitous decline in uranium prices doesn’t respond to underlying fundamentals, though, and is the consequence of a social and political backlash on fears that Fukushima Daiichi could repeat itself around the globe.  According to RBC, prices will remain range-bound below $60 for the rest of the year, possibly dipping below $50 depending on how the situation in Japan moves forward.

But markets will recover, and what today are small supply-demand imbalances causing deficits, will grow, as supply substantially lags demand, pushing prices with it.  Demand is forecasted to grow 3.1% per year through 2014, after which deficit will become “very large,” and supply constraints lead to a “much tighter market, which should result in substantially higher prices.”

A 6 month chart of the Uranium and Nuclear ETF (NLR) shows how prices have fallen.

[wikinvestchart exchange="NYSE" ticker="NLR" range="recent" rolling="6 months" height="245" width="390" live_quote="true" annotations="false"]

Amid a global economic slowdown, many have forgotten that China is still massively invested in developing its infrastructure.  The Red Giant plans to expand its nuclear program taking its energy production level to 90 gigawatts by 2020, with its share of uranium demand jumping from 5% of global demand (9.5 million pounds of uranium) in 2010 to 20% of global demand (63 million pounds) by 2020.  The analysts provide fair warning to those banking on a protracted Chinese slowdown:

We think it is unwise to bet against China and its industrial might: when China sets its mind to build something, we believe it has the ability to carry out that wish in a manner that cannot be copied by any other nation. We think China has the will, money, skills, technology and desire to build its reactor fleet in the coming decade.

China is not alone in its aggressive nuclear expansion.  Saudi Arabia has announced plans for 16 new reactors by 2030 worth $80 billion.  The United Arab Emirates, Turkey, and Vietnam have also recently announced plans for new reactors.  And the analysts believe Germany’s threats to close all its nuclear reactors by 2020, and Japan’s suggestion that it should cease to rely on nuclear energy by April 2012, are just bluffs. (Read Speculators Push Uranium Prices Down, China Keeps Long Term Prospects Intact).

The story on the supply side supports their hypothesis.  Tumbling prices have hurt uranium miners, with Cameco, the world’s largest, seeing its stock price tumble 36% in the year-to-date.  Supply growth has been plagued by problems with existing operations and delays with new mine production.  Lower spot prices make projects less attractive while decreased equity market interest makes financing harder to come by.  Regulatory costs have increased as well, as negative public sentiment will make it hard to come by permits.

All in all, supply will lag demand, growing only 2.2% annually on average through 2014,  and peaking in 2017-2018 at about 250 million popunds, after which it will begin to fall.

Deficits will begin to grow substantially after 2014 with uranium production, both current a planned, “unable to satisfy reactor needs, initial core requirements, and inventories for new reactors.”

Prices will necessarily rise in tandem to justify production and, according to RBC’s estimates, will hit $80 per pound in 2014 and stay there until the end of the decade.

While uranium prices are highly volatile, “utilities’ uranium needs are very predictable in volume and timing and [are] absolutely necessary.”  With spot and long-term contract markets tightening due to all the reasons mentioned above, prices will inevitably increase, making a bullish case for uranium miners in the medium to long run. (Read Nat Gas Prices Have Bottomed Out, Goldman Sachs Says).