A few months ago, there was a report that a Japanese town recovering from last year’s tsunami-inflicted Fukushima nuclear disaster is teaming up with Toshiba Corp. to build several solar electricity plants which, combined, would be Japan’s largest solar facility.
The coastal town of Minami Soma plans to install 100 megawatts of solar, which would be about 2 percent of the 4.7 gigawatts of capacity at the now idle Fukushima Daiichi nuclear station 16 miles to the south.
If you recall, a huge earthquake triggered an even bigger tsunami that laid waste to northeastern Japan, including three aging nuclear reactors. Parts of Minami Soma were in the no-go zone following the meltdowns.
Following the Fukushima disaster, Japan shut down all of its 54 nuclear power stations.
But the lesson here isn’t really about how Japan has seen the light (pardon the pun) and is going to replace all its nukes with solar, geothermal and wind.
No, the hidden news peg in all this is that most people have put the disaster behind them and now are getting back to business as usual.
Whether the Japanese restart their nukes is immaterial. Nuclear energy is a clean fuel of the future for developing nations around the world and in particular, China and India.
That means big things for uranium producers and even bigger things for the biggest uranium player, Cameco Corp. (CCJ).
Emerging Markets Bring Growth
U.S. investors have been far too focused on nuclear’s old reputation, when it took forever to build a plant and then you were never sure how well it was built. Things have changed considerably since those days.
But the U.S. utilities and regulators are still having a hard time finding common ground. There’s only one new reactor under construction; and nine are in advanced stages of planning.
In China, however, there are 27 reactors under construction and 50 additional reactors in advanced stages of planning.
India has 20 reactors in six power plants with at least seven in planning mode. Its goal is to triple its nuclear power from 3 percent to 9 percent of overall electricity generation capacity in the next 25 years. By 2020, India’s installed nuclear power generation capacity will increase to 20,000 MW from about 4,800 MW today.
The International Atomic Energy Agency’s most realistic estimate is that 90 new nuclear plants will enter service around the world by 2030. Ten new nuclear plants went online over the past two years.
And plants abroad cost 70 percent to 80 percent less than they do in the U.S. I was at a conference a few years ago and began talking to a guy who worked as a nuclear engineer for Southern Company and then started his own business.
He had consulted on some Chinese nukes and was telling me how amazing it was to watch them put up a plant. They hit their deadlines and had little red tape to deal with, which meant they got to focus on the work.
Simply put, the growth story for nuclear power — much like the growth story for oil and natural gas demand — is centered in the emerging markets.
Uranium Is Heating Up
It’s no surprise share prices of most uranium producers plummeted in the immediate wake of the Fukushima. Since then, the group for the most part has traded sideways; investors have remained on the sideline, awaiting greater clarity on the impact of the accident on global nuclear demand growth.
Many countries announced a pause in the construction of new reactors and/or the beginning of comprehensive safety audits last March, a process that took time to complete. But recent announcements from China, Japan, India and the U.K. have affirmed that nuclear power’s future remains bright. Germany’s and Switzerland’s decisions to phase out their nuclear power programs shouldn’t damage the industry’s growth prospects.
While the uranium price is lower than it was immediately prior to Fukushima, it’s important to remember that it is at a higher level than in mid-2010, which was only six months before Fukushima.
The main things keeping a brake on uranium prices now are the current supply-demand balance and some residual uncertainty regarding Japanese reactor restarts and the issuance of new reactor licenses in China, which were suspended after the Fukushima accident.
It looks increasingly likely that Japan will begin to restart reactors. Local opposition to reactor restarts was overcome earlier this summer, and the government appears to be getting closer to a restart decision.
In China, some nuclear regulators have come out publicly over the course of the past few months saying that they will begin to issue new reactor licenses again. And at the beginning of June, the Chinese cabinet reportedly reconfirmed the country’s commitment to its nuclear program.
The 800-Pound Gorilla
Camecois the largest pure-play miner of yellowcake and is a must-own for investors interested in profiting from rising demand for uranium.
On May 1, Cameco reported a 43 percent surge in first-quarter profit to $131.8 million. During the first quarter, the company sold 8.1 million pounds of uranium at an average realized price of $49.40 per pound. That compared with sales of 6.1 million pounds at an average realized price of $48.60 per pound in the first three months of 2011. The company’s sales rose 22 percent to $562.3 million.
And Cameco has a strategy to double its production by 2018. To accomplish that, there may be some acquisitions in the company’s future. With prices flat-lined until demand picks up and smaller miners getting stretched over the past year, this may be the perfect time to snap up productive properties and eliminate some of the competition simultaneously.
Also, Cameco has a series of major projects under way. The largest is the long-delayed Cigar Lake mine in Canada. The company expects the facility to produce about 1 million pounds annually from the mine by 2013. The mine’s annual output could hit 5.6 million pounds by the latter half of the decade.
Cameco is in prime position to fuel the next generation of nuclear reactors and score some big gains in the process; it’s a buy up to 27.
A Local Hero
A smaller, more leveraged play is Vancouver, Canada-based Uranium Energy Corp. (UEC). All its operations are in the U.S., and it hopes to gather a bigger share of the U.S. market, since 95 percent of U.S. uranium is imported.
What’s more, 20 percent of U.S. electricity comes from nuclear power and the 55 million pounds of uranium consumed each year in the U.S., but only 4 million pounds of uranium are produced each year domestically. The U.S. is more dependent on foreign uranium than it is on foreign oil.
The biggest problem has been that uranium prices are so low that there’s little opportunity for profit. Miners need prices around $80 a pound to expand production and grow profits, but spot uranium prices are about $50 a pound, which is reason enough for UEC’s lackluster performance up to now.
UEC uses a method called in-situ recovery, which is the lowest-cost method of extraction. As its extraction costs are lower, any up-move in prices will be leveraged in the company’s performance.
And two factors are working in the company’s favor: Domestic demand may rise simply for economic security reasons; and if that doesn’t happen, demand overseas will soon begin to make up for it. Emerging economies are building nukes like crazy — not only China and India but South Korea and oil-rich nations like Saudi Arabia and the United Arab Emirates, as well as Iran. As oil gets dearer, it makes more sense to sell it than to consume it, especially if there are more efficient alternatives.
Either way, UEC is a leveraged way to play the rebirth of nuclear energy globally.
And something seems to be happening, because the stock is up almost 15 percent this week on no news. When flat-lined stocks rally that much with no explanation, there’s something going on that the smart money knows and can’t or won’t talk about it. UEC is a speculative buy below 3.75.