By The Wall Street Fox → Friday, August 23, 2013
Uranium is the one commodity that has been consistently receiving bad press, and for good reasons. Between the horrific disaster that struck Japan in March 2011, and the resulting aftereffects, uranium can't catch a break -- and neither can its spot price. The price has practically been cut in half when compared to pre-Fukushima spot prices, currently hovering around $35.
Because of so many different factors affecting the spot price, it's difficult to keep up to speed with the constant news flow that affects the price of the yellow cake, let alone predict where the price will be one month from now. Many analysts thought that uranium bottomed when it hit $49 last year. Regardless of the negative press that has been hampering the confidence of uranium investors for more than two years, and the industry as a whole, I believe now is the time to jump in and invest. There are too many positive developments occurring that will inevitably put upward pressure on this depressed energy source.
First, The Bad News
On Aug. 7, a startling revelation was made with regards to the clean up efforts at the Fukushima Daiichi facility. The Japanese government revealed that the ruined nuclear facility has been leaking up to 300 tons of toxic water into the Pacific Ocean every single day. The government could not rule out that this has been happening every day since the disaster occurred. That means its possible that more than 275,000 tons of radioactive water have leaked into the Pacific Ocean since the nuclear disaster occurred. And when looking at the map below, the realization hits that as terrible as this is for Japan, it may be even worse for America.
The consequences of nuclear debris inevitably hitting America's West Coastmay be profound. From food production to health complications and the overall economy, this is very bad. If you'd like to further dive into material that makes "Food, Inc." look like a bedtime story, click here. On top of this, it was announced just this week by Tokyo Electric (TKECF.PK), the operator of the Daiichi facility, that a storage tank holding 300 tons of radioactive water leaked into the ground. Another tank leaked 120 tons of radioactive water into the ground back in April, too. All of these embarrassments do not bode well for uranium, or the nuclear industry in general.
At the same time, it is hard to gauge how much of an effect these recent developments will have on the future of nuclear power and the spot price of uranium, and when exactly this effect will occur. If public awareness of this problem increases and becomes mainstream, then expect increased pressure on developed countries to phase out their nuclear power plants. Japan, Germany, and France have already begun this process.
This development is just one piece to the ever-growing puzzle. There are so many factors that can hinder or boost the development of nuclear power and the price of uranium. Every long-term uranium/nuclear investor should continue being bullish, however, they should keep the map posted above in back of their minds, and be aware that this negative press, and the severity of this problem, can send uranium spot prices to new multi-year lows.
And now the good news...
The Snowden Effect
Notorious NSA whistleblower Edward Snowden has been all over the news since he leaked classified information back in June. The closely watched saga that ensued led to Edward Snowden standing on Vladimir Putin's front doorstep. With tensions already high between America and Russia, Putin ultimately decided to grant Snowden asylum (to be renewed on a yearly basis).
Edward Snowden has effectively put a kibosh on America's last possible chance at extending the soon to expire Megaton to Megawatts agreement, with President Obama canceling a meeting between Putin and himself shortly after Snowden was granted asylum. The program, which provided America with low enriched uranium from Russian Cold War missiles, will effectively take up to 24 million pounds of uranium off the market. Thank you, Edward.
The basic principles of supply and demand apply to the uranium market just like any other, though it should be noted that the spot price acts more like an indicator of sentiment. Most uranium transactions are dealt through long-term contracts, so a majority of the uranium is not traded on the open market.
The large surplus of uranium that has been on the market due to reduced usage by Germany, France, and Japan has led to incredibly low spot prices. These low spot prices have crushed uranium miners, who usually have to see uranium prices above at least $40 in order to make a profit. This has led to consolidations in the uranium market recently, and has caused some miners to halt production until the prices go back up. About 50% of global production does not make money at these current levels, and the shut down of miners will lead to an eventual shortfall in supply. Combine this with the removal of 24 million pounds from the open market, and the spot price will surely see some upside.
Just this week, a three-week rally in the uranium spot price ended after an expected deal to buy one million pounds of uranium fell through. If a one million pound transaction of uranium has that much pull on the spot price, just think of the potential impact 24 million pounds would have on the market. The potential is even bigger when considering the looming production halts.
We need nuclear energy. In 2011, 13.5% of the worlds electricity was generate from nuclear power. The energy produces nearly zero emissions, and new facilities are smaller, safer, and more efficient, especially when compared to the majority of plants world wide that were built more than 40 years ago.
As of March 2013, there are 435 nuclear power plants in operation. There are at least 63 new plants under construction in 13 different countries. At least 30 of them expect to be completed by 2014. Currently there are 160 planned nuclear power reactors, and 320 proposed power reactors, worldwide. A majority of the growth is coming from China, India, Russia, and America. You can get all of these numbers from the World Nuclear Association.
Uranium provides affordable, clean power that is necessary for any economy to grow and develop. Burning coal and gas can take a toll on the environment, especially when dealing with densely populated cities, like in China. These cities have been devastated by terrible air pollution, which takes a toll on the health of its inhabitants. Nuclear energy provides a clean, cheap solution to the problem.
China will be a main source of growth. Currently, the country operates 17 nuclear reactors, has 28 under construction, and has plans to commence more constructions. Only 2% of China's electricity production is derived from nuclear power.
Japan and Germany have realized how hard it is to run a country with minimal nuclear energy. Both countries now sport some of the highest electricity costs, which is weighing down on their economy. It's not sustainable. Both countries have increased their imports of natural gas, and Germany's coal produced electricity has increased by 16.8% from 2011 to 2012. The countries are feeling the effects. Japan is planning to start up more reactors in the imminent future, and there is mounting pressure on Angela Merkel to reign in these costs. The potential for Germany to follow suit is highly likely.
Don't Forget The Risks
There are several factors every investor needs to keep in mind, including the first part of this article. While the Fukushima disaster was a once-in-a-lifetime tragedy, the effects of a meltdown are devastating, however rare they may be. And this will lead to public opposition, and more pressure to shut down nuclear reactors across the globe. Nuclear power plants are capital-intensive projects that require billions of dollars in funding and take years to build. Therefore, any cash strapped country may defer projects later into the future.
Natural gas was the double whammy that knocked down uranium spot prices back in 2011. Natural gas prices were at an all time low, required less capital investment, and therefore was more attractive to producers. If natural gas prices manage to drop down to lower levels, or if natural gas truly becomes the driving force behind this country, nuclear power may get battered. However, I don't think this is likely, and the nuclear growth overseas would outweigh this problem.
How To Play
You can play a long-term run-up in uranium prices by buying any company that is related to the element. Explorers, miners, power plants -- you name it. Cameco (CCJ), based in Canada, might possibly be one of the purest plays. Other names include Uranium Energy Corp. (UEC), Ur-Energy (URG), Uranerz Energy (URZ), Denison Mines (DNN), Uranium Resources, USEC (USU), Paladin Energy (PALAF.PK), Rio Tinto (RIO), Market Vectors Nuclear and Uranium ETF (NLR), and many others. Please do your own due diligence when choosing companies.
With uranium prices at yearly lows, impressive worldwide growth plans, and an impending shortfall in the supply of the yellow cake element, now seems like the perfect time to gain some exposure to uranium. I believe the risk/reward ratio is quite compelling for the long-term-oriented investor. There are bound to be plenty of bumps along the way, so fasten your seat belt.