As seen in the latest issue of Master Investor Magazine
At 14:46 on Friday 11th March 2011, the Tohuku earthquake – now sometimes referred to as the Great East Japan earthquake – struck off the east coast of Japan. At a magnitude of 9.0 (Mw) it was the most powerful earthquake ever recorded to have hit Japan, and the fourth-most powerful in the world since modern records began in 1900. The tsunami waves that followed afterwards reached heights of up to 40.5 metres and travelled up to 10 kilometres inland.
The resulting devastation led Prime Minister Naoto Kan to refer to the ensuing crisis as “the toughest and the most difficult” since World War II. A National Police Agency report released on 10th March 2015 finally confirmed the heavy toll exacted: 15,894 deaths, 6,152 injured, and 2,562 people missing across twenty prefectures, as well as 228,863 people living away from their home in either temporary housing or due to permanent relocation. The report also confirmed 127,290 buildings totally collapsed, with a further 272,788 buildings ‘half collapsed’, and another 747,989 buildings partially damaged. Early estimates placed insured losses from the earthquake alone at US$14.5 to $34.6 billion. The World Bank’s estimated economic cost was US$235 billion, making it the costliest natural disaster in world history.
The fallout from Fukushima
Aside from the devastation and misery caused by the tsunami, one of the most enduring images we have of this crisis is the nuclear disaster at Fukushima Daiichi. Although the active reactors at Fukushima shut down their sustained fission reactions automatically immediately after the earthquake, the tsunami destroyed the emergency generators cooling the reactors. This led to three nuclear meltdowns and the release of radioactive material from 12th March, as well as several hydrogen-air chemical explosions between 12th and 15th March.
Fukushima ranks as the largest nuclear disaster since the 1986 Chernobyl disaster. And yet, remarkably, there have been no fatalities linked to radiation as a result of the accident. In fact, on 5th July 2012, the Fukushima Nuclear Accident Independent Investigation Commission found that the causes of the accident had been foreseeable. It also concluded that the plant operator, Tokyo Electric Power Company (TEPCO) (TYO:9501), had neglected to meet basic safety requirements.
Nevertheless, the fallout in the wider market for nuclear energy was swift and damning. Prior to Fukushima, 442 nuclear power reactors in 30 counties produced 14% of the world’s electricity. That share fell to just 11% in 2012, barely a year after the disaster, as countries such as Japan and Germany turned off a total of 15 reactors. The spot price of uranium responded by falling around 60% to $30 per lb in mid-2014. There was a brief bounce back towards the end of 2014 as Japan began to re-start a few of its reactors, but the price has since settled back down to trade at just over $26 per lb at time of writing.
But it has to be acknowledged that the travails of uranium are as much to do with sentiment as fundamentals. And yet the negative sentiment surrounding nuclear power doesn’t stand up to scrutiny. True, the World Health Organisation’s 600-page report on the Chernobyl disaster estimated that the total number of radiation-related deaths is likely to total 4,000. Although sobering, that statistic pares into comparison against the millions of people the WHO estimates die from air pollution caused by fossil fuels each year. Notwithstanding the Chernobyl and Fukushima disasters, nuclear energy has proved itself to be a clean and reliable source of energy over time, providing the necessary safety measures are adhered to. As the Scientific American observes, “Nuclear energy’s clean bona fides may be its saving grace in a wobbling global energy market that is trying to balance climate change ambitions, skittish economies and low prices for oil and natural gas.”
The nuclear renaissance
Five years on from the Fukushima disaster, interest in nuclear power is beginning to build again. In the US – where in 2012 Congress approved the construction of four new reactors, for the first time since the 1970s – the future of nuclear power is looking brighter if upcoming legislation is anything to go by. One bill looks set to open up national laboratories to entrepreneurs and their innovative new companies to develop public-private partnerships with the potential to bring new ideas to market. Another bill aims to build a sensible regulatory framework to allow diverse advanced reactor concepts to go from the drawing board to reality. These bills have been moving through Congress and are garnering broad bipartisan support. The Nuclear Energy Innovation Capabilities Act recently passed the Senate as part of a bipartisan energy bill, on an 87-4 vote. Meanwhile, the Nuclear Energy Innovation and Modernization Act was approved by the Senate Environment and Public Works Committee on a 17-3 vote.
Japan restarted nuclear reactors at the Sendai power plant towards the end of 2014, and it is understood that around 40 of the country’s 54 nuclear power plants will be restarted. Japan is crucial to stabilising the uranium price, as it has accumulated 120 million pounds of uranium stocks while its reactors have been idle (it had to honour existing contracts), which is enough to fuel its needs for the next decade. The fact that Japan – the world’s third largest nuclear power consumer at the time of Fukushima – is practically swimming in uranium is what many believe to have kept the price of uranium below $40 per lb for so long.
As Japan prepares to bring its nuclear fleet back online, its neighbour across the East China Sea is planning a much more ambitious programme of nuclear expansion. In fact, China plans to almost triple its atomic power generation by the end of the decade, and is forecast to spend $1 trillion to expand capacity by 2050. By that time, the Middle Kingdom would account for roughly one quarter of global nuclear output. Although China produces only four million pounds of U3O8 (known colloquially as ‘yellowcake’, which is essentially uranium in its naturally occurring form) annually, the country consumes 19 million pounds per year. China’s planned increase in nuclear energy will raise that amount to over 70 million pounds by 2030.
Although China’s is the most impressive plan for nuclear expansion, it actually only represents 36% of the global pipeline of nuclear projects. Other important players include India, South Korea, Russia, the UAE, and the US. Aside from the US, which we’ve already covered, India is the most important after China. India has just ratified a new nuclear liability law that addresses an issue that has been delaying deals for new reactors. Now, with the new legislation in place, there should be a flurry of new Indian reactor deals. In fact, India is already right behind China in terms of planned reactors over the next decade, with plans to construct about 60 reactors.
The turning point
But as we’ve seen above, there is currently a uranium glut, mostly in the form of Japanese stockpiles. In fact, as the above chart shows, demand is not forecast to begin outstripping supply until 2020. So why bother investing in uranium stocks today? The smart money (see below) isn’t hanging around until 2020. And here’s why. Nuclear power operators can’t risk going anywhere near running out of fuel, as that would cause a meltdown. On top of this, they can’t simply put yellowcake straight into their reactors – they require fuel rods, which can take around a year to a year-and-a-half to produce. To provide a buffer, operators tend to cover their uranium requirement around three years out, which is incidentally just before the shortfall comes into play, according to the chart.
But it gets better. When uranium prices were rocketing back in 2007, operators rushed to sign supply deals for fears that prices would continue to soar. Despite the fact that prices subsequently crashed back down to earth, these deals were binding, and many of them were for periods as long as ten years. Furthermore, in the intervening period, operators have held off from signing new contracts, as they have been able to pick up uranium cheaply on the spot market. But once they do, those new contracts will be at higher prices than the current spot rate. This is simply because producers will demand higher prices so they can expand production to meet future demand – the present spot price of uranium is such that almost no new production can be brought online economically. In turn, the plant operators will accept higher prices because: a) uranium is a relatively small component of their overall costs; b) they know new production is necessary in order to meet future demand; and c) secure access to uranium is critical for the safety reasons we touched on earlier.
But if you remain unconvinced of the arguments in favour of uranium as a potentially lucrative investment, it is worth taking a look at the activities of the ‘clever money’ – billionaires, hedge fund managers and the like. In June, Hong Kong billionaire investor Li Kashing, through his CK Hutchinson Holdings and CEF holdings, said he would buy $60 million in convertible bonds from NexGen Energy targeting uranium projects in Canada’s Saskatchewan province. The month before that, billionaire D.E. Shaw notified the market that he’d acquired 1.4 million shares in Cameco. Shaw and Kashing follow other big names, including George Soros, Ken Griffin, Ray Dalio and Steve Cohen, all of whom have been dipping into the uranium sector of late. Of course, there is nothing to say that they couldn’t all be wrong – they are only human after all – but it appears they can sense a change is afoot in the uranium market, and they don’t want to be left behind if and when it gets underway.
How to invest
So how can investors gain exposure to the sector? UK investors may want to begin by taking a look at Geiger Counter (LON:GCL), a UK-listed investment company managed by New City. The fund is relatively concentrated in a handful of companies and the shares sit at an 18% discount to NAV at time of writing. Those who prefer a passive investment strategy as opposed to active managed may wish to consider the Global X Uranium ETF (NYSE:URA), Market Vectors Nuclear Energy ETF (NYSE:NLR) and the iShares S&P Nuclear Index Fund ETF (NASDAQ:NUCL). The first of these holds uranium miners exclusively whereas the latter two hold a mix of miners and utilities. As such, all three should do well if the demand for nuclear power rises significantly, but if the uranium price rises while the demand for nuclear power remains static, Global X Uranium is likely to be the best option.
Investors looking to gain direct exposure via individual mining stocks have rich pickings right now, not least because what’s left standing has already been through almost a decade of falling uranium prices. At the peak of the uranium price in 2007 there were roughly 500 listed companies exploring for uranium. That number has now been whittled down by around 90%. While both BHP Billiton (LON:BLT) and Rio Tinto (LON:RIO) have significant uranium interests, by far the largest independent pure play uranium company is Cameco (TSE:CCO), the largest and lowest cost uranium producer in the world. Cameco is very well financed and has operations across the entire spectrum of the market, from exploration to power generation. It pays a dividend and is a solid option for those looking for a lower risk route into the uranium sector.
Investors with a higher risk tolerance would do well to investigate companies operating in Canada’s Athabasca Basin, which has been producing grades in excess of 100x the global average of late. It is also home to the world’s richest uranium mine, Cameco’s Cigar Lake. Fission Uranium’s (TSE:FCU) Triple R deposit at Patterson Lake South is now the single largest undeveloped uranium deposit in the Athabasca Basin among projects that have a resource estimate. Interestingly, Fission recently attracted investment from China’s CGN Mining Corp., which took a 19.9% equity stake through an $82 million private placement. The deal is further evidence of China’s commitment to securing its future supply of uranium in order to meet the needs of its nuclear programme. Other players to investigate include Denizon Mines (TSE:DML), whose 60%-owned Wheeler River project hosts two deposits with combined total resources of 113.2 million pounds of uranium, and NexGen Energy (CVE:NXE), whose promising Arrow deposit is growing at an astonishing pace.
Cameco (TSE:CCO) – Vertically Integrated
Investors looking for a well capitalised pure play on the uranium sector would be hard-pressed to do better than Cameco. The company explores, mines, mills, buys, and sells uranium concentrate, whilst also operating four nuclear reactors. With its newest mine in Saskatchewan, Canada expected to produce 16 million pounds of uranium concentrate in 2016, and with plans to open as many as three uranium mines in the Nebraska Panhandle, the firm is clearly gearing up to meet growing demand. Indeed, the firm is well placed to ride the wave of demand stemming from China’s nuclear programme given its position as the country’s primary supplier of yellowcake, under a contract that runs until 2025. Cameco’s dominant position is underpinned by over one billion pounds of uranium reserves, of which 410 million are in the proven and probable category. As well as being the largest producer, Cameco is also the lowest cost operator, with a cash cost of production of around C$20 per pound, versus a current uranium price of c. US$26. This has helped it to remain cash flow positive at the operating level in recent years despite low uranium prices.
Berkeley Energia (LON:BKG) – World Class Potential
Spain-focused Berkeley Energia is sitting on what looks likely to be the largest uranium mine in Europe and the eighth largest in the world. To put that into context, it has sufficient resources to power the whole of the UK’s energy needs for five and a half years. What’s more, management seems confident that the resource will become bigger with further work, and as such they have identified another 11 high priority targets with similar geology to the core Zona 7 area. Zona 7 itself is one of the highest grade deposits in the world, and crucially it sits near the surface, making it a potentially low cost project. Notably, the project is financially viable at a uranium price of just $15.60 per pound, which is well below even today’s depressed prices. The company received a major vote of confidence in May when major shareholder Resource Capital Funds backed the company to the tune of $10 million at a premium to the then share price.
Energy Fuels (TSE:EFR) – “If you own the mill, you own the district”
Energy Fuels is set to be the number two producer of uranium in the US in 2016, yet it its market capitalisation is less than $150 million. This company is of interest to investors as it has strong positions in production and processing as well as exploration. As well as boasting the largest uranium resource portfolio in the US among producers, the firm has an operating capacity of over 11.5 million pounds of uranium per year and several projects that can be advanced into production relatively quickly if and when prices improve. Of particular note is the fact that Energy Fuels owns the only conventional uranium mill in the US, at White Mesa in Utah, and one of the newest uranium production facilities in the US, at Nichols Ranch in Wyoming. As a result, Energy Fuels not only has the facility to process its own conventional ore – which it is already doing – but it can also earn royalties by milling ore from other mines in the region that come online as uranium prices begin to improve. Mill licences are very difficult to come by, so it would be reasonable to assume that Energy Fuels’ White Mesa mill would become increasingly valuable should the uranium sector begin to fire up again.