Nuclear power has been a hot topic recently.
And as a result, the price action of its input commodity has been quite
schizophrenic. Investors and speculators are in a state of great
wonderment over what to expect from this intriguing mineral that is mined for
energy.
Based on its
core strategic fundamentals, investors ought to be wildly bullish on
uranium’s future. But with a veil of uncertainty cast over it
thanks to the tragic Fukushima disaster, should we be looking at the future
differently? Of course only time will tell how things play out.
But based on cold-hard rationality, my money is on
a future where nuclear power is an indispensible part of the world’s
energy infrastructure.
This
rationality is based on the fact that electricity demand is expected to
increase by about 75% over the next 20 or so years. With this
soaring demand, only economically-scalable sources of energy will
suffice. For a variety of reasons renewable energy does not have the
right combination of economics and scalability in today’s
environment. And while coal and natural gas will continue to be big
players, the world’s push towards clean energy
pits a lot of objections to these sources.
Nuclear energy
on the other hand is scalable, economical, sustainable, reliable, and even
with such black-swan events as Chernobyl and Fukushima, it is clean. It
already accounts for about 14% of the world’s electricity, and most of
the world’s utilities/governments realize that nuclear power is
integral to meeting future energy needs.
For these
reasons and more uranium, the commodity that fuels nuclear power, is in the
midst of an incredibly-powerful bull market. And based on the economic
imbalance of the uranium market, this bull ought to plow forward for many
years to come.
Mine production
is of course the main supplier of uranium for the world’s 440 operating
nuclear reactors. And over the last decade or so the miners have done a
fine job increasing production volume. In fact, according to the World
Nuclear Association (WNA) mine production had increased by an impressive 51%
from 2003 to 2010, to nearly 54k metric tons. But amazingly this current
rate of production is a staggering 15k metric tons short of what is required
to power the reactors in 2011.
Filling this
giant gap is supply from military and commercial stockpiles. But while
this stockpile supply has been reliable, its outlook is bleak. With
programs like “Megatons to Megawatts”, in which Russia converts
highly-enriched uranium from dismantled warheads into nuclear fuel, coming to
an end in 2013, along with the dwindling of other stockpile sources,
consumers are soon to find themselves in a pinch.
And this pinch
will be even more painful as the competition for this resource grows.
Per the WNA’s most recent assessment, there are 558 nuclear reactors
currently under construction, planned, or proposed. And with these new
reactors expected to come online at a much faster pace than those that are
decommissioned, uranium’s supply crunch is looking quite ominous.
Needless to say
growing demand, decreasing stockpiles, and mine-production shortfalls have
not gone unnoticed. And for these reasons and more, uranium prices have
skyrocketed over the course of its bull. But as you can see in this
chart, uranium’s uptrend has been far from orderly.
After years of
reliance on the liquidation of stockpiled inventories, uranium consumers had
grown complacent. Competition for obtaining this mineral was a
non-issue, and they didn’t see any reason to fret about supply
disruptions and/or higher prices. But as you can see, beginning in the
latter half of 2003 reality smacked this industry in the face.
From 2003 to
mid-2007 uranium was the hottest commodity in all the markets. And when
folks finally came to the realization that a supply deficit was imminent,
prices went parabolic. Uranium’s breathtaking surge took prices
from their lows just over $7 per pound in December 2000 to $136 in June 2007,
a staggering 1815% gain.
Parabolas are
of course unsustainable, regardless of how bullish fundamentals are.
Uranium was way overbought at its 2007 apex, and the downside action to
rebalance sentiment was bound to be messy. It needed to correct, and
indeed the resulting correction was as fast and furious to the downside as
uranium had been on the upside.
After a year or
so of aggressive selling, uranium appeared to find its bottom. But as
with nearly every asset, it got sucked into the universal selloff spawned by
the infamous stock panic. Stock-panic splash damage dragged uranium
prices even lower. And thanks to global economic worries that
reverberated across the nuclear-power industry, uranium didn’t see its
bottom until early 2010. By the time the dust settled, uranium was off
71% from its high.
Uranium had
finally found support at the $40 level. And while this was a whopping
$96 off its high, it was still 450%+ above its lows. The bull was still
intact. After a rough few years folks realized that the need for
nuclear energy had not diminished, nor did uranium’s
fundamentals. Demand was still rising, stockpiles had three more years
of drawdowns, and the miners were still way behind the eight ball.
In mid-2010
uranium caught a serious bid, one that transpired into a powerful upleg that gained 75%. And by February 2011 prices
had climbed back to $70, a level that hadn’t been seen for nearly three
years. But as is necessary, and healthy, a selloff was due in order to
rebalance sentiment.
Uranium prices
took a little breather into March, but this breather has turned into a big
blow thanks to a catastrophic series of events on March 11th. Following
one of the biggest earthquakes ever recorded, a giant tsunami pounded
Japan’s Fukushima-1 nuclear power plant. Unfortunately this plant’s
seawall was only designed to withstand a tsunami about a third the size of
the one that hit it. And this 43-foot-high beast flooded the entire
plant, incapacitating its cooling systems and ultimately leading to a full
meltdown in three of its six reactors.
This disaster,
which is still ongoing, has certainly given a reality check to the
nuclear-power industry. While the operation of a nuclear power plant is
about as clean as you can get from an environmental standpoint, the risk of a
failure (core meltdown) and its resulting widespread damage is always a
concern. And though a meltdown is an incredibly low-probability event,
what transpired at Fukushima makes it all too real.
The result of
such a disaster is heated deliberations on the future of nuclear power.
And you may recall a similar situation in the mid-1980s following the
aftermath of the Chernobyl disaster in Ukraine. Many were outspoken
about completely shutting down commercial nuclear power.
The
nuclear-power industry of course rebounded from Chernobyl, but this disaster
had clearly damaged its growth prospects. As an example, right around
the time of this meltdown Italy was rolling out a plan to build out nuclear
power. But even though it was determined that Chernobyl’s reactor
failure was a result of shoddy workmanship and insufficient safety
procedures, Italy fearfully shelved its nuclear program. Provocatively
just this year Italy was in the process of revisiting nuclear power.
But thanks to Fukushima, it is again off the table.
And Italy
isn’t the only country allowing Japan’s disaster to alter its
policy on nuclear. Switzerland, a country that uses nuclear to power
40% of its electricity needs, recently announced it will be decommissioning
all of its nuclear power plants by 2034. Germany is also planning on
phasing out nuclear thanks to Fukushima. This major European powerhouse
currently gets 23% of its electricity from nuclear, but will wipe this source
by 2022.
News like this
and more will no doubt impact and remold the future of nuclear power. Even
the Ux Consulting Company (UxC),
one of the nuclear industry’s premier market/consulting houses,
acknowledges that Fukushima has notably impacted future nuclear-power
growth. And for this reason uranium’s ongoing correction has
likely overshot to the downside, bringing prices back down towards $50.
But though it
may seem like the future of nuclear power is in jeopardy and that uranium
prices are in a death spiral, this couldn’t be farther from the
truth. Though tragic, Fukushima will serve to improve safety standards
going forward. And despite the speed bump that this disaster’s
aftereffects will have on the global nuclear buildout,
nuclear power will still be a vital component of today’s and
tomorrow’s electricity needs.
Even with the
notable impact of Fukushima, UxC still foresees a
steady construction of nuclear reactors in the coming decades. While
there might be some delays directly linked to Fukushima, such as what we are
seeing in a next-generation reactor under construction in France, most reactors
will still be built. Even before Fukushima the majority of existing
construction projects and those in the pipeline belonged to China, Russia,
India, and South Korea. And these countries are expected to proceed as
planned.
The world needs
nuclear power, and regardless of what’s going on in Germany,
Switzerland, Italy, and even the US, nuclear power will increase and so will
uranium demand. In fact, UxC anticipates that
even with the Fukushima effect we will still see a double in uranium demand
by 2030.
With this Japan
disaster still so fresh on people’s minds, uranium may indeed still
have some downside in the interim. But on balance it still ought to
trend upwards as fundamentals overtake the current negative sentiment.
In which case there are still excellent opportunities for investors to cash
in on this bull.
There are a
couple of primary ways to play uranium. First is via futures, vehicles
that are still relatively new to the uranium scene. Only in 2007 did
the NYMEX introduce off-exchange-traded uranium futures. These
contracts are in cooperation with UxC, in which UxC provides month-end spot U3O8 prices.
Futures
trading is of course designed for more sophisticated traders
with a higher appetite for risk, so most investors prefer stocks. But
even uranium stocks are not for the risk-averse. Ask any investor who’s put capital into these stocks and you’ll
get consensus that this realm comes with gut-wrenching volatility.
When uranium
prices were going parabolic, so were uranium-mining stocks. In fact,
before uranium gave up its ghost in 2007 there was a bit of a mania to grab
any company that had a stake in a uranium deposit. Most of these
companies weren’t even close to production and had yet to prove up
their deposits to economic feasibility. But that didn’t
matter. And most of these stocks delivered legendary gains, positively
leveraging uranium’s own gains.
But once the
bottom fell out of uranium, these stocks got crushed. Uranium’s
sharp multi-year downtrend decimated the companies scouring the earth for
this mineral. Many didn’t survive, and many of those that did
shifted gears in their search for mineral wealth. With uranium in the
depths of despair, they decided to look for something with more promise like
gold, silver, copper, or even rare earths.
This
uranium-stock bludgeoning was unfortunate considering the dire need to
increase mine production going forward. With stockpiles dwindling,
demand not letting up, and mature uranium mines depleting, miners have a lot
of weight on their shoulders to get the next generation of mines into
production.
Fortunately
uranium prices are still plenty high enough to entice mining companies to discover
and develop uranium deposits. And investors still have ample
opportunity to capitalize on the fortunes of the elite companies that will be
successful in doing so. But identifying high-potential uranium stocks
is easier said than done.
Interestingly
there is plenty of uranium in the ground, it is not
a rare mineral. In fact, uranium is as common in the earth’s
crust as tin and zinc. Higher prices also serve to make lower-grade
deposits that may not have been economical in the past economical today.
For these reasons and others, mining companies that own uranium deposits are
not hard to come by.
The biggest
challenge that miners are faced with is not discovery, but rather
development. Since uranium is toxic by nature, proposed mining
operations are subject to substantial regulatory oversight. These mines
usually need specialty permitting from a country’s nuclear agency for
such things as tailings disposal, processing, and transportation. And
overall this makes the process of developing a uranium
mine quite cumbersome from a time and cost perspective.
For these
reasons and more, most uranium companies will fail. And I suspect the
road will be even tougher in the interim considering all the negative
sentiment currently surrounding nuclear. These mining companies are
likely to encounter a much leaner capital-raising environment until some of
the fear abates.
Provocatively
these negative factors are quite bullish for uranium’s long-term
fundamental picture. The major challenges miners are faced with will
only allow them to ramp up supply so fast. And this is apparent when
you look at the universe of uranium stocks. There aren’t many
projects in the development pipeline.
As investors we
need to be selective in the stocks we choose. There aren’t many
producers to choose from, emerging producers are few and far between, and
explorers with a combination of high-potential deposits and managerial
know-how to drive development are even more rare.
But if you do find these stocks, huge gains are likely to be had. And
considering the carnage in this sector from the events earlier this year, it
is currently a bargain-hunter’s paradise.
At Zeal
we’re taking advantage of the rotten sentiment towards nuclear, and in
our newsletters
we’ve recently taken positions in some high-probability-for-success
uranium stocks. We’ve also been deploying capital into other
high-potential commodities stocks, and will continue to layer in trades for
what we believe to be an upcoming autumn rally. To see our trades and
get cutting-edge market analysis, subscribe today to our weekly and/or
monthly newsletters.
The bottom line
is uranium’s bull market has so far exhibited a series of extreme highs
and lows, with the highs taking this mineral on an uptrend that has delivered
spectacular gains. And while the recent tragic events at Fukushima have
temporarily marred the nuclear industry, and thus uranium prices, nuclear
power will still be a vital source of today’s and tomorrow’s
energy needs.
As a result
folks must not lose sight of uranium’s wildly-bullish
fundamentals. Even with the Fukushima effect, demand is expected to grow
at a rapid pace. And because supply from both the mining and stockpile
fronts is expected to struggle to meet this demand, uranium prices should
continue to rise. Investors can play this imbalance by buying quality
stocks that are currently out of favor. Contrarian plays like this
typically lead to huge gains.
Scott Wright
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