Investing in Nuclear, Post-Fukushima
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Nuclear power is in a slump and uranium prices are down. But not for long. Surging international power demands should soon create an opportunity for a good uranium producer. And the best of that bunch is Cameco Corp. (NYSE: CCJ).
Overall, we see value in uranium mining stocks. Cameco is one of the world’s largest uranium miners. The company produces approximately 22 million pounds per year, fully 16% of worldwide uranium production, with plans to double its annual output by 2018. Currently, it has commitments to supply about 290 million pounds of uranium under long-term contracts.
Cameco’s McArthur River mine in Saskatchewan boasts the world’s highest-grade uranium ore. The mine’s ore grades are 100 times the global average, resulting in lower production costs than most competitors. In late August 2012, Cameco successfully bought the rights to Yeelirrie, Australia’s largest undeveloped uranium deposit from BHP Billiton Limited (NYSE: BHP). Uranium is only a small part of BHP's asset portfolio, which is the world's biggest minerals and metals producer (ranging from lead to copper). With the Yeelirrie sale, BHP retains uranium deposits in just one mine, Australia's Olympic Dam, where copper, gold and silver are extracted, as well. Cameco is a uranium pure play.
Cameco also pays a 10-cent per share quarterly dividend, giving investors a dividend yield of 1.9%. None of its uranium-mining peers boasts a dividend. Cameco’s direct competitors are all in the red.
So far this year, the stock has advanced 22.22% to $22.00. Out of 14 analysts covering it, 10 rate the stock a buy and four call it a strong buy. Earnings per share are expected to increase 37% to $1.55 in 2013 versus 2011.
For the last 12 months, the long-term future price of uranium dropped 15%, or half that of the decline in the spot price. We believe that this will reverse as demand for uranium increases.
After the March 2011 nuclear disaster in Fukushima, Japan, policy makers in several countries delayed or dumped their nuclear power programs. This coincided with an economic slowdown that brought down demand for several commodities. Result: a near-30% decline in uranium spot prices and a 50% slump in many uranium-related equities. But the retreat from nuclear power was likely an overreaction.
Despite widespread political pressure to the contrary, the use of nuclear power and the demand for uranium will likely increase substantially in the coming years. Nuclear power is one of the cleanest energy sources, with no carbon or greenhouse gas emissions. It is also vastly more efficient. One gram of uranium 235 produces the same amount of energy as four tons of coal.
According to the World Nuclear Association, the number of reactors worldwide is expected to grow from 431 today to 985 by 2030, an increase of nearly 130%. The newer plants will produce more energy than the previous generation of reactors. The massive increases in output should lead to huge increases in uranium consumption.
“The Fukushima Daiichi accident resulted in a slowing of the expansion of nuclear power but did not reverse it,” according to the International Atomic Energy Agency’s latest annual report. “Nuclear power remains an important option for countries, and interest in nuclear power remains high.”
One simple reason for this is the world’s unceasing demand for energy. Japan, no stranger to nuclear catastrophe, hastily closed all 50 of its reactors after the Fukushima tragedy. The last working reactor shut down in May 2012. However, this seemed to be a short-sighted move and a drastic over-reaction. Cursed with poor geological resources, Japan must import about 84% of its energy needs. Even before the nuclear plants went offline, Japan imported the most liquid natural gas and the third largest amount of crude oil. Since abandoning nuclear energy, reliance on thermal power soared. Dependence on imports for energy left Japan exposed to commodity price swings.
Not surprisingly, Japan reversed course recently and restarted two reactors, and plans to gradually open the remaining 48. In early 2011, before the accident, nuclear energy accounted for approximately 30% of Japan’s total electricity. It is still expected to increase to 40% by 2017, and 50% by 2030. That’s vital to combat an electricity shortage that is harming Japan’s faltering economy.
Japan is not alone in its about-face on nuclear power. After the Fukushima disaster, China did a safety inspection on all of its reactors, both those in operation and under construction. This review is almost complete, and construction has resumed on several reactors. To decrease its reliance on pollution-causing coal and imported oil and gas, nuclear energy is particularly attractive to China. There are currently 15 operating reactors in China, plus 26 under construction and another 51 planned. In late 2011, the US Energy Information Administration estimated that China’s nuclear generating capacity could rise as high as 115 gigawatts, a prodigious increase from nine in 2008.
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Partners Mark J. Foley and Tina Larsson manage the Pendo International Strategy for international investment specialist Pendo LLC in New York City. Their firm holds a long position in Cameco.
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