Email of the day (2)
Comment of the Day

December 02 2011

Commentary by David Fuller

Email of the day (2)

On "Russia dominates global uranium markets":
"I know this is a theme you have been following and which you like over the longer term, as do I.

"I welcome your daily commentary during these uncertain times."

David Fuller's view Thanks for the feedback and a very informative article which will be of interest to many subscribers. Here is a sample:

The Megatons to Megawatts program had, as of August 2011, down-blended 425 tonnes of HEU - equivalent to 17,000 nuclear warheads. The twenty year program to down-blend 500 tonnes of weapons grade Russian HEU into fuel for nuclear reactors will eliminate the equivalent of 20,000 warheads by the time it comes to an end in 2013. Nuclear warheads that were once on Russian ICBMs aimed at American cities are now providing 50% of the electricity produced by America's nuclear power plants.

Russian stockpiles of weapons grade material being down-blended for civil nuclear reactors has filled a very large part of global uranium demand. This has exerted significant downward pressure on uranium prices. Long term low uranium prices, which just starting to climb before the Japanese nuclear accident, seriously affected mining activity.

The world's uranium miners currently produce 40 million pounds less than the world's nuclear power plants need - this figure doesn't include the power plants under construction or the hundreds in planning stages. According to the World Nuclear Association, China is currently building 26 reactors with plans for dozens more, the UK has plans to build eight more, Russia has 10 reactors under construction, 14 planned, and another 30 proposed. India has 6 reactors under construction, 17 planned, and another 40 proposed.

A host of other countries plan to build nuclear capacity, or expand upon their existing nuclear power capacities - emerging markets such as Brazil, Saudi Arabia, United Arab Emirates, Turkey, and Vietnam as well as developed nuclear markets such as South Korea, Canada and France. Some believe that Germany's decision to close all of its reactors will be reversed and the Japanese closing all of their reactors is unlikely.

Uranium miners are cheap having fallen back to their 4Q 2008 to 1Q 2009 bases in most instances, as you can see from this weekly chart of Cameco, one of the minority of primarily uranium producing companies to actually have earnings.

However, following Fukushima, the uranium sector has seen a setback of between five to ten years in my view. Moreover, with all the emphasis on renewable forms of energy, not to mention the game-changing technological breakthroughs enabling many countries to develop their vast reserves of shale oil and gas over the next few decades, we cannot be certain about the outlook for nuclear power.

On the one hand, nuclear energy will also benefit from technology, including safer reactors and presumably, more effective processing of waste which would reduce storage problems. Nuclear energy could also gain from a further backlash against fracking and / or increasing CO2 emissions from fossil fuels.

On the other hand, nuclear power could be sidelined by less costly alternatives, including more efficient renewables or cleaner coal and oil. Also, another major accident involving one of the 400 plus and increasingly elderly reactors currently in operation would render the nuclear industry politically unacceptable in more countries.

Meanwhile, because of the bullish points in the article above and since uranium miners are arguably cheap today, we are likely to see further takeovers, such as diversified giant Rio Tinto's apparent victory in its battle with Cameco for Hathor Exploration.

While takeover possibilities will increase the speculative appeal of uranium miners, many of the smaller companies have 'burn rates' due to development costs and the current absence of earnings. This will lead to additional capital raising, particularly when a less cautious stock market environment lifts their share prices.

I am holding onto my uranium miners, for the time being, but will review this strategy during the next decent rally. Subscribers considering medium-sized to junior uranium miners for a recovery may wish to regard them as option money rather than investments.

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