Uranium Sector Coverage
Comment of the Day

September 08 2011

Commentary by David Fuller

Uranium Sector Coverage

My thanks to a subscriber for this informative report by Versant Partners. It is posted in the Subscriber's Area but here is a brief sample:
We view the current scenario as the point of maximum pessimism for nuclear and the uranium industry. Outside of global economic weakness, there does not appear to be a foreseeable negative catalyst for yellowcake. Germany, Italy and Switzerland have made their decisions while the Fukushima Da-Ichi plant is under control (with no fatalities). There is nothing to cause the next leg down.

The fundamentals for the nuclear and the uranium market remain largely unchanged. Of the 440 nuclear reactors that are currently operable, Germany's 17 reactors account for only 3.9% and Switzerland's 5 plants account for just 1.1%. Notably, 62 nuclear power reactors are currently under construction, which is a 14.1% increase from the current state.

As can be seen in exhibit 2, global nuclear reactor growth has continued despite the tragedy at Fukushima there are now a total of 558 reactors that are currently in the construction, planned or proposed stage as opposed to 540 at the beginning of the year.

David Fuller's view The graphic referred to in the paragraph immediately above is certainly interesting.

However, the increase shown since the Fukushima disaster is entirely in proposed reactors, which may or may not be ordered and constructed. Also, in mentioning cancellations and phase outs, Japan was omitted. Currently, Japan is very anti-nuclear, for understandable reasons.

Today, nuclear is mostly beneath the radar in terms of investor thinking. Investment is a global beauty contest and investors have enough to worry about without chancing their luck on a nuclear's sullied reputation anytime soon.

My one fear for uranium shares - stated before Fukushima and after I had increased my personal investment in the sector - was that a major accident in one of the old reactors could set the industry back a decade. I also accept the view of a subscriber, published in an email several months ago, that the emotive consequences of trouble in any reactor make nuclear an inherently risky industry, despite its proven ability to provide a significant amount of clean energy, reliably and yes, safely, judging from the industry's low fatality rate since its inception.

Nevertheless, from an investment perspective, in a hypothetical lock up for ten years, would you rather hold Apple shares or several uranium miners with proven reserves in the ground in politically stable countries? Contrarians, I suggest, might opt for the latter.

There is no question as to which outperformed over the last decade, but the next ten years? Will Apple's products continue to outperform the most intense competition from numerous rivals, when sadly without the firm's genius founder at the helm? I wish Apple well but have my doubts.

Meanwhile, there is likely to be an energy reality check in countries wishing to phase out nuclear power. Everyone is a green at heart but many of us will bridle when we have to pay considerably more for far less reliable energy. Germans and Japanese are unlikely to put up with inefficiency.

Consider this article from The Economist: German Energy - Shock to the System. Here is a paragraph:

More disturbing, perhaps, is that the disarray extends to the renewables industry, which is supposed to benefit from the nuclear closures and fill the gap. Germany's solar industry, once the world leader, has been eclipsed by Asian producers and the country's onshore wind-power specialists are being buffeted by a move to offshore wind farms. The technology for capturing and storing carbon emitted by hard-coal and lignite plants is still not commercially proven. The nuclear gap, says a study prepared jointly by the Institute of Energy Economics at Cologne University, and two consultancies, GWS in Osnabrück and Prognos in Basel, Switzerland, is more likely to be filled by new gas-fired power plants and electricity imports. Both will be expensive and increase Germany's dependence on foreign and sometimes fickle gas suppliers. Prolonged use of coal and lignite plants, without carbon capture, will drive up the price of carbon-emission certificates and hence the cost of electricity, not only for Germany but across the European carbon-trading area.

Both Germany and Japan risk becoming considerably less competitive, in my view, unless they reconsider their nuclear options in the next few years. This will require a backlash against expensive and unreliable renewables, a change of government, a preference for less reliance on fossil fuels, and evidence of China's and India's success with their new generation nuclear power plants.

Personally, I will not sell my uranium shares - Cameco (weekly & daily), Denison Mines (weekly & daily) and the investment trust, Geiger Counter (weekly & daily) at depressed levels, even though I maintain that one will have to be very patient before a meaningful recovery occurs. On technical and fundamental grounds I could now justify increasing positions but this is not a priority at present.

Meanwhile, Geiger Counter appears to be turning itself into more of a gold share fund, judging from this change in its top-5 holdings. That is fine with me although I hope that it holds onto Kalahari (weekly & daily). The market has yet to reflect the change in Geiger's holdings - it sells at a current discount to NAV of 21 percent - so watch for an eventual name change. I humbly suggest Gold Counter.

Weaker companies among uranium miners are likely to require additional funding. Small to medium-sized miners with good reserves are potential takeover candidates. Cameco recently made a hostile bid for Hathor Exploration (weekly & daily) which owns the Roughrider deposit in Canada's Athabasca Basin.

Here is an additional report on the Nuclear Industry.

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