Less Uncertainty for Nuclear Power
Editor’s Note: Because there are five Wednesdays in June, the next issue of The Energy Strategist will be delivered on June 22. During this production break, Elliott will issue Flash Alerts as needed to keep readers apprised of key developments affecting Portfolio recommendations and global energy markets.
In the May 18, 2011, issue The Big Picture, I noted that the US economy appeared to have entered a soft patch akin what occurred in summer 2010. In the subsequent two weeks, key economic indicators have continued to deteriorate.
The May reading from the Institute of Supply Management’s US Manufacturing Purchasing Managers Index (PMI) fell well short of analysts’ expectations, while figures from ADP Employer Services indicate that the economy created only 38,000 private-sector jobs last month.
Expect this downtrend to continue for at least a few more weeks, prompting the major Wall Street economists to trim their estimates for US economic growth in earnest. This steady stream of disappointing news has weighed on stock prices, though the pullback pales in comparison to the selloff of summer 2008.
Bearish commentators once again have jumped the gun. Although economic data have softened, key indicators suggest that US gross domestic product continues to grow at a modest pace; at these levels, another recession doesn’t appear to be in the cards.
Moreover, some of this weakness in job creation figures stems from misleading seasonal adjustments and temporary disruptions to supply chains stemming from the massive earthquake that hit Japan in early March.
As the outlook for the US and global economy sours, expect stock and energy prices to take a breather. This transitory summer swoon once again will offer investors an outstanding chance to buy our favorite Portfolio holdings at attractive prices.
In particular, shares of uranium producers continue to trade at bargain levels, though the nuclear renaissance appears largely intact and uranium prices appear to have bottomed. With investor sentiment toward the industry still at low ebb following the disaster at Japan’s Fukushima Dai-ichi power plant, these stocks have limited downside and trade at compelling valuations.
Investors seeking a hedge against weakness in the broader market should consider a short position in First Solar (NSDQ: FSLR). After defying gravity for several months, the stock price has dropped sharply amid concerns that lower EU subsidies for alternative energy will hurt the company’s revenue. I revisit this short play in this issue’s Fresh Money Buys.
In This Issue
The Stories
Germany’s decision to permanently close eight of its nuclear power plants has major implications for global energy markets. But investors shouldn’t assume that this anti-nuclear sentiment has spread to other EU countries. See German Drama.
The US and Japan weren’t expected to make a major contribution to the growth in the global fleet of reactors, but nuclear power will continue to play an important role in each country’s energy mix. See US and Japan: Nuclear Family.
With India, China and Russia reaffirming their commitment to atomic energy, the nuclear renaissance remains intact. See Still Going Nuclear.
The market has focused on demand conditions in the uranium market of late, but the supply side of the equation should also contribute to a tightening market. See The Supply Side.
The Energy Strategist’s top four uranium picks include a new play that’s suitable for speculative investors. See Uranium Plays.
Want to know what to buy now? Check out the Fresh Money Buys list. See Fresh Money Buys.
The Stocks
BG Group (LSE: BG/, OTC: BRGYY)–Buy < GBp1,650
Oil Search (ASX: OSH, OTC: OISHY)–Buy < AUD8
Peabody Energy Corp (NYSE: BTU)–Buy < 72.50
Teekay LNG Partners LP (NYSE: TGP)–Buy < 41
Cameco Corp (Toronto: CCO; NYSE: CCJ)–Buy < USD33 in Nuclear Power Field Bet
Paladin Energy (ASX: PDN, TSX: PDN)–Buy < CAD3.80 in Nuclear Power Field Bet
Uranium One (TSX: UUU)–Buy < CAD4 in Nuclear Power Field Bet
Extract Resources (ASX: EXT, TSX: EXT, OTC: EXRLF)–Buy < AUD8.25 in the Nuclear Power Field Bet
First Solar (NSDQ: FSLR)–Sell Short > 110
Diamond Offshore Drilling (NYSE: DO)–Sell Short > 60
Seadrill (NYSE: SDRL)–Buy < 38
As we predicted in the March 24, 2011, issue The Fallout, German Chancellor Angela Merkel will proceed with the shutdown of all of the nation’s 17 nuclear reactors by 2022. Given a strong anti-nuclear movement in Germany and the Green Party’s recent electoral success, this decision hardly comes as a surprise.
But Germany’s extreme reaction to the accident at Japan’s Fukushima Dai-ichi nuclear power plant is the exception, not the rule. Most countries have adopted a more measured response to the tragedy, including Japan. More important, the emerging markets that continue to drive the nuclear renaissance have largely reaffirmed their commitment to atomic energy.
Expect the supply-demand balance in the global uranium market to continue to tighten over the next 12 to 24 months, pushing prices beyond their 2011 high of USD67.75 per pound by the first quarter of 2012. Recent prices of $50 to $53 per pound should represent a bottom for yellowcake, or milled uranium oxide (U3O8).
Nevertheless, share prices of uranium producers–especially the junior miners–will continue to be beset by volatility, though current market values should mark the bottom. Investor sentiment toward uranium producers has yet to recover from the disaster at Fukushima Dai-Ichi, providing us an ideal opportunity to buy into this out-of-favor industry.
Before a 9.0-magnitude earthquake crippled the Fukushima Dai-Ichi nuclear power plant, Germany’s nuclear power fleet included 17 operating reactors that boasted total capacity of a little over 20 gigawatts (GW).
Source: World Nuclear Association
In recent years, output from these plants has accounted for 25 to 30 percent of the country’s total electric power supply.
During her 2009 re-election bid, Merkel pledged to extend the lives of Germany’s power plants. In late 2010 she followed through with that promise, unveiling a plan that extended the reactors’ operating licenses by an average of 12 years. Merkel proceeded with this initiative despite significant popular opposition to nuclear power, though she never proposed building new plants or supported a long-term commitment to atomic energy. Extending the operating lives of the country’s fleet of nuclear reactors simply provided additional time to phase out this capacity in favor of other electricity sources.
But the Fukushima disaster sapped support for extending the life span of Germany’s nuclear power plants; Merkel quickly announced that the nation’s seven oldest reactors–about 35 percent of its nuclear power capacity–would close for a three-month safety review. As I projected, the German government recently announced the permanent shutdown of these seven reactors and the Krummel boiling-water reactor, which had been temporarily shuttered prior to the Fukushima disaster.
This decision means that about 41 percent of Germany’s nuclear power capacity–and roughly 11 percent of its overall generation capacity–will be offline during the summer, a period of peak demand. Six of Germany’s nine remaining nuclear power plants are slated for closure at the end of 2021, while the final three facilities will be decommissioned in 2022.Although the German Bundestag has yet to approve Merkel’s plan, this legislative hurdle is unlikely to reverse the policy. But the success of the anti-nuclear power Green party in recent state elections suggests that the near future could bring an accelerated schedule for phasing out the country’s reactors–assuming the Greens maintain their political momentum and do well in the 2013 federal elections. This development would put even more pressure on the country to update its electric grid and replace lost generation capacity.
The party line is that Germany will fill the gap with alternative and renewable power sources such as solar, wind and biomass. In The Fallout, I explained why the inherent limitations of these alternative energy sources relegates this plan to the realm of wishful thinking.
My analysis of Germany’s energy outlook hasn’t changed one iota, though the immediate consequences may be direr than I’d initially anticipated. With average temperatures since April near record levels, Europe appears to be in for a hot summer. Sadly, Germany’s energy policy will strain the EU grid and heighten the possibility of a major blackout, putting the elderly and other at-risk individuals in harm’s way. I can only hope that drought won’t constrain output from the Continent’s hydroelectric facilities or the French and Czech nuclear power plants that rely on river water for cooling and will be crucial to keeping Germany’s lights on.
The German government’s recent decision to shutter eight of its nuclear reactors has at least four major implications for energy markets:
- Higher prices for natural gas and liquefied natural gas (LNG) in markets outside North America;
- Higher electricity prices in Europe, including a huge jump in Germany’s already sky-high electricity prices;
- Upward pressure on the price of thermal coal; and
- An increasingly unreliable and overtaxed power grid in Continental Europe.
The model Portfolios offer direct exposure to many of these themes. Wildcatters Portfolio holding BG Group (LSE: BG/, OTC: BRGYY) and Gushers Portfolio pick Oil Search (ASX: OSH, OTC: OISHY) stand to benefit from rising demand and prices for LNG in both Europe and emerging-market Asia, while Peabody Energy Corp (NYSE: BTU) offers exposure to a similar dynamic in the thermal coal market. Teekay LNG Partners LP (NYSE: TGP), which operates a fleet of LNG carriers, is a play on rising global demand for LNG.
All four of these names have pulled back in the recent correction and trade at attractive valuations. BG Group is a buy under GBp1,650. (See The Fallout.) Oil Search is a buy up to AUD8 and Teekay LNG Partners is a buy under 41 (See International Opportunities in Coal and Natural Gas.) Buy Peabody Energy Corp up to 72.50 (See Buy Coal-Related Stocks This Holiday Season.)
But Germany’s efforts to wind down its reliance on nuclear power are largely a nonevent for the global atomic energy and uranium mining industries. The country’s 17 nuclear reactors consumed about 3,408 metric tons of uranium each year; estimates peg the global uranium market at 69,000 metric tons in 2011. Assuming that the loss of 40 percent of Germany’s nuclear power capacity produces an equivalent reduction in its uranium use, global demand would decline by about 3 percent.
Moreover, the market had already largely priced in a decline in German uranium demand, albeit over a longer time frame. Although extending the operating lives of these facilities would have yielded a modest uptick in global demand, Merkel’s pre-Fukushima plan would have phased out one-quarter of German nuclear power capacity by 2022 and all of its capacity by 2036. The country wasn’t expected to build any new reactors.
Germany’s response to the crisis in Japan hasn’t touched off a domino effect among other major EU nations.
Italy extended its moratorium on new power plants, but the nation doesn’t have any operating reactors and consumes no uranium. Prime Minister Silvio Berlusconi’s government had proposed restarting the nation’s nuclear power program, prompting the World Nuclear Association (WNA) to pencil in as many as 10 “proposed” nuclear reactors, or facilities expected to be operational within 15 years.
In short, Italy’s decision to extend its moratorium on new nuclear power facilities won’t impact the current market for uranium.
Switzerland has also decided to phase out its five nuclear reactors–or 40 percent of its power supply–and scotch plans to build as many as two to three new plants over the next 10 to 15 years. The last of Switzerland’s nuclear power facilities will go dark in 2034.
With a gross domestic product of less than USD500 billion and a population of less than 8 million, Switzerland plays a minimal role in the global uranium market, accounting for about 0.8 percent of global demand.
The situation in France, which depends on its extensive fleet of nuclear reactors for 75 to 80 percent its electricity supply, remains unchanged.
A recent poll found that less than one in five Frenchmen would support a rapid reversal of the country’s reliance on nuclear power. Meanwhile, government backing for nuclear power hasn’t wavered. President Nicolas Sarkozy announced a safety audit of the nation’s reactors, but has emphasized repeatedly that the country wouldn’t rethink nuclear power’s role in its energy mix.
Construction continues apace on Électricité de France’s (France: EDF) AREVA (France: CEI)-designed European Pressurized Reactor (EPR) on the Normandy coast. Although the project has suffered substantial delays and cost overruns, such setbacks come with the territory and don’t detract from this new design’s advanced safety features, which includes multiple system redundancies and the latest containment technologies.
French officials have even criticized Germany’s changes to its energy policy. Minister for Energy, Industry and Digital Economy Eric Besson recently stated that Germany’s decision will increase its reliance on imported electricity, lead to more pollution and push up retail electricity prices. German consumers already pay almost double French retail electricity prices.
In short, France is unlikely to mothball its successful nuclear power program–regardless of which party is in power.
Across the English Channel, the UK operates 19 reactors that produce about one-fifth of the nation’s power. With oil and gas production from the UK’s vast North Sea reserves in decline, the country’s dependence on imported fossil fuels continues to increase.
Source: BP Statistical Review of World Energy 2010
Although the 2008-09 recession temporarily weighed on UK natural gas consumption, the decline in the UK’s natural gas output began more than a decade ago. Falling UK gas production stems from maturing fields, not a lack of capital spending. In other words, the gap between domestic production and consumption will continue to widen, implying rising demand for imports.
The British government has eyed nuclear power as one way to decrease the nation’s demand for imported fossil fuels. The Conservative-led coalition government supports nuclear power, echoing the sentiments of former Prime Ministers Tony Blair and Gordon Brown, both of whom hailed from the Labor Party.
That’s not to suggest that nuclear power doesn’t face significant political opposition in the UK. In fact, the current coalition government’s junior partner, the Liberal Democrats, espoused a halt to new nuclear power facilities as a key plank in their 2010 general election campaign.
But the party’s leadership has demonstrated a willingness to compromise since taking office. For example, Energy Secretary Chris Huhne, who once described nuclear power as a “failed technology,” recently assented to the construction of new reactors as long as the state doesn’t provide financial support. Some Liberal Democrats remain opposed to nuclear power, but the party leadership appears to have backed off from their militant stance.
As for the British public, a May 8 poll conducted by Populus found that only 16 percent of Britons were opposed to nuclear power under any circumstances, while eight out of 10 respondents said they supported or at least expected nuclear power to play a role in the country’s energy mix. A Harris poll commissioned by the Financial Times showed that only 12 percent of UK residents believe that the nation’s nuclear power plants are unsafe, whereas 20 percent of French and 39 percent of German respondents thought their nations’ reactors were unsafe. In this survey, 35 percent of British participants described themselves as favoring nuclear power, compared to 30 percent who opposed atomic energy.
After the Fukushima incident, Huhne asked Chief Inspector of Nuclear Installations Mike Weightman to conduct a safety review of the nation’s reactors. The interim findings of that review were released to the UK Parliament in mid-May.
The report emphasizes the differences between the UK’s reactor sites and the Fukushima Dai-Ichi facility, which was battered by a magnitude-9.0 earthquake and a 14-meter (46-foot) high tsunami wave. Located 1,000 miles from the nearest fault line, the UK will never suffer an earthquake of tsunami of that magnitude.
The report contains 11 key conclusions:
- In considering the direct causes of the Fukushima accident we see no reason for curtailing the operation of nuclear power plants or other nuclear facilities in the UK. Once further work is completed any proposed improvements will be considered and implemented on a case by case basis, in line with our normal regulatory approach.
- In response to the Fukushima accident, the UK nuclear power industry has reacted responsibly and appropriately displaying leadership for safety and a strong safety culture in its response to date.
- The Government’s intention to take forward proposals to create the Office for Nuclear Regulation, with the post and responsibilities of the Chief Inspector in statute, should enhance confidence in the UK’s nuclear regulatory regime to more effectively face the challenges of the future.
- To date, the consideration of the known circumstances of the Fukushima accident has not revealed any gaps in scope or depth of the Safety Assessment Principles for nuclear facilities in the UK.
- Our considerations of the events in Japan, and the possible lessons for the UK, has not revealed any significant weaknesses in the UK nuclear licensing regime.
- Flooding risks are unlikely to prevent construction of new nuclear power stations at potential development sites in the UK over the next few years. For sites with a flooding risk, detailed consideration may require changes to plant layout and the provision of particular protection against flooding.
- There is no need to change the present siting strategies for new nuclear power stations in the UK.
- There is no reason to depart from a multi-plant site concept given the design measures in new reactors being considered for deployment in the UK and adequate demonstration in design and operational safety cases.
- The UK’s gas-cooled reactors have lower power densities and larger thermal capacities than water cooled reactors which with natural cooling capabilities give longer timescales for remedial action. Additionally, they have a lesser need for venting on loss of cooling and do not produce concentrations of hydrogen from fuel cladding overheating.
- There is no evidence to suggest that the presence of MOX [mixed-oxide] fuel in Reactor Unit 3 significantly contributed to the health impact of the accident on or off the site.
- With more information there is likely to be considerable scope for lessons to be learnt about human behaviour in severe accident conditions that will be useful in enhancing contingency arrangements and training in the UK for such events.
Although this 122-page report also includes 25 recommendations for the industry, the 11 aforementioned conclusions reaffirm the safety of the UK’s nuclear power installations and uphold existing siting and safety standards. More important, the first item in this list establishes that the safety review found “no reason” to curtail the operation of nuclear power plants in the UK.
The report’s conclusion that the use of MOX fuel at the Fukushima Dai-ichi plant didn’t increase health risks also stands out. MOX fuel is a combination of fresh natural uranium and reprocessed nuclear waste. In the sensationalist coverage of the accident, reports about the extreme dangers posed by the MOX fuel stored reactor No. 3 and leaking plutonium from that facility were among the most egregiously misleading.
According to the UK report, further analysis of the miniscule quantities of plutonium discovered revealed that this material was fallout from nuclear weapons tested some decades earlier. Using reprocessed nuclear fuel in a reactor entails no additional risk.
France, Germany and the UK–the three largest operators of nuclear power plants in the EU– account for more than 70 percent of the region’s total nuclear capacity. Other European countries that operate nuclear power facilities also announced safety reviews and have affirmed their commitment to this alternative energy source. Spain, long a hotbed of anti-nuclear sentiment, appears unlikely to shutter any of its eight reactors, though the current government opposes the construction of additional facilities.
Meanwhile, most of the former Eastern Bloc have stated that nuclear remains a key part of their energy mix. Atomic energy accounts for one-third of electricity generated in the Czech Republic, a country that has the capacity to export as much as one-quarter of its power generation, primarily into the German market. After Germany closed its seven pre-1980 plants for safety inspections, Czech exports of electricity to Germany increased as much as fivefold.
Recent polls also suggest that almost 70 percent of Czechs support the building of new reactors, a profitable endeavor for a country that can export electricity to Germany during periods of peak demand.
Though rash, Germany’s decision to shut down seven of its nuclear reactors was a predictable move. Nevertheless, media attention devoted to this story has led some investors to conclude th hostility toward nuclear power has grown across the EU.
But Germany is the only major EU economy that plans to abandon nuclear power. Ever since the Chernobyl disaster in 1986, anti-nuclear power sentiment has run high in Germany. Recent concerns about greenhouse gas emissions softened this rhetoric, but the Fukushima disaster has tipped the balance against nuclear power.
Given the ongoing problems at the Fukushima Dai-ichi nuclear power plant, Japan would be justified in reducing its dependence on nuclear power.
But reality dictates that nuclear power will remain an important component in Japan’s energy mix: The country’s 54 reactors generated about 48 GW of power in 2010, or close to 30 percent of the island nation’s electricity needs. At present, the country’s nuclear plants are operating at 40 to 50 percent of their potential capacity.
Prime Minister Naoto Kan in May 2011 confirmed that nuclear power would remain a key part of the nation’s energy mix and stated that plants closed for inspection would be permitted to resume operations after finalizing emergency safety procedures.
Thus far, Chubu Electric Power’s (Japan: 9502) Hamaoka facility appears to be the lone exception. The government has requested that the utility close all three of the facility’s reactors–roughly 3.5 GW of capacity–until the plant is outfitted with a higher seawall, additional backup generators and new reactor safety features. This installation is close to the Pacific Ocean, in an area with an almost 90 percent chance of suffering at least a magnitude-8.0 quake within the next 30 years. Chubu Electric Power’s management team estimates that these modifications will be completed in about two years.
Some of Japan’s idled nuclear capacity should come back online in late 2011 or early 2012. The loss of this capacity is a challenge, but over the past decade, Japan’s nuclear power plants have operated at far less than their rated capacity.
Source: Energy Information Administration
This graph tracks nuclear capacity utilization rates for the US and Japan since 1980. As you can see, the overall US capacity utilization rate has risen steadily to more than 90 percent. In other words, US utilities have become more efficient and can now operate facilities at close to their maximum rated capacity for extended periods.
In contrast, Japan’s capacity utilization rate has averaged less than 70 percent, largely because of a regulatory regime that favors lengthy shutdowns for maintenance. With the government anxious to prevent power outages, Japanese regulators could reduce maintenance-related downtime to bring average capacity utilizations closer to prevailing capacity utilization rates in the US and other developed markets.
Nevertheless, Prime Minister Kan has reined in Japan’s plans that called for nuclear power to account for about 50 percent of the nation’s electricity supply by 2030. Kan set a goal that 20 percent of Japan’s power should come from renewable sources by the early part of the coming decade–about 10 years earlier than previously planned.
For the same reasons that Germany’s plan to offset nuclear lost power capacity with alternative energy sources, Japan will struggle to meet Kan’s new goal of generating 20 percent of the country’s electricity from renewable sources. Even the country manages to hit this target, the end result would simply be higher energy prices and an uptick in natural gas consumption; the net benefit of solar and wind power would be modest at best. The cost of such a policy would also vastly exceed the benefits, but Kan’s announcement was likely a political move aimed at showing leadership in the wake of a terrible natural disaster.
The Fukushima nuclear accident has likely impacted Japan’s plans to add aggressively to its nuclear power capacity over the next 20 years, though the Prime Minister has been careful to leave the door wide open to new plants in recent speeches.
But even before the Fukushima incident, few analysts expected nuclear reactors to generate half of Japan’s electricity target by 2030. Conventional wisdom suggested that the country’s anemic economic growth would limit any uptick in demand for electricity. Regardless, Japan imports virtually all of its energy; the nation’s leaders understand that nuclear power remains one of the only viable domestic sources of electricity. The country has no intention of following Germany’s lead and abandoning its nuclear power program.
US attitudes toward nuclear power soured in late March, influenced by the media’s sensationalist coverage of the crisis at Fukushima. In a sign of irrational panic, sales of potassium iodine tablets on the West Coast briefly spiked, as some fretted over exposure to radioactive particles from Fukushima.
But nearly three months after the accident, the media has moved on to other issues and US attitudes toward nuclear have rebounded significantly. According to a recent Harris poll commissioned by the Financial Times, 43 percent of US respondents supported nuclear power and only 24 percent voiced opposition.
The day after Germany announced its intention to abandon nuclear power, Deputy Secretary of Energy Daniel Poneman indicated that the US wouldn’t second-guess Merkel’s plan to phase out the country’s nuclear reactors. He also reiterated that President Obama regards nuclear power as an important part of the nation’s energy portfolio. President Obama, Secretary of Energy Steven Chu and several prominent Republicans have reaffirmed their support for nuclear since the tragedy at Fukushima.
The US Nuclear Regulatory Commission began a 90-day safety review of US nuclear power plants back in March. I expect the findings in the July draft report will resemble the conclusions in the UK’s interim report, Japanese Earrthquake and Tsunami: Implications for the UK Nuclear Industry.
In short, the US won’t follow Germany’s lead and phase out all of its existing plants. On the margin, the Fukushima Daiichi accident could slow plans to build new reactors. But that won’t sap global uranium demand; the US was never expected to be a major growth market for nuclear power, even before Fukushima.
US investors have been far too focused on the domestic policy toward nuclear power plants and the long lead time required building new reactors. But the reality is that the nation has only one new rector under construction right now and nine in advanced stages of planning. Compare that to the 27 reactors under construction in China and the 50 additional reactors in advanced stages of planning.
The growth story for nuclear power, much like the growth story for oil and natural gas demand, is centered in the emerging markets.
Source: World Nuclear Association
As you can see, 61 reactors are under construction around the world, with a total maximum capacity of 65 GW.
China is home to almost half of all nuclear power capacity (measured in GW) under construction. If we add in India, Russia and South Korea, the total jumps to well over 80 percent. The US, France, Canada and other developed markets are building reactors, but these projects account for only a tiny share of the 65 GW of capacity under construction.
Emerging markets have been even more vociferous in their defense of nuclear power. Five days after the earthquake crippled the Fukushima Dai-ichi plant, China halted approvals for new reactors until a safety review could be conducted and new safety plans put in place. But inspections are already winding down, and the country plans to release its new safety plan and resume approvals in August. Senior Chinese officials have indicated that the country will meet its target of 70 GW of nuclear power capacity by 2020 despite the post-Fukushima freeze.
China can rightfully claim that its fleet of reactors is among the safest in the world because the country is building third-generation plants such as the Westinghouse AP1000, an advanced reactor that can be cooled without access to external power sources. This feature would have prevented the partial meltdown at Fukushima.
Russia also ordered a safety review of its nuclear power plants, but the government has unequivocally stated that it will not abandon nuclear power and will continue to build new power plants. Russia also continues to build plants in other nations, including planned Russian-designed reactors in Turkey and Belarus. In fact, the latter deal was inked after the earthquake hit Fukushima Dai-ichi.
Russian Prime Minister Vladimir Putin has long been a proponent of nuclear power and has criticized Germany’s anti-nuclear stance on several occasions. For example, at a conference in late 2010, Putin chided German business leaders about the country’s plan to gradually phase out its nuclear reactors, observing that “The German public does not like the nuclear power industry for some reason“ and adding “I cannot understand what fuel you will take for heating.” He followed up this comment with an incisive joke: You do not want gas, you do not develop the nuclear power industry, so you will heat with firewood?…Then you will have to go to Siberia to buy the firewood.”
But Germany’s decision to accelerate the closure of its nuclear will have Russian gas producers laughing all the way to the bank: Germany will need to import more natural gas to offset lost nuclear power capacity and provide baseload power to support the country’s growing dependence on renewable energy sources. Germany already imports more than half of its natural gas from Russia.Russia’s aggressive build-out of nuclear plants in recent years is partly motivated by a desire to free up more natural gas for export. Ironically, this means that Russia is building nuclear power plants to support Germany’s efforts to shut down its domestic reactors.
Finally, India also ordered a safety review of its nuclear reactors, but Prime Minister Manmohan Singh has emphasized repeatedly that India must make use of nuclear power to meet its growing demand for electricity and emissions targets. Singh stated that safety standards for new Indian reactors would be world-class and that the country stands by its target of increasing nuclear capacity from about 5,000 megawatts (MW) today to 20,000 MW by 2020. Singh stated that further expansion is possible after 2020, though no firm decisions have been made.
In the immediate aftermath of Fukushima, many speculated that the Fukushima disaster would strangle the global nuclear renaissance. This jaundiced projection hasn’t come to fruition. Countries that were already anti-nuclear have hardened their stance, but the growth story is intact in China, India, Russia and other emerging markets. In short, the worst accident since Chernobyl has had a surprisingly modest impact on the global nuclear power industry.
In the aftermath of Fukushima, investors focused their attention on the demand side of the nuclear story and the potential for a major global slowdown in reactor construction.
But equally important developments have occurred on the supply side of the equation. Uraniyum prices ramped up from around $10 per pound in 2002-03 to about $40 per pound by the mid-2006. This uptick in prices reflected a growing recognition that China, India and other emerging markets planned to proceed with a major build-out of new plants. In addition, the rising cost of energy commodities such as oil and natural gas over this period put the spotlight on nuclear power as a legitimate and clean alternative.
From late 2006 to mid-2007, the rally in uranium went parabolic. That move was largely sparked by fears of a supply shortage caused by a flood and rock fall at Cameco Corp’s (TSX: CCO, NYSE: CCJ) massive Cigar Lake project in Canada.
Fallout from the global recession and credit crisis contributed to the subsequent collapse in uranium prices to as low at $40.75 per pound in mid-2010. But a ramp up in Kazakh uranium production over this time period also alleviated near-term supply concerns and raised the specter of a uranium glut. An oversupply of uranium was the primary factor that limited upside for uranium prices in the 1990s.
Kazakhstan is now far and away the world’s largest producer of uranium, with total output just shy of 18,000 metric tons, compared to the less than 10,000 metric tons produced by Canada, the Eastern European nation’s closest competitor. Kazakhstan’s uranium output soared from 1,740 metric tons in 2000 to 5,279 metric tons in 2006 and 17,803 metric tons in 2010. Between 2009 and 2010 alone, the country’s uranium production jumped 27 percent. Meanwhile, Canada produced less uranium in 2010 than it did a decade ago.
Having secured the top spot, Kazakhstan has begun to rein in production growth to buoy prices. In 2011 the country plans to grow output by about 10 percent, though comments from some officials at state-owned Kazatomprom suggest that it may cut that production target even further. In 2012 the country plans to grow output by only 2 percent–the slowest rate of production growth in well over a decade. Although officials believe the country could ramp up production by 30 percent with relative ease, Kazakhstan would prefer to avoid flooding the market with excess supply.
Outside Kazakhstan there have also been myriad difficulties maintaining output. Energy Resource Australia’s (ERA) Ranger Mine in Australia has been plagued by excess water in the mine shafts since late 2010. In a mid-April presentation, ERA confirmed that it has extended the suspension of uranium processing at the facility until at least July. Flooding at the Pit 3 mine also has prompted ERA to cease mining operations. Management said the firm won’t be able to resume mining the higher-grade ore in Pit 3 until at least late 2011. Ranger is one of the world’s largest uranium mines producing, extracting 4,500 metric tons of uranium per year when it operates at maximum capacity.
Meanwhile, Rio Tinto’s (NYSE: RIO) Rossing mine in Namibia produced 3,628 metric tons of uranium oxide in 2010, down from 4,150 metric tons in 2009. Further reductions in output are expected over the next couple of years.
Secondary supplies should also diminish significantly over the next decade as the Megatons to Megawatts program winds down. Under the auspices of this program, the US and Russia agreed to convert about 500 million metric tons of Russia’s weapons-grade nuclear material into low enriched uranium (LEU), the material that’s used to make nuclear power plant fuel rods. That agreement yielded 11 to 12 million pounds of uranium per year–about a third of the world’s secondary supply of uranium. The program will expire in 2013.
Share prices of most uranium producers plummeted in the immediate wake of the Fukushima. Since then, the group for the most part has traded sideways; investors have remained on the sideline, awaiting greater clarity on the impact of the accident on global nuclear demand growth.
Many countries announced a pause in the construction of new reactors and/or a comprehensive safety audits in March, a process that takes time to complete. But recent announcements from China, Japan, India and the UK have affirmed that nuclear power’s future remains bright. Germany and Switzerland’s decisions to phase out their nuclear power programs shouldn’t damage the industry’s growth prospects.
It took a few months for shares of deepwater drillers to stabilize after last year’s Gulf oil spill. The same is true of the uranium mining stocks in the wake of the disaster at Fukushima Dai-ichi. The other factor weighing on all stocks is the macroeconomic picture I covered at great length in the May 18, 2011, issue The Big Picture. At these levels, shares of uranium miners have likely bottomed.
Here’s a look at my top four uranium mining plays.
Cameco Corp (TSX: CCO; NYSE: CCJ), the 800-pound gorilla of the uranium mining industry, is the largest pure-play miner of yellowcake and is a must-own for investors interested in profiting from rising demand for uranium.
In 2010 Cameco produced 22.8 million pounds of uranium oxide, a significant portion of the 180 million pound per annum global uranium market. Production was up roughly 10 percent from 2009 levels and 32 percent from 2008.
Management’s long-term, “double-U” strategy calls for the company to increase its uranium output to about 40 million pounds per year by 2018. To accomplish this, Cameco plans to maintain or slightly increase output from its existing major mines, including MacArthur River and Key Lake in Canada and the Inkai mines in Kazakhstan. These are some of the richest and cheapest-to-produce uranium mines in the world.
In addition, the company has a series of major projects underway. The largest is the long-delayed Cigar Lake mine in Canada. The company appears to have finally brought its water flooding issues at the facility under control and expects the facility to produce about 1 million pounds annually from the mine by 2013. The mine’s annual output could ram up to at least 5.6 million pounds by the latter half of the decade.
Cameco also owns US mines that are produced using in-situ leach (ISL) technology, whereby water and some chemicals are pumped into the ground to dissolve the uranium. The water and uranium mix is then pumped to the surface and the uranium extracted. The firm’s ISL projects in the US are being expanded, and management’s latest guidance is for production to grow from 2.5 million pounds per annum to 3.8 million pounds per annum by 2015.
With the potential to double its uranium production in less than a decade, Cameco Corp rates a buy under USD33 in the Nuclear Power Field Bet and Fresh Money Buys list.
Note that I’ve lowered the buy target to reflect Cameco’s post-Fukushima trading range– not because my assessment of the company’s underlying value has changed. As uranium prices rebound in late 2011 and into 2012, the stock could easily hit USD50 per share.
Paladin Energy (ASX: PDN, TSX: PDN) owns mines in Namibia and Malawi. In Paladin’s most recent investor update, the firm indicated quarterly production from the Kayelekera mine in Malawi rose to a record 606,034 pounds of uranium, up 14 percent from the prior quarter. Poor weather impacted output at the Langer Heinrich mine in Namibia, but the company still produced more than 700,000 pounds of uranium. And the mine received 10 times its normal rainfall so far this year; Paladin is putting additional measures in place that will reduce the operational impact of future deluges. In total, management expects the company to produce about 6 million pounds of uranium in 2011.
Both of Paladin’s operating mines are being developed in stages. Langer Heinrich stages 1 and 2 are complete, and the mine’s maximum capacity is now 3.7 million pounds per annum. The stage 3 expansion of that mine is now 92 percent complete and should be commissioned by mid-2011. That will ramp up total output to about 5.2 million pounds per annum. Paladin expects to be running the mine at close to its stage 3 nameplate capacity by year-end.
Langer Heinrich may also be expanded further as part of a stage four project, depending on the results of a feasibility study that should be completed by year-end. If management determines that further expansion is geologically and economically feasible, Langer Heinrich could produce up to 10 million pounds of uranium per annum.
Kayelekera has been hit by several operational challenges, including unusual high levels of rainfall and a shortage of diesel. But Paladin still managed to operate the mine at 90 percent of its nameplate capacity in the fiscal quarter ended March 31–a record level.
The company has a number of additional projects in earlier stages of exploration and development. Even if none of these projects enter production over the next five years, the company could grow its output to almost 14 million pounds per annum by the end of 2016. The company could also lock in attractive prices for its production by seeking long-term, fixed-rate deals. A riskier play than Cameco, Paladin Energy rates a buy under CAD3.80 in the Nuclear Power Field Bet.
Uranium One (TSX: UUU) has stakes in a number of Kazakh mines that produced slightly less than 8 million pounds of uranium last year. Last year, Russia-based JSC Atomredmetzoloto (ARMZ) received a controlling interest in Uranium One in exchange for contributing its interests in two Kazakh uranium mines. ARMZ also paid Uranium one USD610 million in cash. The deal improved Uranium One’s cash position and gives the firm the inside track on acquiring additional assets in Kazakhstan.
In the first quarter, Uranium One produced a record 2.4 million pounds of uranium, up by a third from the same quarter one year ago. That puts the company on track to achieve its full-year 2011 production target of 10.5 million pounds. The firm is targeting total uranium sales of 12 million pounds per annum in 2012. Risk-tolerant investors should buy UraniumOne under CAD4.
Finally, I am adding Australia’s Extract Resources (ASX: EXT, TSX: EXT, OTC: EXRLF) to the Energy Watch List. Like Paladin, Extract business owns mines in Namibia, one of the world’s oldest producers of the yellow metal.
The company discovered the Husab uranium deposit in Namibia in 2008, and the company’s definitive feasibility study (DFS) suggests that it could be larger than Rio Tinto’s nearby Rossing mine and contain a higher grade of uranium ore. Higher-grade ores are generally less expensive to produce than low-grade reserves.
The DFS estimates the capital cost needed to develop the mine at about USD1.5 billion, though the price tag could rise with raw materials prices. Production costs are expected to be less than USD30 per pound, and the mine could yield as much as 15 million pounds of uranium oxide per year.
Unlike my other three picks, Extract is not a producer yet, making it’s a higher-risk play. But plenty of catalysts could push the stock higher this year, including the publication of an additional study late in 2011 that could potentially increase the estimated size of Husab. In addition, the company is applying for various mine and project approvals that could be announced in coming months.
Husab could begin production as early as 2014 or 2015, and current ore grade and cost estimates suggest it could be one of the lower cost operations in Namibia. A speculative play, Extract rates a buy under AUD8.25 in the Nuclear Power Field Bet.
The stocks recommended in the three model Portfolios represent my favorite picks. The three Portfolios are designed to target different levels of risk: Proven Reserves is the most conservative; the Wildcatters names entail a bit more volatility; and Gushers are the riskier plays but have the most potential upside.
I realize that this long list of stocks can be confusing; subscribers often ask what they should buy now or where they should start. To answer that question, I’ve compiled a list of 18 Fresh Money Buys that includes 16 stocks and two hedges.
I’ve classified each recommendation by risk level–high, low or moderate. Conservative investors should focus the majority of their assets in low- and moderate-risk plays, while aggressive investors should layer in exposure to my riskier and higher-potential plays. Hedges are appropriate for investors looking to offset exposure to energy stocks.
Also note that stocks that exceed my buy target for more than two consecutive issues will either be removed from the list or the buy target will be increased.
Source: The Energy Strategist
With worries of a second summertime swoon, the selloff in the broader market could persist for a few more weeks. Investors looking to add a bit of ballast to their portfolios should consider the two hedges listed in the Fresh Money Buys table.
Shares of First Solar (NSDQ: FSLR) have tumbled in recent months. First Solar, like other alternative energy stocks, rallied in the wake of the Fukushima Dai-ichi nuclear power plant accident. Several prominent news outlets had carried stories about how the demise of nuclear power would encourage greater investment in solar and wind.
In the March 24 issue of The Energy Strategist, I explained why the rally in alternative energy stocks had little basis in fundamental reality. Solar and wind power installations can’t replace nuclear reactors, regardless of how many governments pay lip service to this idea.
Further, the alternative energy market depends heavily on generous state subsidies, such as the generous feed-in tariffs offered in Germany to encourage solar and wind power construction. These feed-in tariffs ultimately will be passed on to consumers in the form of higher electricity rates. As many German manufacturing interests are exempt from paying these subsidies, consumers will bear the brunt of the cost. Some estimates call for German retail power prices to double over the next two to three years–a tough sell, especially in a subpar economic environment.
Many alternative energy supporters aren’t in a position to subsidize alternative energy either. Spain and Greece, widely regarded as leaders in solar power before the financial crisis, lack the wherewithal to continue subsidizing these expensive and ineffective technologies.
Competition from other solar equipment producers, coupled with falling feed-in subsidies in key markets, have depressed the price of First Solar’s thin-film solar panels. Meanwhile, rising raw materials costs continue to squeeze margins. First Solar’s operating margins have declined in almost every quarter since the first quarter of 2010, from 33.7 percent to a more recent 22.8 percent. In the most recent quarter, management also highlighted an increase in European solar panel inventories, an overhang should continue to push down selling prices.
Shares of First Solar will rally occasionally–the stock was up after Germany’s predictable decision to phase out nuclear power. The short interest-people betting on a further decline in the stock–has risen in recent months, leaving the stock open to short-covering rallies. Regard any rally in First Solar as an opportunity sell the stock short. The stock could decline to as low as $75 in 2011.
Shares of contract driller Diamond Offshore Drilling (NYSE: DO) rallied in sympathy with oil prices in early 2011. More recently, shares have begun to slide and the stock has consistently underperformed Seadrill’s (NSDQ: SDRL) stock over the past year.
Our rationale for shorting Diamond Offshore Drilling remains intact. The company owns a fleet of older, less-capable drilling rigs that tend to garner much lower day-rates than well-equipped, ultra-deepwater rigs. The company recently signed longer-term contracts covering two rigs that should allow Diamond to maintain its current dividend. But the firm’s current fleet limits growth opportunities with its current fleet. Sell Diamond Offshore Drilling short above 60.
In contrast, Seadrill’s fleet of modern, new rigs will continue to earn premium day-rates. And the market for these more capable rigs looks much tighter because there are fewer rigs and a growing list of projects.
Seadrill recently announced solid quarterly results and hiked its dividend to $0.70 per share. In addition, the company plans to pay out a $0.20 special dividend over the next four quarters that will bring the quarterly payout to $0.75 per quarter for at least the next year. Based on that $3 annualized payout, Seadrill yields 8.5 percent.
I’ve predicted that Seadrill would pay $0.75 per quarter in dividends by early 2012 for more than a year. Management beat me to the punch by more than six months. Buy Seadrill under 38.
Join Me in the City by the BayI am thrilled to be returning to San Francisco this year and invite you to join me at The MoneyShow, August 10-12, 2011, at the San Francisco Marriott Marquis Hotel. Be there as recommendations and advice are revealed for how to best position your portfolio for profit—in 2011 and beyond. As this new era of investing unfolds, smart investors know it’s imperative to stay informed and educated. The MoneyShow is your one-stop resource for the most comprehensive education, efficient research, and valuable advice. Don’t miss out…register FREE today and be sure to mention Priority code 022447!
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