Finally, Importantly, Japan Returns to Nuclear
The Venture index is now down almost 2,000 points from its March 2011 high, a 75% slide fueled by gold’s 40% haircut, copper’s 45% decline, silver’s 66% cut, platinum’s 50% fall…
That was bad. Then China devalued the yuan and things got even worse. Copper sank to a six-year low, zinc fell to a two-year low, and aluminum sank to a six-year bottom.
At the same time, there was positive news from an outlier metal: uranium.
At long last, Japan has restarted a nuclear reactor. It happened yesterday, at 10:30am local time. By today the reactor should have reached criticality. By Friday it will be contributing power to the grid. By early September it will be at full capacity.
Kyushu Electric has spent 25 months navigating the Nuclear Regulation Authority’s (NRA) new approval process. The NRA has now conditionally signed off on five reactor restarts (including yesterday’s Kendai 1 and next month’s Kendai 2). Another 20 applications are in progress.
Japanese reactor restarts have been imminent for ages, so why does this long-expected moment even matter?
First, actually turning reactors on is very different from expecting or hoping for restarts. Operating reactors mean uranium being consumed. That is what nuclear utilities outside of Japan need: some confidence that Japan is not going to dump its 100-million-lb. stockpile into the market.
Had Abe lost the battle restart Japan’s 43 reactors, the country would have had no need for its uranium and would have dumped the lot. Moreover, until a reactor or two restarted, Japan was going to continue selling its supply bit by bit into the spot market.
Secondary supply from Japan plus the possibility of a massive dump of Japanese stocks have been a huge overhang on the uranium price. Even with prices so low, non-Japanese utilities have put off stocking up in case a Japanese dump pushed prices down farther.
With reactor(s) once again operational, not only is a dump no longer on the table but the slow drip of Japanese uranium that has been supplanting mine supply will dry up. And while Japan will continue to defer deliveries – its stockpile is enough to fuel its planned restart fleet for seven years – deferrals will shrink.
Then there’s the enrichment side of the cycle. Once a few reactors are up and running, Japan will start sending its uranium to enrichment facilities to be turned into fuel rods. That will reduce another impact of Japan’s hiatus: with piles of excess enrichment capacity, some Russian centrifuges are being underfed. Underfeeding is, as the name implies, feeding less raw uranium into an enricher to produce the same amount of enriched output, achieved by accepting a lower quality of enrichment tails. Underfeeding lets enrichers set aside natural uranium for resale, creating yet another stream of supply into the spot market.
As Japan ramps back up, enrichment facilities will be under pressure to perform and underfeeding will diminish, eliminating that supply.
The point is that Japanese restarts are not just of psychological importance. Japan plans to put two-thirds of its reactors back online in the next ten years. By returning to the scene as a consumer and by slowing, and eventually stopping, the persistent leak of uranium into the spot market, Japanese reactors will have a real impact on the market. Globally, utilities will have to return to buying primarily on contract from mines – and as they all try to do so, there will not be enough traditional supply to go around. It is the perfect storm to lift prices.
As with the overall mining rebound, I hesitate to put a timeline on uranium’s rally. I can say that, while investment banks generally have flat gold and copper price outlooks over the next five years, almost all analysts agree that uranium prices should double in that time frame.
Five years may sound like a long time to mining-oriented investors who have spent years waiting for upside opportunities to materialize. Thankfully, there are nearer-term openings.
Here’s how I see it. There are 64 nuclear reactors under construction around the world. Uranium prices have been too low for too low to incentivize new mine development or expansions of current operations. In other words, supply is flat.
I do not think I am overstepping to say that every uranium analyst out there sees the sector moving into supply deficit within the medium term. That deficit will lift prices.
And prices should start to rise before the deficit hits because of the nature of uranium use: utilities cannot risk running out of fuel, so they secure supply years in advance. That means a supply deficit three years down the road would start to impact pricing soon.
New supplies will be needed, but owning shares of a company actually building a mine is not particularly fun. In general, the timelines and costs involved in permitting, raising money, and building a mine are not great for share price performance.
Selling an asset to another company that wants to turn it into a mine – that is where share prices perform. And the confluence of low uranium prices, a depressed mining sector, and an acknowledged need to build more uranium mines in the medium term means uranium discoveries showing real development potential are going to get acquired – and soon, before rising uranium and share prices make such deals more expensive.
And there are simply not very many entries on the list of uranium discoveries showing real development potential. As I’ve said before, the only kinds of discoveries that I think fit that bill are Athabasca Basin deposits that are high grade, not too deep, and ideally not under a lake, and U.S. deposits amenable to in-situ recovery with an established processing facility nearby.
Sitting atop that first list is Nexgen Energy’s (TSXV: NXE) Rook project. The Arrow zone at Rook is a high grade, near surface uranium discovery that is not under a lake. First resource estimate is expected before the end of the year. Analyst forecasts for this initial estimate range from 65 million lbs. to more than 120 million lbs. U3O8. To put that in context, Fission Uranium’s (TSX: FCU) PLS project is home to 105 million lbs. U3O8 at similar grades and Fission was just valued at $491 million in a merger deal with Denison. Nexgen’s market cap is currently just $205 million and in my eyes Arrow is a better discovery.
NXE’s share price chart is the inverse of most junior explorers, a sign the market understands the value being outlined at Arrow. And with five drills turning on site, the company will continue to generate news through the rest of 2015 and beyond.
I don’t mean this as a Nexgen promo. What I mean to say is that Japan’s restarts are an important step in uranium’s post-Fukushima recovery, a recovery that will be fueled by strong supply-demand fundamentals in not too long, and that cream-of-the-crop discoveries provide exposure with the highest leverage.
There are other ways to play uranium. For direct exposure to the price without exploration, development, or mining risk, buy Uranium Participation (TSX: U). U owns uranium. That is the entire business model: to hold uranium within a public vehicle to give investors direct commodity price exposure.
Producers are another option. Cameco (TSX: CCO) pulled in $46 million in adjusted net earnings in the second quarter. That is not a huge amount, but the company is still cleanly in the black despite uranium’s price weakness. When prices rise, Cameco will reap rewards.
Which route to choose is a matter of risk tolerance. All will require some patience. But as metal fundamentals go, uranium is the best of the bunch. And the restart of just one reactor in Japan removes an overhang that has been suffocating those fundamentals for years.
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