Unloved uranium may glow as longer-term bet

Fukushima crisis has not deterred nuclear appetite in China, India and Russia, writes Clyde Russell

IT WOULD be hard to find a natural resource less liked than uranium, but the radioactive fuel may just be the place to go for contrarian investors.

It is not hard to see why uranium is not popular with swathes of the world’s public, given the high-profile disaster at the Fukushima nuclear power plant after a major earthquake and tsunami struck Japan in March 2011.

Uranium prices, both spot and New York futures, plunged after the Fukushima meltdown and have stayed depressed as countries such as Germany backed away from nuclear power amid rising public mistrust.

Spot uranium is around $35 a pound, less than half of what it was before Fukushima and about a quarter of the record reached in the middle of 2007.

Given that all of Japan’s 50 reactors are offline and Fukushima is once again in the news over the build-up and leaking of contaminated water, it hardly seems the right time to turn bullish on uranium.

But a couple of factors are pointing to better times ahead for the sector, although these are more medium to long term.

The first is that the Fukushima crisis has not deterred nuclear appetite in China, India and Russia, the three main countries committed to increasing nuclear power generation.

China has 29 units under construction, Russia has 10 and India seven, according to data on the World Nuclear Association’s (WNA) website.

Furthermore, China recently committed to accelerating reactor building as part of efforts to cut pollution from coal-fired generation, planning to have 50 gigawatts (GW) of capacity by 2017 and 200GW by 2030, up from 12.5GW currently.

The proliferation of new reactors in coming years should be enough to overwhelm the potential new mine supply of uranium, even assuming closures of nuclear plants in Europe and a slow restart for Japan’s nuclear generators.

The current fleet of nuclear plants needs about 68,000 tonnes of uranium per annum, according to the World Nuclear Association, with mine supply at 58,394 tonnes last year.

The gap has been largely met from stockpiles and reprocessing of military weapons into power plant fuel. However, the 20-year “Megatons for Megawatts” that saw enough weapons-grade uranium for 20,000 Russian warheads turned into fuel for US power plants ends in December this year, and there are no signs it will be renewed.

This will tighten supplies of uranium in the short term, but it is more likely that the market will move to structural shortage in the next decade, assuming the reactor-building programme continues in developing nations.

The WNA’s base case estimates that uranium demand will rise to 108,000 tonnes per annum by 2030, but mine supply only to 89,000 tonnes. Of course, such long-range forecasts always assume other factors remaining equal and experience teaches us that this is seldom the case.

But it is always worth watching what the Chinese are doing. Imports surged 316% in the first eight months of 2013 over the same period a year earlier to 11,667 tonnes, with 4,113 tonnes being bought last month alone, according to customs data.

Chinese firms, as well as Russian ones, have also been active in seeking new reserves of uranium around the globe. But viable reserves are limited and the bestplaced country to develop new mines may be Australia, holder of just under a third of known reserves but producer of about 10% of the world’s uranium ore.

Australia has four operating mines, including the world’s second-largest in BHP Billiton’s Olympic Dam, and has approved two more for construction.

While uranium mining remains a definite taboo for environmentalists, it is supported by Australia’s newly elected Liberal government and by the state governments in South Australia and Western Australia, where the bulk of reserves are located.

It is also a harder target for environmental groups, given the remote locations of the mines and a public whose attention is more easily attracted by campaigns against coal-seam and shale gas for use in liquefied natural gas exports. The next mine to be developed in Australia is likely to be Toro Energy’s Wiluna project, which is aiming for a 2016 start-up.

Toro was still seeking finance for the $250m mine, and MD Vanessa Guthrie said in a recent interview that the economics can stack up. The spot price of uranium did not reflect what miners actually received on contract prices, which were about $58$59 a pound, while mining costs ranged from $22 to $40 across the industry.

The fact that companies are facing uphill battles to get projects off the ground show that uranium is still viewed as problematic and risky, but maybe it should also now be viewed as potentially profitable.