Uranium producers singing the blues
Industry crying over low prices
For depressed uranium producers, the hurtin’ music just won’t end. It’s like Sixteen Tons of bad Johnny Paycheck lyrics swirling around in the industry’s head.
Since Japan’s Fukushima nuclear plant disaster sent uranium prices tumbling two years ago, miners have been caught in a seemingly endless Ring of Fire.
Shares of Cameco, Canada’s top uranium producer, traded for more than $40 apiece before a tsunami slammed into the Fukushima power plant in early 2011. Today, with virtually all of the country’s nukes still shut down amid a glut of uranium supplies, the stock is worth just half that.
Although a few bullish analysts donned Rose Coloured Glasses last year, predicting that a rebound in demand and prices would reignite interest in uranium stocks, it turns out those were just Sweet Dreams. Clearly, the industry’s Cryin’ Time ain’t over yet.
Instead of rising, uranium prices plunged again in recent months as the projected restart dates for more than 40 idled Japanese nuke plants kept being delayed. As a result, the uranium spot price sagged to just $34.50 US a pound in late July, before bouncing back to the $36 range this week.
The late-July trough marked the lowest level for uranium prices since December 2005, and a 50-per-cent drop from the pre-Fukushima price of more than $70 a pound.
In mid-2007, the uranium spot price soared to an alltime high of more than $150 a pound — a level that now seems like It’s Only Make Believe, like Countin’ Flowers on the Wall.
With Fukushima again generating ugly headlines as contaminated water from the crippled nuke plant pours into the Pacific, industry supporters are probably ready to Take This Job And Shove It, Before the Next Teardrop Falls.
And who could blame them? If anything, public opposition to nuclear energy in Asia — the world’s fastest-growing market for nukes, and the one that still gives analysts some cause for some hope — is growing, not fading.
Witness recent anti-nuke protests in Taiwan, China and South Korea, where an investigation revealed that the country’s nuclear plants had used components that bore fake safety certificates. Dang Me, talk about having Friends in Low Places.
Despite the never-ending cascade of crappy news, some industry watchers, such as Raymond James analyst David Sadowski, insist better days lie ahead. Although he sees continued weakness in spot prices heading into 2014, Sadowski says the longer-term outlook remains bright.
“The picture in the medium to long term is, if anything, becoming increasingly compelling: the long-term (contract) price has hardly budged yearto-date and now sits at $57 a pound,” he wrote in a recent report.
Sadowski believes several factors will underpin a gradual rise in prices, which he expects to average $40 a pound this year, $52 a pound in 2014, and $70 a pound in both 2015 and 2016.
A key factor — and one that is often cited by bullish analysts — is the pending expiry this fall of an agreement between the U.S. and Russia, under which Russia recycles uranium from its nuclear weapons to provide energy-grade fuel to utilities. The end of the pact should lead to a tighter market, since the recycled Russian uranium currently makes up about 15 per cent of global supplies.
Sadowski says current low prices are also likely to underpin a tighter supply-demand balance by discouraging new mine development, and putting higher-cost mines at risk of closure.
Another key factor: nuclear plants, which have to lock in secure supplies at least three years in advance, currently have “uncovered requirements” that are at the highest level in six years, he says.
“China’s new build rate remains frenetic with 28 reactors under construction (of 68 globally), and many of Japan’s reactors appear as likely as ever to restart,” albeit slowly, he argues. “These realities underpin a global supply shortfall that we expect to exert upward pressure on prices during 2014.”
Due to its size, liquidity, healthy balance sheet, low operating costs and stable dividend, Cameco remains Sadowski’s top pick in the sector. He rates the stock “outperform” with a 12-month target price of $24.
Of course, most uranium stocks have given investors little but grief in recent years, and driven a few Crazy. So if Sadowski’s bullish call on Cameco proves prescient, he could be King of the Road a year from now. If not, he may be drinking a Whiskey River or two, to Make the World Go Away.