SOURCE: Resource Capital Research

Resource Capital Research

April 01, 2011 06:00 ET

Resource Capital Research -- March Quarter 2011: Global Uranium Companies

Equity Research Report

DENVER, CO--(Marketwire - April 1, 2011) -

Key Points

Uranium Market:

  • The uranium spot price is US$60.00/lb. It has partially recovered from its plummet mid March to US$49/lb on news of the damage at the Fukushima nuclear plant in Japan.
  • The uranium spot market is likely to experience increased volatility over the next 3 to 9 months.
  • The long term contract uranium price is US$73/lb (28 Feb). Any impact from Japan on the contract price is expected to be temporary, remaining at or quickly returning to +US$70/lb territory, the level necessary to support development decisions at a number of advanced projects.
  • The full impacts of the Japanese earthquake on the nuclear power and uranium mining industries may take 12 months to unfold.
  • About 75% of all reactors in operation today are over 20 years old, and 25% are over 30 years old. Older reactors will be under increased scrutiny from regulators.
  • The uranium market is expected to be buoyed by solid fundamentals mid to long term.

Uranium Companies:

  • The Merrill Lynch Uranium Equity Index (a global basket of uranium equities) is down 19% over the past month, down 14% over 3 months and up 15% over the past 12 months.
  • Global uranium equities hit by high volatility following events in Japan.

Analyst Comments:

"The impact of the damaged nuclear reactors in Japan to the outlook for nuclear energy will likely take 12 months to fully unfold. However, mid to long term, growth in the sector is expected to remain buoyant, albeit on a flatter trajectory than previously thought, driven by strong fundamentals, including the global need for low carbon, base load electricity generating capacity," said John Wilson, Managing Director of Resource Capital Research ("RCR").

"It is evident that older reactors, certainly those over 30 years, will be under increased scrutiny. However, the key lesson from Japan's nuclear crisis may point to the need for, and benefit of, greater transparency and accountability of government, and stricter oversight of government nuclear agencies," said John Wilson.

Resource Capital Research ("RCR"), an equity research company which focuses on small and mid size resource companies, today launched its major quarterly research report covering 17 global uranium exploration and development companies.

The report covers TSX/V and USA listed companies: Australian-American Mining Corp. Limited, Bannerman Resources Limited, CanAlaska Uranium Limited, Extract Resources Limited, Paladin Energy Limited, Ur-Energy Inc.; and ASX listed companies: Aura Energy Limited, Deep Yellow Limited, Energy and Minerals Australia Limited, Energy Resources of Australia Limited, Energy Ventures Limited, Greenland Minerals and Energy Limited, Northern Uranium Limited, Peninsula Energy Limited, PepinNini Minerals Limited, Stonehenge Metals Limited, and Toro Energy Limited.

To access the free summary report or to purchase the full comprehensive report, go to www.rcresearch.com.au/reports. RCR also publishes gold, iron ore, rare and minor metals, and copper sector reports.

Equity Market Performance

The Merrill Lynch Uranium Equity Index (a global basket of uranium equities) is down 19% over the past month, down 14% over 3 months and up 15% over the past 12 months. The sector has been adversely impacted by serious crises at a number of Japan's nuclear power plants following the devastating earthquake and tsunami on March 11.

In the past 1 month, the uranium mining majors have had negative share price performance: Cameco (CCO) is down 23% (3 month performance -24%), Denison Mines (DML) is down 27% (3 month performance -17%), Uranium One (UUU) down 32% (3 month performance -8%), Energy Resources of Australia (ERA) down 19% (3 month performance -26%) and Paladin (PDN) down 24% (3 month performance -24%).

The market valuation of Australian companies with one or more uranium projects is down 7% over the past month, up 6% over the past 3 months, and up 62% over the past 12 months. Canadian companies with one or more uranium projects are down 10% over the past month, up 6% over the past 3 months, and up 71% over the past 12 months.

Uranium Price Outlook

The uranium spot price is US$60/lb (Trade Tech; UxC US$62.50/lb), and following a volatile quarter it is back to the same price it was in December. It has partially recovered from its plummet mid March to US$49/lb on news of the partial meltdown at the Fukushima nuclear plant in Japan. Immediately prior to the massive Japanese earthquake on March 11, the spot price had been trading at US$68/lb.

We expect the spot market to be characterized by heightened volatility around the US$60/lb mark in the coming months.

The long term contract uranium price is US$73/lb (February 28), up from US$65/lb three months ago. While the impact of the Japanese quake may weaken discretionary inventory purchases, and produce some delays to new reactor construction programs, the impact on contract prices is likely to be temporary, remaining at or quickly returning to +US$70/lb territory, the likely level necessary to support development decisions at a number of advanced projects, particularly in Namibia, eg. the large scale Extract (EXT) and Bannerman (BMN) projects, and potentially a Deep Yellow (DYL) project.

Impact of the Japanese Earthquake

The full impact of the Japanese earthquake and tsunami is yet to be determined. Indeed the reactors at the Fukushima plant, the worst affected by the earthquake, appear to be stabilizing, though, at the time of writing, they are not yet fully under control. However, as the risk from the damaged reactors becomes clearer, the question remains as to what impact the crisis will have on the rate of nuclear power expansion elsewhere in the world and the associated impact on uranium demand. The answer to both questions may not be evident for 12 months. However, it appears likely that the nuclear expansion trajectory will be flatter, due to the possibility of constrained reactor life extensions, and increased reactor capex driven by an expectation of increased regulatory requirements and associated increased construction time.

Of the 13 reactors on Japan's northern coast impacted by the quake and tsunami, it was the 4 oldest reactors (pre-1980) that completely failed, and at least 3 of these, and possibly all 4, will remain permanently closed. There will likely be delays to restarting the other reactors that shut down automatically when the quake hit, due to damage of related facilities and infrastructure.

Japan has 55 nuclear reactors with annual uranium consumption of 21.3mlbs, or about 12-13% of global uranium demand. With the shut down reactors accounting for 20% - 24% of the Japanese fleet, the impact to global uranium demand is about 4-5mlbs on an annualized basis. In relation to the 3 or 4 reactors to be permanently shut down, annual uranium demand is estimated at 1 to 1.5mlbs. With annual global uranium demand from nuclear power of ~185mlbspa, the destroyed reactors represent less than 1% of global uranium demand.

Germany has indicated it is temporarily shutting down its older reactors (commissioned pre-1980) to undertake a safety review. This has resulted in the temporary shut down of 7 of its 17 reactors.

All countries will review their nuclear fleets for safety, and some reactors may be closed (temporarily or possibly permanently) if safety upgrades ('backfits') are required. At this stage, apart from Germany, there is no indication of extended shut down delays. However, it should be noted that about 25% of the world's reactors are over 30 years old (refer to chart in this report).

In the view of one former U.S. NRC commissioner (Victor Gilinsky, Current Affairs), the lessons of the current crisis will likely indicate that:

(1) older reactors have been built to lower safety standards than required today and not adequately upgraded.

(2) the fundamental approach of regulators to nuclear safety will need to be examined with a view to taking a stricter approach to enforcement. In relation to older plants in the U.S., he points out, that the NRC "must enforce up-to-date safety standards more forcefully" reflecting his view that nuclear regulators have been "overly accommodating to the industry they supervise."

However, while there is potential for some impact to the marginal growth of nuclear energy, the key forces driving the nuclear "renaissance" appear to remain intact, viz:

  • Competing fuel prices increasing (oil, gas, coal)
  • Carbon dioxide pricing to be introduced
  • Growth in world energy demand for electricity, currently expected to double in the next couple of decades
  • Uncertainty around renewable energy technologies market penetration
  • Uncertainty around carbon capture and sequestration costs

China, India, Russia, and the USA have the largest planned and proposed reactor programs (refer to World Nuclear Power Reactor table in this report) and aspects of these programs are being reviewed in response to the Japanese quake to see what lessons may be applicable.

In the days following the crisis, a number of high profile announcements from various officials and governments around the world affirmed the commitment to nuclear energy, setting the tone for the market rebound.

In particular, comments from the U.S. that it is committed to nuclear energy buoyed markets in our view: "Regulators should press ahead with approving construction licenses for new nuclear power plants despite Japan's nuclear crisis," U.S. Energy Secretary Steven Chu said on March 15. Chu told a US House panel that "the American people should have full confidence that the United States has rigorous safety regulations in place to ensure that our nuclear power is generated safely and responsibly." He added that the administration "is committed to learning from Japan's experience." Chu stated that he thought construction license applications pending at the US Nuclear Regulatory Commission could proceed. (Trade Tech).

A former chairman of India's Atomic Energy Regulatory Board, A. Gopalakrishnan, reported in a major Australian newspaper, echoing Gilinsky's point 2 above concerning the impact of regulators on the safety of the industry, warned that government secrecy, insularity and lack of transparency was likely the key issue behind the crisis in Japan. He indicated that, in his experience, the Indian nuclear regulator "operates like a lapdog of the Department of Atomic Energy and the Prime Minister's office." He points to the need for, and benefit of, transparency and accountability of government, and in particular the negative impact of deficiencies in closed oversight/supervisory systems.

About Resource Capital Research

Resource Capital Research ("RCR") (www.rcresearch.com.au) was founded in 2004 and is based in Sydney. RCR provides investors with in-depth reports on current investment opportunities in the mining sector both in Australia and globally. The focus is on small and mid cap resource companies, within the gold and uranium sectors, ranging from exploration stage through development and production. John Wilson the principal of the firm and analyst has over ten years' experience analyzing mining companies in Sydney and on Wall Street including for major investment banks.

The report is available at www.rcresearch.com.au. The next Uranium Sector Review will be published in the June Quarter, 2011. RCR also publishes the Gold Company Review, Iron Ore Company Review, Rare and Minor Metals Company Review; and a Copper Company Review.

Abbreviations: WNA - World Nuclear Association, ktpa - thousand tonnes per annum, lb - pound, Mlb pa - million pounds per annum, U3O8 - uranium oxide.

Contact Information

  • For further information please contact:

    John Wilson
    Analyst, Resource Capital Research
    Phone: (+61-2) 9252 9405
    Email: Email Contact