By: The Energy Report and Edward Sterck
With Japan set to restart reactors and Russia's Megatons to Megawatts program near its expiration date, Analyst Edward Sterck thinks uranium stocks could pick up momentum, even if uranium prices show no inclination of heading north. In this exclusive interview with The Energy Report, Sterck warns of a supply-demand gap that could hit the world as early as 2015. In the meantime, consolidation is the name of the game.
The Energy Report: Why is the uranium market still down more than a year after the Fukushima accident?
Edward Sterck: While the uranium price is lower than it was immediately prior to Fukushima, it's important to remember that it is at a higher level than we saw in mid-2010, which was only six months before Fukushima. At that time, the uranium price was in the mid- to low-$40s, and we're now in the mid- to low $50s. From that perspective, I think the market is looking more robust than it did in 2010 despite the impact of Fukushima.
Uranium prices appear to have established a base in the mid- to low-$50s, but are now drifting along without any particular inclination to head higher. The main things keeping a brake on uranium prices are the current supply-demand balance and also some residual uncertainty regarding Japanese reactor restarts and the issuance of new reactor licenses in China, which were suspended after the Fukushima accident. I think we could see some positive news on both fronts in the not-too-distant future.
It looks increasingly likely that Japan will begin to restart reactors. Local opposition to reactor restarts was overcome last week, and the government appears to be getting closer to a definite restart decision, although the exact timeframe remains unknown.
In China, some nuclear regulators have come out publicly over the course of the last few months, saying that they will begin to issue new reactor licenses again, potentially as early as June. We could possibly see those licenses issued fairly shortly. In addition, at the beginning of June, the Chinese cabinet reportedly reconfirmed the country's commitment to its nuclear program, although exact details are yet to be released.
In summary, Japan and China's unfolding nuclear policies are potential catalysts we may see in the near future. These two short-term catalysts may not necessarily result in an increase in the uranium price, but I view them as being potentially positive for uranium stocks. Such events may derisk the outlook for the nuclear industry in the investment community, and therefore for uranium demand. This could draw capital back into uranium stocks and potentially result in a rerating of the market valuation multiples applied to them.
TER: Could a catalyst like the end of the reprocessing program in Russia turn the prices up again?
ES: The downblending of Russia's highly enriched uranium, derived from decommissioned Russian nuclear weapons, ends at the end of 2013. The so-called Megatons to Megawatts program currently produces the equivalent of about 23 million pounds (Mlb) per year. Although it's possible Russia may continue to downblend some material for internal purposes or sell its reactor technology to third-party countries, the resulting production will be greatly reduced. Even in 2013, the last year of the current deal, the quantity of material available to the market is expected be somewhat lower, at around 16 Mlb. However, the impact of that is somewhat difficult to ascertain with absolute certainty.
The program's output does represent a fairly large part of the market—around 12% of annual uranium demand. As such, one would expect some price appreciation after that material is no longer available to utilities. However, when you look at the procurement process for nuclear fuel, the utilities typically look at supply levels 18+ months ahead. So we're actually already coming into the timeframe where the Russian material is all spoken for, and the utilities should need additional sources of material from 2014 onward. But we haven't really seen a huge price movement to reflect any supply-demand shortfall there.
It's probably fair to assume that the increase in production from various parts of the world, particularly Kazakhstan, has been sufficient to offset the Russian material, at least for the time being, although we could see a supply-demand deficit opening up in the years after 2014.
TER: Given what you've said about China and Japan, will things pick up in the market over the summer? Or is it going to take a little longer than that to bounce back?
ES: The summer is traditionally a very quiet time in the nuclear space, as it is in capital markets in general. It's possible we could see some movement toward the end of the summer, but I think the world is still somewhat fixated on the uncertainty surrounding the Eurozone and the broader macroeconomic impact that any continued problems with the Eurozone might have. Until those are resolved, it's very difficult to make absolute calls on these sorts of things.
TER: Quite a few of the uranium stocks are down right now. Is this going to make them ripe for acquisitions?
ES: I think it's possible we could see a period of consolidation. There have been some transactions over the last year or so.
TER: Thank you for your time, Ed.
Edward Sterck covers uranium, diamond and platinum group metal mining companies for BMO Capital Markets. He joined BMO in 2007, prior to which he was a mining analyst at Hargreave Hale. Before working in mining research, he spent more than four years trading government bond futures on a proprietary basis. Sterck holds a Bachelor of Science in geology with honors from the Royal School of Mines, Imperial College London.
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-- Posted Thursday, June 7 2012 | Digg This Article |
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