Analysis: Japan reactor restarts could spark uranium rally

TORONTO Fri Jun 15, 2012 3:41pm EDT

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TORONTO (Reuters) - Signs that Japan is ready to restart a pair of reactors idled in the aftermath of last year's Fukushima nuclear meltdown could spark a rally by uranium-mining shares, which have languished since the March 2011 disaster.

Recent steps to bring the first of 50 shuttered reactors back online have already bolstered long-term uranium prices, which rose last month for the first time since January 2011.

Analysts say the reactor restarts, expected to be approved on Saturday, will likely soothe equity investors, who pulled out of Cameco Corp (CCO.TO) and other uranium stocks en masse following the worst nuclear accident since Chernobyl.

The sector's shares have remained sluggish since then, even though China, India and Russia have given every indication of pushing ahead with ambitious plans to expand their capacities to generate nuclear power.

"If Japan restarts reactors, that goes some way towards derisking nuclear power and therefore also the uranium sector," said BMO Capital Markets mining analyst Edward Sterck.

"Two reactors would just be a signal that Japan isn't abandoning nuclear power altogether," he added. "That could be a positive catalyst for uranium stocks."

Shares of Cameco, the world's largest listed pure play uranium miner, are down more than 40 percent since March 2011, when a massive earthquake and tsunami struck Japan, causing a meltdown at the Fukushima Daiichi power plant. The two reactors set to be turned back on are in Ohi, about 550 kilometers (340 miles) from the Fukushima plant.

Shares of Uranium One Inc UUU.TO, once the darling of the uranium space, have lost half their value, while shares of explorers such as Fission Energy Corp FIS.V and UEX Corp (UEX.TO) are down more than 65 percent.

Seemingly contradictory comments by Japan's prime minister, caught between a nuclear-wary public and power-starved manufacturers, have not helped build confidence. While the long-term price has risen, the spot price remains little changed at $51 a pound and the stocks just aren't moving.

Uncertainty over Japan has countered strong growth in demand for uranium to fuel new reactors, along with a pending supply gap as a pact to downgrade weapons-grade uranium ends next year.

"Quite frankly I'm surprised it hasn't gotten back to where it should be at this point," said Rob Chang, a mining analyst with Versant Partners, an investment bank in Toronto.

"I thought, within a year, uranium equities would be higher than where they were before."

JAPAN'S POWER WOES

Prior to Fukushima, some 30 percent of Japan's power came from nuclear generation. After the disaster, the nation gradually idled its entire fleet of 50 operable reactors. Nuclear's energy share has now bottomed out at zero.

To make up for the shortfall, resource-poor Japan has turned fossil fuels. Utilities burned 22 percent more natural gas in May than the year before, and petroleum consumption rose 157 percent in the same period.

With summer looming, the country's already struggling manufacturing sector is bracing for a potential power crisis. That has put pressure on politicians to turn reactors back on or risk crippling blackouts.

Last week, Prime Minister Yoshihiko Noda said two reactors owned by Kansai Electric Power Co (9503.T) must be restarted to ensure jobs and the "survival of society.

But on Friday he appeared to backtrack, telling Reuters that Japan should reduce its reliance on nuclear power in the medium and longer term. Noda and key ministers are expected to approve the Kansai restarts on Saturday.

Even if the reactors are turned back on, challenges remain. It will take weeks to reconnect them to the grid and Japan will only have a fraction of its former nuclear capacity. If Japan makes it through summer on limited to no nuclear energy, it could bolster arguments against turning more reactors back on.

Even so, many industry observers expect Japan eventually to restart about two-thirds of its reactors, tempering negative sentiment in the near term and pushing equities higher.

"It's going to be back to business as normal," said John Kinsey, a portfolio manager at Caldwell Securities in Toronto. "I think the bad news for uranium is over now."

With the tide turning, Kinsey points to Cameco as a potential winner. The blue-chip producer - with projects in Canada, Kazakhstan, Australia and the United States - has an ambitious plan to double uranium production to 40 million pounds a year by 2018 - just in time to capitalize on a massive nuclear push by China.

THE CHINA FACTOR

With 26 reactors under construction and 171 in the planned and proposed stages, China is on track to be a top generator of nuclear power within the decade.

The Asian nation suspended approvals of new nuclear plants after Fukushima, but last month it endorsed a nuclear safety plan that is likely to get the approval process back on track.

"That last hurdle that needed to be jumped over has been crossed, so it's now a matter of weeks, maybe days, maybe months," said Chang. "They are in full on growth mode."

China is not alone. Russia has 10 reactors under construction and another 41 in the planned and proposed stages, according the World Nuclear Association. India is building seven, with another 56 planned and proposed.

At the same time, a major source of nuclear fuel is running dry. The so-called Megatons to Megawatts pact, through which Russia pumps some 25 million pounds of downgraded uranium into the market each year, ends in 2013. That means about 17 percent of global supply will exit the market next year.

While investors are still hesitant after being burned by risky uranium in 2007 and then again in 2011, restarts in Japan could mean the time is right to get back into uranium equities.

"I think it's a fantastic opportunity for investors with long-term viewpoints," said Chang. "We're seeing catalysts coming up and I'm fairly certain we're going to exit this year significantly higher than we are right now."

(Additional reporting by Jon Cook in Toronto; Editing by Frank McGurty)

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