November 18, 2010 / 10:24 PM / 9 years ago

Analysis: China's nuclear program boosts uranium producers

TORONTO (Reuters) - After weathering a tough third quarter, Canada’s uranium producers are looking at much brighter prospects as their shares surge, spot uranium prices jump and growing demand for nuclear fuel pushes expansion into overdrive.

Not surprisingly, China is driving the underlying trend. Its ambitious program of building nuclear power plants promises double-digit growth in demand for uranium, a trend that should benefit Canada’s established producers and juniors alike.

In addition, the Asian superpower could prompt a round of mergers and acquisitions as it looks for ways to control the supply of uranium needed to feed its fleet of reactors.

Global uranium demand is expected to grow 32 percent by 2015, according to RBC Capital Markets, a forecast that already has share prices climbing.

Analysts are urging investors to jump on the bandwagon and buy shares of Cameco (CCO.TO), Uranium One UUU.TO, Paladin Energy (PDN.AX) <PDN.TO and other industry stalwarts.

“Over the next 10 years, without a shadow of a doubt, we’re going to need significant expansions in uranium production,” said BMO Capital Markets analyst Edward Sterck.

By 2010, China aims to produce between 80 gigawatts and 112 GW of electricity from nuclear power, up from a current capacity of just 11 GW. In order to start and fuel those new reactors, it will need to buy an additional 82 million pounds of uranium.

In 2010, total global production for uranium is estimated to be about 187 million pounds. Annual demand is estimated at 190 million pounds.

“In terms of the producers, pick one that has a high degree of exposure to spot prices,” Sterck said. “There may be price spikes.”

Uranium spot prices have risen nearly 44 percent since June, hitting $58.50 a pound this week. This momentum has helped push shares in Uranium One up as much as 142 percent, while Paladin has risen almost 60 percent and Cameco 66 percent.

Stocks slipped earlier this week, as China’s nuclear rollout was questioned. But with 23 new reactors already under construction, the country appears to be on track to achieve its lofty nuclear ambitions.

“We think that betting against China’s ability to attain its goals is dangerous,” RBC analysts Adam Schatzker said in a note to clients.


But building reactors is just the first step for China. Securing uranium supplies to fuel those power plants will be its next big concern.

To that end, the Chinese have already signed three long-term supply deals, one with France’s Areva CEPFi.PA and two with Cameco. Analysts say China will soon take the quest for secure supplies a step further.

“In nearly every other commodity, China’s gone out there and bought assets to ensure that they have some form of captured supply,” said Sterck. “They haven’t done that in uranium yet.”

He said juniors are a prime target, as they are cheaper, and have longer timelines to get into production, which meshes well with China’s nuclear rollout.

Sterck said he favors Extract Resources EXT.AX EXT.TO as a key target. Other promising names are Mantra Resources MRL.TO and UR Energy (URE.TO).

But Sterck doesn’t rule out a mid-tier producer being gobbled up by China, or a diversified miner with uranium interests. He sees Paladin, which has no majority shareholder, as a prime takeover target.

While he says the climate is ripe for mergers, he emphasizes that higher uranium prices will drive any deal-making. Higher prices will boost the value on projects that companies had put on the back burner after spot prices tumbled from a peak of about $135 a pound in 2007.

Analysts are calling for spot prices to average around $65 a pound in 2011, but there are still risks for investors looking to add uranium producers to their portfolio.

Most of the demand is long-term, and much of the future supply is located in politically unstable regions of the world.


In 2009, Kazakhstan surpassed Canada as the world’s top producer of uranium. Neighboring Uzbekistan and Kyrgyzstan also have large, untapped uranium deposits.

But the Central Asian states are rife with political and social unrest — at least 75 people were killed earlier this year in a bloody Kyrgyz revolt.

Fidelity Management fund manager Joe Overdevest said that when picking uranium stocks, like any natural resource, the location of the company’s projects should be a top concern.

“Number one is political stability, where the actual supply is coming from,” Overdevest said.

“The future supply coming online is in countries like Kazakhstan, Namibia, Uzbekistan,” he said. “These are not countries that are the most stable politically, so that kind of adds an element of potential risk to future supply.”

While the uranium sector has not yet seen foreign-owned companies lose their resources to nationalism, oil majors have lost stakes in their Kazakh projects to the government.

The majority of Uranium One’s projects are in Kazakhstan and Paladin’s Langer Heinrich project is in Namibia. Meanwhile Cameco, the blue chip of uranium miners, operates primarily in Canada with one major Kazakh project.

According to Thomson Reuters I/B/E/S, Fidelity Management holds a 7.9 percent stake in Uranium One, along with smaller stakes in Paladin and Extract.

Overdevest said that while project location is a top concern, there are other factors for investors to consider.

“Number two: how much growth they are offering?” he said. “And number three is execution: a lot of companies can promise production, but can they actually execute on it?”

Editing by Frank McGurty and Rob Wilson

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