What Does Fukushima Mean for Uranium?

The Japanese government's official report on Fukushima shows that collusion between the utility and regulators helped multiply human error and cause a disaster. The problem is not nuclear power per se, but neglect and the disastrous effects of poor regulation. It would be easy to write off uranium miners altogether because of Japan's nuclear challenges, but a critical analysis of Fukushima points elsewhere.

Official findings
For a number of years regulators and the utility TEPCO were aware that Fukushima's backup systems could lose power if a tsunami were to reach the site's level, but nothing was done to mitigate these risks. Also, new guidelines had recently been issued to improve the site's safety, but the Nuclear and Industrial Safety regulator let TEPCO set its own upgrade schedule. At the time of the disaster none of the required upgrades had been put into place.

The commission found that Fukushima was representative of the industry. Japan's nuclear regulatory bodies did not have the necessary degree of knowledge or understanding for the job, thus allowing for regulatory capture. Plant safety upgrades do not provide any immediate boost to utilities' profits, so they are motivated to avoid new safety measures as long as possible. 

Poor regulation coupled with a lack of responsible disaster planning led to failure of backup systems, creating an enormous catastrophe. To maintain uranium demand, the uranium mining industry needs to ensure that regulatory capture is limited and plants are designed with backup systems that can withstand probable natural disasters. 

Why did Japan build nuclear reactors in the first place?
Japan built nuclear reactors to help combat its lack of domestic fuel sources. Coal is easily imported, but Japan is very densely populated, and the negative health effects from burning coal could be very costly. The LNG market is growing, but LNG is expensive and high transportation costs mean that America's fracking boom is not a silver bullet. 

Nuclear energy is still attractive for Japan, as long as regulatory capture is limited and natural disasters are planned for.

Industry consolidation
Cameco (NYSE: CCJ  ) is one of the biggest pure uranium plays with profitable and high-yield mines. When BHP Billiton (NYSE: BHP  ) wanted to sell out, Cameco came along and paid $430 million for BHP's Australian Yeelirrie project. Fukushima helped push BHP Billiton to pour its money into copper, iron ore, metallurgical coal, and hydrocarbons.

Overall, BHP Billiton's uranium divestments are understandable. It needs to refocus itself if it wants to grow, considering its total debt to equity ratio of 0.48 and China's falling growth.

The best pure uranium play
Even considering mine closures, Cameco expects a net increase of 91 new nuclear power plants by 2022. The company profits across the fuel cycle, from its high yield McArthur River mine to its recent acquisition of the NUKEM uranium trading company.

With an acceptable debt load and a total debt to equity ratio of 0.27, Cameco is simply one of the best ways to invest in the uranium industry. As demand starts to pick up in the coming decade, expect uranium prices and Cameco's 7.5% profit margin to rise. 

Rio Tinto (NYSE: RIO  ) is another miner with interests in the market, but its uranium production is a very small portion of the company's total operations. It owns 68.4% of the Australian Ranger Mine and 68.6% of Rossing Mining's Namibia mine, with third quarter 2013 production of 1.27 million pounds and 1.38 million pounds of U3O8 respectively.

In the first half of 2013 iron ore contributed $4.273 billion in net earnings, while the entire energy segment posted a loss of $52 million. Even with fears about China pushing many commodities prices down, Rio Tinto's non-energy interests are the main drivers of the company's bottom line. Uranium's long term future is encouraging, but it plays a minuscule role in the company. Cameco is a better way to play the market than Rio Tinto.

Denison Mines (NYSEMKT: DNN  ) is a pure uranium play, but it is a small miner with its own set of risks. It has partnered with Rio Tinto on the Namibian Dome project. It is the majority owner in the Wheeler River project, and it has Cameco and JCU as minority owners.

Denison is an exploration and development company. Drilling and exploring potential projects takes money, and in 2012 the company posted a total loss of $117.95 million and a loss from continued operations of $25.46 million. Do not expect Denison to turn a profit anytime soon, but if you are looking for a high risk and high reward investment, then it is worth a second look.

Bottom line
Regulations matter, and there is very strong evidence that better enforced disaster mitigation planning could have averted Fukushima. The disaster hurt the industry, but it is important to not throw out the baby with the bath water. Cameco is one of the best possible uranium investments, thanks to its large size and profitability. Denison's small size and Rio Tinto's focus on non-uranium investments make these companies less attractive options to take advantage of growth in nuclear power.

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