Japan Gives Cameco Corporation a Big Boost

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Cameco Corporation (NYSE: CCJ  ) shares opened sharply higher on Tuesday, with the stock gaining more than 2% in early trading following reports that Shinzo Abe's government in Japan drafted a new Basic Energy Plan in which it sees nuclear power playing an important role. The Japanese government's plan is the latest in a series of positive developments for the uranium industry. 

The importance of Japan to the uranium industry
Prior to the Fukushima nuclear power plant meltdown nearly three years ago, Japan generated 30% of its power from nuclear energy. However, following the disaster, Japan shut down all of its nuclear reactors. Since then there has been no decision on whether the reactors will be started. In fact, the previous government in Japan had pledged that all nuclear plants will be phased out.

In its most recent quarterly earnings release, Cameco had noted the uncertainty over the future of nuclear power plants in Japan. The company had noted that slower than expected pace of Japanese reactor restarts was one of the reasons behind the deterioration in uranium market conditions in 2013. As a result, Cameco eliminated its previous 2018 supply target of 36 million pounds. The deterioration of the uranium market was also responsible for BHP Billiton's (NYSE: BHP  ) exit from the uranium business in 2012. Recently, investment bank Goldman Sachs also announced that it is exiting the uranium business.

Of course, the uncertainty over Japan would have played a major part in the decisions made by the likes of Cameco, Goldman Sachs, and BHP Billiton. This makes the latest development very important for the uranium market. The initial draft of the new Basic Energy Plan says that the government will restart nuclear reactors deemed safe by the Nuclear Regulatory Authority.

But opposition to nuclear energy continues
Since the Abe government came to power in 2012, it has favored a revival of the nuclear energy industry. This is in stark contrast to the stand taken by the previous government of Naoto Kan, which wanted to phase out all nuclear power plants following the Fukushima meltdown. Public opinion also seems to be in favor of phasing out nuclear power plants. Despite the opposition, I expect the Abe government to push for restarting at least some nuclear reactors. The reason behind the push would be Japan's mounting trade deficit.

Trade deficit widening
A report released by Japan's Ministry of Finance last week showed that the country's trade deficit widened to 2.79 trillion yen ($27.3 billion) in January as imports rose 25%. Strong consumer demand has been cited as one of the reasons for a rise in imports. The other reason behind the surge has been Japan's increasing reliance on oil and gas to generate energy.

Japan has been forced to import more oil and gas to generate energy as its nuclear power plants remain shut. January's trade data showed that crude oil imports surged 28.1% and LNG imports rose 21.4% on a year-over-year basis. Of course, a weaker yen also increased import costs.

The widening trade deficit is a concern for Abe as it can derail the Japanese government's plan to revive growth. Trade deficit had resulted in the Japanese economy growing at just 1% in the fourth quarter of 2013, well below the consensus forecast. Abe's focus on reviving Japanese economic growth makes a narrowing trade deficit very important. Reducing oil and gas imports will certainly help in narrowing the trade deficit. It is not surprising then that the new energy plan sees nuclear power as an important source of energy of Japan.

Outlook brightens further for Cameco
The Japanese government's new energy plan, which is expected to be approved by the cabinet, suggests that at least some nuclear reactors will come online. This is good news for the likes of Cameco, given Japan's importance for the uranium market. I noted in a previous article that the expected rebalancing of the uranium market makes Cameco a good long-term bet. The latest development from Japan further strengthens the investment thesis.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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