Is a nuclear spring on the way? Uranium prices have stopped falling, which is good news for the industry, and Japan is planning to restart some of its reactors, which is even better news.
Future demand from Japan
Under the economic policies of Prime Minister Shinzo Abe, Japan is trying to stimulate its economy at all costs. Japan's economy has been stuck in neutral after two decades of deflation and all the damage that comes along with it. To get Japanese consumers spending again, Shinzo Abe is unleashing QE-squared through Abenomics, which intends to improve the Japanese economy by:
a) pumping the stock market to increase consumer confidence and spending through the wealth effect;
b) devaluing the yen to increase aggregate demand;
c) improving economic competitiveness by building infrastructure projects.
While the Nikkei has rallied and the yen has fallen, Japan's overall economic competitiveness is still in question. Abenomic's margin for success is razor thin. Any push or drag, no matter how small, can potentially decide whether Abenomics works or fails.
Restarting nuclear reactors would be a positive push for Japan, as nuclear comprised 30% of Japan's total energy mix before Fukushima. The energy source is significantly cheaper than imported LNG and would improve Japan's economic competitiveness by lowering electric costs.
For the uranium market, any increase in Japanese demand would likely translate to higher uranium prices given that Japan accounted for nearly 12% of uranium demand before the nuclear reactor accident (compared to the de minimis amount now).
Long-term demand from emerging nations
While Western countries such as Germany and Switzerland are phasing out nuclear, there is still a future for nuclear energy because of demand from emerging markets.
For the emerging markets like China, nuclear energy is worth the risk. Those nations need energy to keep their economies growing. Because of pollution issues, they cannot depend on coal exclusively, nor can they rely on cheap natural gas as they are yet to develop their own massive shale reserves. Likewise, renewable energy is still costly despite rapid growth in recent years.
Adopting nuclear aggressively would help those nations mitigate pollution while improving energy security.
For the uranium market, demand from emerging markets is a big opportunity that may more than compensate for the decreased demand from the West.
While only 20 of the world's total 434 operating nuclear reactors are currently Chinese, the nation is building 28 more and has an additional 58 in planning stages. India is building six nuclear reactors and has 18 in the planning stages. In short, barring a paradigm breakthrough in renewable energy, uranium demand will still be strong for decades to come.
The bottom line
After a long winter, nuclear fundamentals are becoming attractive. Japan is planning to restart some of its nuclear reactors while Russia is asking for higher prices for its uranium after the expiration of the Megatons-to-Megawatts program.
Prices have stabilized, and many market participants now expect them to go higher.
In the long term, Cameco is probably the best bet. The company is a market leader and a low-cost producer. Because of this, the company has managed to stay profitable even when uranium prices fell below $40.
The company has the production costs and balance sheet to survive in bad times and thrive in good times.
Another interesting opportunity is Denison Mines. While more speculative than Cameco because it is not currently profitable, the company does have a solid balance sheet to wait out the low prices, and has stakes in promising uranium mines that may make it attractive as an acquisition.
BHP Billiton (NYSE:BHP) is another uranium producer. The company is much bigger and more diversified than Cameco and Denison Mines. Because it gets a significant part of revenue from copper, coal, and iron ore, the company is also more dependent on China's macro condition in the short term. That could be either a good thing or bad thing depending on China's economy.
Uranium miners have taken it on the chin after Fukushima, but industry fundamentals are slowly turning the nuclear winter to spring.