Japan Makes the Hard Call, Backtracks on Nuclear Power

Facing rising energy costs, Japan has reconsidered its post-Fukushima decision to shun nuclear energy—that's good news for the uranium market.

Reuben Gregg Brewer
Reuben Gregg Brewer
Apr 30, 2014 at 9:09AM
Energy, Materials, and Utilities

During his company's fourth quarter conference call, Tim Gitzel, CEO of pure-play uranium miner Cameco Corporation (NYSE:CCJ), said, "we know there will be a great deal of growth in uranium demand over the long-term and that new production will be needed, it's just a question of when." Now that Japan has publicly announced that it will reconsider its nuclear power ban, "when" is getting a lot closer.

A hazy picture
When discussing Cameco's 2013 performance, one of the top negatives Gitzel highlighted was Japan. There have been hints that the country would restart at least some of its nuclear fleet, but no firm commitments. Now, with Japan's 3E+S energy policy update, it looks like the government has realized that a tiny island with few natural resources of its own can't import fossil fuels for virtually all of its energy needs. Nuclear power, along with renewable sources, is the clear answer.

That doesn't mean there's a timeline for restarts, because there's not. But it does mean that the haze is starting to clear. And it's about time. Cameco's earnings peaked at just over $2.80 a share in 2009 and came in at around $0.80 last year. That earnings falloff came about despite revenues being 5% higher in 2013.

(Source: Digital Globe, via Wikimedia Commons)

In fact because of the industry's uncertain state, Cameco, which is targeting uranium production of around 24 million pounds in 2014, has decided to pull back from its previously stated long-term production goals. It had been targeting a nearly 50% increase in production by 2018. Now, Gitzel says it will focus on increasing production as market demand dictates.

But there are still good signs...
That said, Cameco still sees huge demand growth in the future. For example, in 2023 the company is projecting uranium consumption of 240 million pounds, but the supply from existing mines will only be able to produce half that much. A big part of that demand is going to come from Asia, where there are 117 reactors today but there are expected to be 191 online in 2023.

That said, if Cameco isn't certain enough about the future to ramp up production, perhaps you don't want to own a pure-play uranium miner. If that's the case, consider Rio Tinto (NYSE:RIO). This diversified miner produces about a third as much uranium as Cameco, but has operations spanning iron ore, thermal and metallurgical coal, and copper, among others.

(Source: Alberto Otero Garcia, via Wikimedia Commons)

Iron ore made up about half of Rio Tinto's revenues in 2013, with copper coming in at around 10%. Uranium doesn't actually hold a candle to either of these, so it's just a sideline business right now. But if Cameco is right about demand growth, it could quickly become a more important business. And, in the meantime, you can't build a nuclear power plant without iron ore and copper.

In other words, Cameco has to wait for uranium demand to pick up before its business will improve. But the over 90 reactors Cameco expects to be built over the next 20 years or so can't get started without the products that drive Rio Tinto's business. That it supplies uranium, too, just means it will have the opportunity to keep nuclear utility supplying customers even after their construction plans end.

Focus or safety?
The uranium market is kind of like being able to see the mountain top, but getting stuck in a thick fog during the climb. Cameco is an all-in call that there aren't any serious pitfalls hidden in the fog. With Japan's renewed consideration of nuclear that fog is, indeed, starting to clear, but it's not gone yet. Rio Tinto provides exposure to the construction that will come before uranium demand -- with the potential to participate in the uranium market if Cameco's positive market view comes to fruition.