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Global Conditions Are Conspiring for a Swift Upswing in Uranium Prices
Posted by: Elliott Gue (IP Logged)
Date: July 30, 2012 01:38PM
In 2011 China generated 82.6 billion kilowatt-hours of electricity from nuclear power stations, about 10% of the 800 billion kilowatt-hours U.S. reactors produced in 2011.
China’s insatiable appetite for electricity will continue to drive the nuclear renaissance. Although the country currently produces less than 2 percent of its electricity needs from nuclear power, this percentage will increase rapidly in coming years to keep pace with demand that’s growing at an average annual rate of 10 percent.
Twenty-six nuclear power reactors are under construction on the Mainland, with an additional 51 facilities at some stage of advanced planning. Prior to the Fukushima Daiichi accident, Beijing had planned to increase the nation’s nuclear power capacity to 80 GW from 11.9 GW. However, after the disaster in Japan, the government suspended approvals for new plants and conducted a comprehensive safety inspection of all its operating reactors, as well as those under construction.
This review process has almost run its course, and construction has resumed on a number of facilities. In June 2010, the State Council approved a nuclear safety plan that will be in force through 2015, though these requirements shouldn’t prove to be a major impediment; recent generations of reactor designs eliminated many flaws in older models, including the need for an external power supply to cool the core in an emergency. China has also enhanced flood controls at nuclear power plants in coastal regions.
Although China has yet to update its goal for nuclear power, media outlets have suggested that authorities may lower the target to between 60 and 70 GW from 80 GW. Investors should also consider that China has a long history of exceeding these targets. In fact, if China builds all the reactors currently planned or proposed, the Mainland’s installed capacity would swell to more than 200 GW.
China isn’t the only emerging economy that’s banking on nuclear power to meet growing electricity demand faced by utilities.
India recently approved the construction of a new nuclear power facility and has seven projects that are currently under way. An additional 15 nuclear power plants are in the planning stage.
President Vladimir Putin has affirmed Russia’s plan to grow nuclear power’s contribution to the nation’s electricity mix to 20 percent from 15 percent. The country has 10 reactors under construction and 17 in some stage of planning.
The growth outlook for nuclear power has deteriorated slightly since the accident at Fukushima Daiichi. With the exception of Japan and Germany, nuclear power’s future remains secure in France, the U.S. and other countries with large, established bases. Meanwhile, countries such as China and India continue to move forward with plans to grow their reactor fleets.
The Supply Side
The International Atomic Energy Agency (IAEA) forecasts that global nuclear capacity will grow to 429 GW in 2020 and 501 GW in 2030 from 375 GW. Many projections call for global uranium demand to reach 100,000 metric tons per annum by 2020, a substantial increase from an estimated 68,000 metric tons in 2012.
In 2011 uranium mining operations produced 58,000 metric tons of the feedstock – well short of global demand. Historically, the secondary market – for example, government stockpiles and reprocessed Russian nuclear warheads – has bridged the supply gap. But the Russian government will terminate its Megatons to Megawatts program at the end of 2013, placing the onus on mining outfits to offset the decline in secondary supplies.
In 2011 uranium mining operations produced 58,000 metric tons of the feedstock–well short of global demand. Historically, the secondary market–for example, government stockpiles and reprocessed Russian nuclear warheads–has bridged the supply gap. But US-Russia Megatons to Megawatts program at the end of 2013, placing the onus on mining outfits to offset the decline in secondary supplies.
Although uranium is relatively plentiful, production costs are the biggest impediment to supply growth. Cameco Corp’s (TSX: CCO)(CCJ) McArthur River uranium mine yields high-grade uranium ore and generates solid returns at the current spot price of $50 per pound. However, this mine, which produces about 15 percent of global supply, is the exception rather than the rule.
Many of the greenfield mines in development aren’t profitable in the current pricing environment, prompting some companies to mothball expansion plans over the past year.
As I said in Profitable Themes in a Tough Market, to incentivize miners to ramp up production to meet anticipated demand growth, uranium prices would need to increase to at least $80 per pound.
China has taken advantage of weak uranium prices to add to its stockpile whenever the feedstock dips to the low end of its trading range. Investors should follow Beijing’s example.
Cameco Corp remains my top uranium play on an eventual recovery in uranium prices. In addition to the low cost of production from its world-class McArthur Lake mine, the firm expects to start production from the promising (and long-delayed) Cigar Lake site, a development that management expects to eventually produce 8,165 metric tons of uranium per year.
Cameco Corp sells about 40 percent of its output under long-term contracts, which provides a cushion when uranium prices weaken.
Stocks Discussed: CCJ,