Effects on Commodity Pricing of Uranium

Over the medium, to long-term, nuclear power capacity and power generation are growing, while uranium production will likely struggle to meet this growing demand. As a result, it should be expected that prices will likely rise to higher, sustained levels in order to support new mines that will be required to meet increasing demand.

As you can see, clearly there will be increased pressure to acquire the Uranium needed to fuel the current and future nuclear reactors. Quoting several sources, “Prices of the radioactive metal are forecast to climb more than 40 percent by the end of the year as Japanese power plants restart nuclear reactors that have been shut down since the March 2011 earthquake and tsunami in Fukushima. The rebound in uranium demand may fuel takeovers as buyers try to get ahead of rising prices,” Bank of Nova Scotia said. The median price-book ratio for uranium stocks is almost half the level it was before the disaster, according to data compiled by Bloomberg. “Now is a great time for cherry-picking good assets,” Rob Chang, a Toronto-based analyst at Cantor Fitzgerald LP, said in a phone interview. “We think 2014 is going to be really the kick-off year for the uranium space. The timeframe for cheap acquisitions may be running out.”

Japan, once Asia’s largest nuclear power producer, may restart one in every five reactors this year after safety reviews, driving uranium back into a bull market, according to analyst estimates compiled in a Bloomberg survey last month. Prices will climb to $50 per pound in the fourth quarter, according to the median of forecasts compiled by Bloomberg. Uranium has bottomed and is poised to rebound, Ben Isaacson and Shawn Siddiqui, analysts at Bank of Nova Scotia, wrote in a Jan. 8 report. “When the uranium market starts to pick up steam, we expect to see increased M&A activity,” the report said.

The fabled "uranium renaissance" may finally come to pass as one of the main catalysts for the uranium market looks to be looming on the horizon.

On Tuesday, Japan unveiled the first draft of its energy policy since the Fukushima Dai-ichi disaster happened three years ago. The draft, which is expected to be approved in March.

Following the Fukushima disaster in March 2011, Japan called a halt to its 48 nuclear reactors, all of which must pass safety inspection before being restarted. According to the company's draft policy, any reactors that meet the safety standards set after Fukushima, are candidates for a restart.

Last week, Reuters reported that the Nuclear Regulation Authority will be compiling a list of priority plants that meet the new criteria, and can be fast-tracked to a restart. The lack of nuclear energy has not been pleasant for the resource-poor Japan, that has been forced to import expensive fossil fuels that have sent the country's economy into a record 18-month trade deficit. However, the new energy plan looks like it could turn the tides somewhat for the country.

The Associated Press reported that the Basic Energy Plan sees a combination of nuclear, renewables and fossil fuels as the most "reliable and stable source of electricity to meet Japan's energy needs."

This latest draft of the energy policy is the government's strongest effort so far to revive its nuclear energy program. Though no specific nuclear targets have be set in Japan's policy, the plan indicates that the country will continue with its nuclear fuel recycling policy, while also emphasizing a need for flexibility should changes to the policy be required in the future.

A Seller's Market on the Horizon

For some time now, uranium market watchers have been waiting for Japan to declare an "all systems go" with regards to firing up its reactors. Once this even happens, the feeling is that the overhanging uranium supply currently flooding the market will start to be chipped away. The end result of course, is expected to be extremely positive to the uranium market, with sellers finally able to start selling their product for higher prices, and buyers biting the bullet and paying more for the coveted energy fuel.

"I think it's an incredibly important announcement," Cantor Fitzgerald analyst Rob Chang told Uranium Investing News in a phone interview. "There have been some people in the market that did not believe that Japan was going to turn their reactors back on and I think this puts that question to bed."

"The government strongly noted that not only is nuclear going to be an important part of their power mix, they will be pushing their reactors to be restarted and even hinted towards potential building even more reactors." Chang said, :"I think it's a very positive note. It certainly does remove that overhang in the market, and it will at least slow down the buildup of uranium inventories with the reactors being restarted."

Overall, Chang sees the latest news from Japan as potentially being the kicking off point that the uranium market has been looking for, noting that sellers are growing increasingly reluctant to let product go for lower prices.

"I think prices will move, but it really just depends when the buyers are willing to bite the bullet and start bidding up the price. Producers/holders of uranium are now stepping back and waiting for the price to come to them, and I think that is a good sign."

Summary from NexGen

  • With the announcement of the restart of Japanese nuclear reactors, uranium stocks have begun to see large upside potential.
  • As uranium prices begin to rise, investors can expect these junior companies to commence and increase production on their lucrative property holdings.

I noted that uranium prices were due for a rebound as demand outpaced supply. Since then, uranium spot prices have remained steady around $35/lb, but the uranium miners have all began to rapidly appreciate; due largely in part to the restarting of Japan's nuclear power plants. While many investors focus on the industry leaders, I believe more attention needs to be given to junior companies. It's in these less noted companies that more risk-accepting investors can expect to see significant upside.