In our most recent commentary on uranium back on 8th September, I reiterated our positive view both on the medium to longer-term health of the nuclear industry and the attraction of uranium equities.
Despite the near-term hit that the uranium business has taken in terms of sentiment, the rationale remains the same: the world doesn’t have many options when it comes to generating significant, reliable base-load power.
Furthermore if you want to follow today’s fashion of minimizing your carbon footprint, once you exclude coal this really leaves only gas and nuclear power.
Since the Fukushima tragedy, government officials from a host of key nuclear players including Russia, China, India, the USA, France and South Korea have reaffirmed their commitment to the sector and nuclear expansion.
Germany is the only nation to announce it will end its production of nuclear power, but rather hypocritically it will continue utilise nuclear-generated energy from France.
So realistically in a world with burgeoning populations in emerging countries that are short on energy, there is going to be greater demands placed on all three forms of traditional energy: coal, gas and nuclear.
According to the World Nuclear Association, China currently operates 14 nuclear reactors, has 26 under construction and a further 52 are planned; India has six under construction and 17 planned; whilst Russia has 10 being built and 14 more in the pipeline.
From a broader perspective, the history of the past 30 years in the uranium industry with respect to previous incidents at Three Mile Island in the USA and Chernobyl in Russia demonstrated that base demand did not fall, as existing reactors in use worldwide were not shut down.
Older reactors will be reassessed and some will see early decommissioning, but the reactor-construction programs underway in most countries will continue, albeit perhaps at a somewhat slower pace. And modern-day reactors are far safer than sometimes problematic older ones.
For those wanting to invest in the uranium equity space however, there are some important provisos. The most significant of all being to choose companies wisely, as the current share market malaise afflicting uranium equities is unlikely to ease rapidly. This means that investors have to demonstrate patience.
Investors must focus on companies that are well run, with a flagship project that stands a better-than average chance of reaching production, or of attracting corporate interest. This enhances the prospect of capital gain with a shorter timeframe.
We said in the wake of the Fukushima tragedy that whilst there were bargains emerging in the uranium space, the likelihood was that those same stocks were going to remain bargains for some time to come.
As Elvis sang, “Wise men say, only fools rush in.”
We highlighted H2 2011 as the time to begin contemplating uranium equity investments and the time is well and truly upon us.
Interestingly enough, market volatility has favoured the patient investor. And what we’ve seen on the corporate front of late merely reinforces my view firstly that there are genuine uranium bargains out there and secondly that nuclear energy does have a bright future.
As we’ve said consistently, one of the biggest winners out of all this is likely to be China, which always manages to focus on the bigger picture. In the wake of Fukushima, China National Nuclear Corp, which began operations at its first overseas uranium mine last year, said it plans to acquire more global atomic fuel assets to meet rising demand.
The decision by China’s biggest nuclear plant operator to potentially implement a detailed overseas uranium business expansion plan follows China Guangdong Nuclear Power Group Co’s recent unsuccessful US$1.2 billion bid for Kalahari Minerals Plc (which has a 43% stake in ASX-listed Extract Resources).
As far as the Chinese are concerned, the gloom in uranium markets couldn’t have been better timed as they look to secure strategic sources of clean, cheap energy to power their economy for the coming decades.
More recently we’ve seen China’s Hanlong Group bidding for fellow ASX-listed Namibian uranium hopeful, Bannerman Resources. Given internal distractions it remains to be seen whether Hanlong will ultimately be successful with their bid.
Nevertheless, the point remains that there is a tremendous opportunity presenting itself for companies that want to strengthen their position in the uranium business.
The Chinese recognize a bargain when they see one and this is likely to be the just the start of many corporate forays in the uranium space in the current market environment.
And it hasn’t just been the Chinese that have recognized that there are bargains aplenty. As Bloomberg reported back in September when Cameco, one of the Western world’s biggest uranium producers announced a US$530 million bid for Hathor Exploration, “Cameco Corp’s gambit to buy a Canadian uranium deposit in its biggest ever acquisition is showing that the nuclear future is now.”
It was not only the nuclear industry’s biggest takeover since the Fukushima disaster, but more importantly Cameco’s biggest corporate play ever. And it involved a staggering 40% takeover premium, despite weak uranium prices!
Rio Tinto however has decided to throw a spanner into the works, today announcing its own higher US$570 million offer for Hathor Exploration, trumping Cameco’s hostile bid. Hathor’s board has apparently unanimously recommended Rio’s offer to its investors.
There’s every chance that a bidding war could ensue, but either way the message is clear: companies like Cameco and Rio can see the bigger picture. They know that uranium demand and uranium prices will both ultimately rebound.
The heightened difficulty in financing and commissioning new uranium projects by small to mid-cap players due to investor and financier unease is also playing into the hands of the uranium industry’s incumbent players. A slowing of new project development ultimately means tighter supplies down the track, which will provide significant price support.
Accordingly, I remain confident with respect to the medium to longer-term nuclear energy picture and anticipate that uranium prices and uranium equities should begin to recover during 2012.
Accordingly, I’m continuing to assess quality emerging uranium opportunities for inclusion in our resource portfolio.
This article originally appeared in full at Mine Life, an Australian resources financial services firm