Fundamentally, the Uranium Sector Still Looks Good


The Energy Report: The Fukushima disaster, protests in Australia over lifting a ban on uranium exploration, and a fire aboard a Russian nuclear submarine in December indicate negative sentiment toward nuclear power. Why would investors risk exposure to a commodity that is so price sensitive to events like these?

Mark Lackey: The fundamentals of the uranium sector still look good. Worldwide, 1.3 billion (B) people lack electricity. In China, load growth for electricity is 10% annually; in India, 8%. That growth is unlikely to diminish any time soon. Nuclear power has to be considered as an option to meet demand.

I would remind you the nuclear industry did not end after the accident in Fukushima, Japan. Yes, there was a reaction; plants were shutdown in Japan and Germany. Subsequently, some startup of those same plants is planned. Furthermore, construction on 65 plants around the world did not stop.

There have been more inspections in China, India and France and that reassures people that everything has been built to specifications.

As many as 200 new nuclear plants are being planned in Asia, Brazil and even Saudi Arabia. The week of Feb. 13, China announced its long-term goal to increase installed nuclear capability by an additional 30%. Their original goal was 65 million (M) kilowatts (KW) by 2020; now it is 80M KW. Clearly, the country does not plan to stop or change direction.

TER: What impact did the U.S. Nuclear Regulatory Commission’s approval of construction of two nuclear reactors in the state of Georgia have on the uranium sector?

ML: It did not move the spot price, but the industry views this as a positive. Recent growth has been largely in Asia and South America. We will have to wait and see if this leads to more positive announcements in the U.S.

TER: Do you expect more licenses to be granted in the U.S.?

ML: Even though U.S. load growth will grow only in the 1% range, the country will need additional capacity in the next 10 to 15 years. It is very hard to build coal plants in the U.S. and the hydroelectric sites are pretty well maxed out. The other option is to burn natural gas. All of this puts nuclear power back in vogue.

TER: Among commodities, is uranium the most sensitive to world events or would you put gold in that category as well?

ML: I would put uranium up there. But it is not the only commodity that is event driven. Gold really reacts to events. You can see that in its volatility related to events in Europe. Silver is also event-driven because it tends to follow the gold market. Base metals are not all that event-driven, although oil has been lately.

TER: In 2010, the nuclear industry used 152 million pounds (Mlb) of uranium. Yet uranium suppliers only produced a total of about 118 Mlb. The shortfall was covered by reprocessing nuclear weapons. When will those finite sources run out?

ML: Russia will stop exporting the highly enriched uranium it has been processing from its nuclear warheads by 2013. Unless a new source is found, a potential shortfall could happen over the next two or three years.

TER: It is now almost a year since Fukushima. The spot price for uranium is now $52 a pound. Has that spot price resumed an upward push?

ML: No, our 2011 forecast would have been correct if the earthquake and tsunami had not happened. The price fell from $72 to the $40s and has remained at $52 for the last six months.

The decision to shut down some plants in Germany and Japan took away short-term demand. During the recent cold weather, Germany restarted a few of those plants, and the Japanese are looking at proposals to restart some as well. As that trend continues and new plants are commissioned, demand should rise.

TER: Just about a year ago, the spot price and the long-term price for uranium crossed paths on the charts. Ever since, they have diverged. When do you think those two lines will meet up again?

ML: Interestingly enough, most uranium sells in the long-term market. The equities all follow the short-term price, partly because that is what the market follows. In the next couple of years, I expect spot prices and long-term prices to rise. We anticipate they will be trading in the same relative price range by 2014.

TER: What range do you expect the spot price to trade in this year?

ML: By the end of 2012, we anticipate $65, moving into the mid-$70s in 2013. That upward pressure is due to the fact that the Russians will no longer export highly enriched uranium starting next year.

TER: What are some different ways to gain exposure to the uranium sector?

ML: Investors could go a couple of different ways. They could buy mutual funds that specialize in the uranium market. Investors also could buy into companies involved in building nuclear plants or other related industries. We tend to focus more on uranium mining companies themselves.

TER: How sensitive are uranium juniors to the spot price?

ML: In general, the correlation on uranium stocks is fairly high. The junior stocks tend to move after the big market has shown recovery. If the uranium price gets to where we believe it will be by the end of 2012, the juniors that are in production or relatively close will move with the market.

TER: Given your expertise in coal, we have to talk a little bit about that. Prices for thermal coal and metallurgical (met) coal remain healthy despite reports about the contribution of greenhouse gases generated by coal-burning power plants and steel mills to global warming. What are your outlooks for thermal and met coal?

ML: The met coal market looks pretty good. We expect steel production to grow in the 6% range over the coming four to five years. European steel production shows some weakness right now, but there is no significant slowdown in India, Korea or China. Even in the U.S., it looks like steel production will be OK, given the expected decent year for auto sales. We expect met coal to trade in the $200-225/ton (t) range, which will be very positive for met coal producers.

Thermal coal is a little more diverse. It can be as low as $15/t and as high as $120/t, depending on the British thermal units (BTUs), sulfur and ash content. At the upper end, the markets for thermal coal look very good. The lower end is always more problematic. Environmentalists have the most problems with this coal, particularly in developing countries. And, it is a little more difficult to develop plants.

TER: What do you like to see in a coal play?

ML: All things being equal, my preference is to be in the met coal market or the upper-end thermal market. We tend to be in North America, where we are familiar with the permitting processes and government issues.

I also look for good infrastructure. Without rail or water or power, having a big coal deposit is not very useful. You also want companies in places where there are lots of people who understand the geology in that jurisdiction.

TER: What do you think the average realized price for met coal will be in 2012?

ML: The met market has not been as high as in China, but then you have to ship it to China. You need to realize that, if we quote a price of $225, you need to deduct the shipping costs.

If we had a decent year in the U.S., the price could go slightly higher. It will not skyrocket. A lot of met coal producers would be happy if they saw $150/t or $140/t. I would suggest prices will stay at the $170/t level, or slightly higher.

TER: Do you have any parting thoughts to share?

ML: We put world growth in 2012 at around 3.5%, down from almost 4.5% last year and almost 5% in 2010. That is better than forecasters who peg world growth as low as 1.5% to 2%. Clearly, if you believe the latter outlook, it will not be a great year for the energy space.

But if you believe our 3.5% forecast, we expect to see good opportunities in both uranium and coal. And, we expect appreciation of these equities as we go through the year.

TER: Mark, thank you for your time and insights.

Mark Lackey, currently the investment strategist at Pope & Company Limited, has 30 years of experience in energy (oil and gas; hydro), mining, central and corporate banking and investment research and strategy. He worked at the Bank of Canada where he was responsible for the production of U.S. economic forecasting, briefing Governor Gerald Bouey on U.S. economic developments on a weekly basis. Mr. Lackey was a senior manager of commodities at the Bank of Montreal where he helped to determine whether or not the bank would loan money to companies in the commodity space. He spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada where his main responsibility was developing corporate plans. He is a regular guest on BNN, having made more than 200 appearances in the last 10 years (more than 40 of which were in 2010).

Published courtesy of The Energy Report –


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