A recent headline in the Financial Times confirms what we had been anticipating for some time: “China to Restart Nuclear Programme”[1]
With an emerging markets push towards increased nuclear power, this is decidedly good news. It bodes well for uranium producers over the mid- to long-term. Chinese authorities undertook a hiatus to implement stringent safety standards in the wake of the Fukushima disaster. One of the main takeaways is that nuclear plants in China are now required to be built with “third generation”, or Gen III technology[2]. This clearly was mandated in the name of safety and is good news for companies such as Toshiba and Areva who pioneered this technology, according to the FT. China plans on establishing 40GW of nuclear power capacity by 2015 – essentially two and a half years from now – which would be three times current production.
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In other news concerning China “going nuclear,” Reuters reports that China Guangdong Nuclear successfully raised 1.5 bln yuan ($240 million USD) through a dim sum bond[3] offering. The article states that the offering was four times oversubscribed – more evidence of the belief both inside and outside China of a renewed push towards nuclear power.
Aside from China, countries such as the UAE, Saudi Arabia, and Poland have all re-newed their commitment to nuclear power recently.[4]
To be sure, there are threats to nuclear power including waste management/disposal, the boom in cheap shale gas, several countries threatening to phase out nuclear generated electricity, and the current low spot price of uranium rendering many projects un-economic. The U3O8 spot price stands currently at $46.50 per pound. While each of these concerns has credence, here is why we like uranium going forward:
Uranium as a Contrarian Play
The uranium story seems to be a favorable contrarian play: a sector absolutely essential to sustaining a high quality of life is beaten up by investors and left for dead with no short-term fix in place to account for a lack of nuclear generated electricity. One point in our Discovery Investing Factor Model concerns “contrarianness” or asking yourself the question of just how out of favor this company (or sector) is in the eyes of investors.
Whether you believe in the idea of a “nuclear renaissance” or not, the security of supply necessary for today’s global reactor fleet of 436 coupled with future demand for the 60 nuclear reactors under construction and the approximately 150 reactors planned is a key issue and should weigh heavily in one’s investment decision-making process regarding uranium. So the question then becomes one of selecting companies positioned to aid in this resurgence.
A Promising Junior with Muscle Behind It
We have written in the past on European Uranium Resources (EUU:TSXV) and continue to believe that this company is well-placed to participate in the potential upswing in uranium juniors. The company holds a high grade-uranium asset in Slovakia (28.5 million lbs of U3O8 Indicated (2.3 million tonnes @ 0.555% U3O8) and 12.7 million lbs of U3O8 (3.1 million tonnes @ 0.185% U3O8) all at a 0.05% U cut-off) in addition to owning a stable of prospective properties in Finland and Sweden.
EUU is also backed by Areva, who took a 10% ownership stake in the company through a placement earlier this year. The technical expertise that Areva can provide EUU as the company advances its 100% owned Kuriskova deposit should certainly be accretive to patient shareholders.
One must also not forget that EUU has a pre-feasibility study published on Kuriskova which demonstrates that the company could be one of the lowest-cost producers of U3O8 in the world with a life of mine cost of $22.98/lb U3O8.
With cost inflation rampant across the financial statements of mining companies today, EUU is in a unique position to capitalize on the development of a strategic asset in a mining friendly jurisdiction.
The share price has come off somewhat lately, likely due to negative press about nuclear energy and the low U3O8 price. However, with both countries and companies throughout the world positioning for a comeback in the price of uranium, we believe in this sector by finding the best-managed, highest-grade assets in mining friendly jurisdictions.
We believe EUU presents one such opportunity. We are long the shares at an average cost of 0.204 and reserve the right to purchase more in the open market within 24 hours of receipt of this note.
Chris Berry will participate in a keynote “Up and Comers” panel on Friday, Nov. 16 and make a newslett3r editor presentation on “Condition Critical: Is the run over for Critical and Strategic Metals?” on Saturday, Nov. 17, during the San Francisco Hard Assets Investment Conference.
The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We own shares in European Uranium Resources and act as an advisor to the company. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin.
[3] A Dim Sum bond is a bond denominated in Chinese Yuan and issued in Hong Kong. These instruments are ideal for foreign (non-Chinese) investors who want to invest in opportunities on the Chinese mainland but are forbidden due to capital controls.