Uranium prices and mining stocks are low, but market forces will push them both higher in the next 12–24 months, says David Sadowski. Miners are jockeying for position and the Raymond James mining analyst tells The Mining Report to expect mergers and acquisitions as they prepare for the good times to come. The market's supply glut will be gone by mid-decade, and mining will have to ramp up to head off a deficit by 2020. The time to buy in is now.
The Mining Report: David, welcome. What is happening with uranium demand? And where are the trends most pronounced?
David Sadowski: Over the next decade, we expect uranium demand to grow at about 3% per year (3%/year) with about two-thirds of that incremental buying coming from China, Russia and India. China is building reactors like they're going out of style—30 units are currently under construction domestically, with 59 in the planning stage — and we've just seen China grow its presence internationally with an equity stake in the Hinkley Point power station in the U.K. Russia is building 10 reactors at the moment. It's got 28 on the drawing board, according to the World Nuclear Association, and that's going to more than offset the retirement of some of its aging reactors. Russia is heavily involved in vending reactors globally as well, with projects around the world. One interesting aspect of that is the build-own-operate model, where Russia will build and operate a plant in your country and then sell you electricity from that plant. In India, despite some headwinds with the nuclear liability law, another new reactor just connected to the grid, an additional six units are currently under construction and five dozen are on the drawing board. You've got new entrants like the United Arab Emirates, Turkey and Vietnam showing that they're very serious about nuclear as a power source.
On the other hand, although the U.S., the world's largest nuclear power producer, is building three large reactors and two more are due to start construction imminently, utilities have decided to close five small, old reactors due to challenging economics, with a handful more at risk of closure. In France you've got some talk about reducing its very heavy reliance on nuclear, while a similar debate has kicked off in South Korea. And Germany, as we all know, is looking to phase out its nuclear power plants by 2022. It's sort of a polarized mix internationally when it comes to nuclear power and uranium demand.
The underlying theme is that Western nations may have slowed their momentum somewhat on nuclear, and there's a variety of reasons for that, including upfront capital costs, which tend to be quite high; the low cost of competing sources of electricity, like natural gas; and in some cases low electricity demand and power rates regionally. Despite that, Eastern nations remain focused on nuclear reactors as a linchpin in their energy mix for its stable, low-cost, zero-emission ability to provide secure base load power.
TMR: With the market sending conflicting signals, how should investors proceed?
DS: For investors, the key thing to focus on is that irrespective of public outcry in some regions and pullback on nuclear power growth plans in others, there is still significant growth of nuclear power globally. Japan is going to be restarting its reactors. We think about 30 gigawatts or so will eventually get turned back on, with those first units firing up again mid-2014. Further clarity on the timing and number of those restarts as well as potential read-through on Japanese inventories is a key catalyst for the uranium market. The investor looking at some of these conflicting signals has to stay focused on the underlying trend and ignore the noise. We think the underlying trend is heading in a positive direction, especially in the medium- to long-term.
TMR: Ontario decided to refurbish existing nuclear plants instead of building new ones. What does this mean for the future of nuclear power in Canada?
DS: Canada has long been a major force in the global nuclear power industry. Nuclear power was first developed in the 1940s. In the 1950s and 60s, Canada developed the CANDU reactor design, a unique heavy water plant that is flexible with respect to maintenance and the fuel that can be used, supplies much of the world's medical isotopes and has been exported to several other countries. For domestic power generation, Canada is pretty reliant on nuclear power. There are 19 reactors operating today, meeting about 15% of the country's electricity requirements. We don't think the decision not to pursue new reactors at Darlington is going to change nuclear's role—the decision to refurbish the existing units is a cost-effective commitment, in-line with demand growth, to maintain nuclear as an important source of power in the country for decades to come.
TMR: Yellowcake is trading now at an eight-year low, around $35 per pound ($35/lb), but it appears to have stabilized there after sliding for three years. What is your advice for investors now and why?
DS: We believe the uranium price is more likely than not to be range-bound for the next 12 months or so given a glut of uranium supply and a significant dip of real demand in the marketplace (as opposed to discretionary demand) from utilities. In the medium to longer term, we continue to see extremely compelling supply/demand fundamentals. Accordingly, we're still inclined toward companies that can weather some spot price weakness, but are leveraged to an inevitable rise in sentiment and equity valuations in the space.