Uranium holds long-term value

Cameco’s US$530m bid for smaller uranium rival underlines long-term value in uranium.

I’m still very much supportive of uranium as a long-term investment play. The reason is quite simple. The world doesn’t have many options when it comes to generating reliable base-load power.

Furthermore if you want to minimize environmental impacts, that really just leaves gas and nuclear energy.

Since the Fukushima tragedy, government officials from a host of key nuclear players including Russia, China, 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 instead utilise nuclear-generated energy from France.

For investors in the uranium space there are, however, a couple of very important provisos.

The major cautionary note is that investors have to focus on quality players: companies that are well run, with a flagship project that stands a better-than-average chance of reaching production, or of attracting corporate interest.

In the uranium space you really have to have everything working in your favour, as the hurdles to becoming a producer are substantial. This means it’s a tough environment for junior companies, as investors want to be able to see a pretty clear path to riches.

For a budding gold hopeful it’s relatively straightforward. You explore for gold, you hopefully identify a modest resource, which then allows you to contemplate becoming a miner.

With uranium it’s not nearly as easy. You cannot simply snag a discovery and then move to mining and cash flow.
This is why I believe it’s very important from an investment perspective to choose companies carefully. The mortality rate amongst uranium hopefuls is pretty high.

Despite the fact that uranium companies were slammed following the Japan crisis, the likelihood was that those same stocks were going to remain bargains for some time to come. And so it’s proved.

Those same uranium bargain-buys are still cheap. Market volatility has favoured the patient investor and now’s the time to begin looking at uranium sector opportunities.

One of the biggest winners out of all of 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 US$1.2 billion bid for Kalahari Minerals Plc (which has a 43% stake in ASX-listed Extract Resources).

The gloom in uranium markets couldn’t have been better timed as far as China Guangdong is concerned.

More recently we’ve seen China’s Hanlong Group bidding for fellow ASX-listed Namibian uranium hopeful, Bannerman Resources.

The Chinese recognize a bargain when they see one and I’m confident that this will be the just the start of many corporate forays in the uranium space in the current relatively depressed market environment as they look to secure their nuclear future.

What’s interesting though is that it isn’t only the Chinese. As Bloomberg reported, “Cameco Corp.’s gambit to buy a Canadian uranium deposit in its biggest ever acquisition is showing that the nuclear future is now.”

Cameco, the world’s largest uranium producer, has just announced a US$530 million bid for Hathor Exploration Ltd. This is the nuclear industry’s biggest takeover since the Fukushima disaster. And interestingly it involves a 40% takeover premium, despite weaker uranium prices.

What this tells me is that companies like Cameco can clearly see the bigger picture. They’re confident that both uranium prices and uranium demand will rebound.

According to the World Nuclear Association, China currently has 14 nuclear reactors, 26 under construction and 52 more planned; India has six under construction and 17 planned; whilst Russia has 10 being built and 14 more in the pipeline.

Renewed support for nuclear power in Japan is also likely to help bolster uranium prices. Yoshihiko Noda, who became Japan’s new prime minister on 30th August said in a policy statement that Japan will “guarantee the stable supply of power by utilizing nuclear plants after confirming their safety.”

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 places like Russia, China and India will continue. Modern-day reactors are much safer than the problematic older ones.

But even if there is a somewhat lower level of investment in uranium development, this in turn is likely to generate higher prices due to supply tightness.

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, investors should begin looking for quality uranium opportunities to include in their portfolio.

Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report