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As the dismal trading in 2011 global share markets ground down to its agonising year-end finish, some Australian investors were heartened by the news that our government was about to lift the ban on uranium sales to India.

Newcomers to investing wondered at the time why Australia wasn’t selling to India in the first place.  India is not a signatory of the Nuclear Non-Proliferation Treaty, claiming it is “flawed and discriminatory,” and Australia will only sell nuclear materials to countries that have signed the treaty.

India is hardly a rogue nation bent on nuclear Armageddon; a fact acknowledged by the United States when it reached an agreement to support the civil nuclear programme in India back in 2008.

Despite that fact and the current economic uncertainty, the decision to lift the ban was controversial.  The vote to pass the proposed removal of the ban was 206 in favor with 185 voting against.

In reality, the lifting of the ban merely opened the door to negotiations between the two countries and it will be some time before Australian uranium producers begin to profit from India’s burgeoning demand for nuclear energy.  Before actual sales of uranium can begin, Australia and India will agree on nuclear safeguard agreements to ensure our uranium will only be used for energy generation, not for nuclear weapons.  But the fact remains; this step opens a huge market to the Australian uranium industry.

In better times this event would have been more of a market catalyst than it was, but the Japanese nuclear troubles earlier in the year dramatically changed global perception of nuclear energy.  In short, the deal with India is seen by some as little more than a short term means to prop up an industry breathing its last gasp.

Prior to the damage done to the Japanese nuclear power reactors by the earthquake in March of 2011, the price of uranium was on an upward roll.  The following table shows month end prices for a pound of uranium from 2010 December to 2011 November.

Monthly Price of Uranium – Australian Dollars per Pound

MonthPrice% Change
December 201061.32 
January 201164.244.76
February 201164.46.34
March 201162.87-2.47
April 201154.8-12.83
May 201152.45-4.28
June 201152.45-4.28
July 201149.03-6.16
August 201148.37-1.36
September 201150.95.24
October 201151.621.4
November 201152.471.65

 

As you can see, the initial drop after the 11 March quake was relatively small; but as the scope of the damage emerged the price of uranium reacted and continued to drop until the end of August, losing close to 30%.

Despite the fact that nuclear energy is a clean and cost effective alternative to coal fired generators, understandably no one wants a reactor next to their home and everyone fears the possibility of nuclear meltdown.  Proponents of nuclear energy point out its long history of close to 50 years of operation with only three accidents in that span – Three Mile Island in the US; Chernobyl in the old Soviet Union; and now Fukushima in Japan.  Opponents counter that it only takes one catastrophic accident to alter the earth’s environment.

While Germany has said they will no longer pursue additional nuclear energy as a power source, the United States is planning to increase safeguards in its nuclear program, not abandon it.  There are other compelling reasons to take the risk on investing in the future of nuclear energy, but let’s stop for a moment and see how Australia’s uranium industry fits into this picture.

Did you know Australia supplies only about 19% of global demand for uranium while holding almost 40% of the world’s uranium supply?  In fact, Australia has more uranium resources than any other country in the world.  Canada, with less than half of what we have in uranium reserves, is the world’s top exporter.

The principal culprit for uranium not joining in the Australian mining boom is a government regulation from the 1980’s called the Three Mine Policy.  At that time the government wanted to limit the expansion of the uranium industry and thus restricted companies to three existing mines.

Although the policy on the federal level was abandoned in 1996, some states continued to try to limit uranium production.  This resulted in somewhat of a confusing classification of Australian uranium companies into producers and explorers, as well as those with operations exclusively in Australia and those outside Australia.

With all that as background, the end result has been the concentration of actual uranium production in Australia in the hands of a few companies.  Australia has only 5 uranium producers, with one of them privately owned.  Here are the 4 publicly traded companies:

CompanyCodeMkt Cap52 Wk High/LowAnalyst Recommendations
Energy Resources of AustraliaERA631.6M12.49/1.172 Buy 3 Hold 4 Sell
BHP BillitonBHP190.3B49.8/33.683 Strong Buy 7 Buy 3 Hold
Rio TintoRIO119.7B89.04/58.529 Strong Buy 9 Buy
Paladin EnergyPDN1.16B5.61/1.118 Stong Buy 4 Buy 6 Hold 1 Sell

 

Of these four, only ERA and PDN are pure uranium plays.  Both BHP and RIO are diversified miners.  Their diversification might explain their better share performance and higher analyst’s ratings when compared to the pure uranium producers.

RIO’s direct uranium production is limited to its Rossing mine in the African country of Namibia.  However, RIO has a 68% ownership interest in ERA, Australia’s largest uranium producer. 

BHP owns and operates the Olympic Dam mine in Southern Australia, the second largest uranium mine in the country.  BHP has plans to increase Olympic ‘s uranium output from 4 kilo tonnes per annum to 19 kilo tonnes per annum.

ERA is Australia’s largest uranium producer and one of the top five in the world.  Its Ranger mine has additional reserves and the nearby Jabiluka project could ensure a bright future.  However, there is resistance from locals to mining expansion and ERA’s uranium oxide has only one purpose – the generation of electricity in nuclear power facilities.  If the anti-nuclear movement has its way in curtailing or even eliminating nuclear power generation, need we say more?  

PDN operates primarily outside of Australia in the African countries of Namibia and Malawi, with producing mines in both those countries.  In Australia, they are in the exploration phase with an ambitious goal of becoming a major uranium mining company.  With literally dozens of small Australian junior miners in various stages of exploration, PDN has the advantage of its producing properties in Africa.  

Of the many uranium explorers in Australia, Thompson/Reuters First call lists only two with analyst coverage.  Here they are:

CompanyCodeMkt Cap52 WK High/LowAnalyst Recommendations
Extract ResourcesEXT2.98B10.8/5.94 Stong Buy 3 Hold
Aura EnergyAEE25.53M.56/.161 Strong Buy

 

The 52 week highs and lows paints the same picture as we saw for the producers – market participants doubt the viability of exploring for a product whose demand may be in jeopardy.  Here is one year performance chart for these two explorers:

Note that EXT fared better than the other shares.  Tiny AEE has exploration projects in Sweden, Australia, and Africa.  EXT’s primary focus is on developing its wholly owned Husab Uranium Project in Namibia, and it is huge.  It is the largest and highest grade deposit in Namibia.  If EXT is successful in achieving its goal of producing 15 million pounds per year, the Husab project will become one of the world’s largest uranium mines in production.  On 14 December 2011 China Guangdong Nuclear Power Corporation made a conditional 2.2 billion dollar offer to EXT for the Husab project.  The project is near Rio’s Rossing mine and some analysts expect RIO to make a counter-offer.

Investing in any Australian uranium company – producer or explorer – requires nerves of steel.  Consider the following share price performance chart for PDN and ERA:

While the performance of the overall ASX Energy Index – the XEJ – has suffered with a 20% drop year over year, the numbers for PDN and ERA are bone-chilling – both down more than 70%.  The chart tells the story – the bottom dropped out for the uranium producers in the aftermath of the Fukushima incident while the XEJ actually went the other way remaining positive for a while.  Share market participants have spoken and they clearly doubt the future of nuclear energy.  

As you know, contrarian investors have made handsome returns betting against the crowd.  But sometimes, the crowd is right.  So what of the future of nuclear energy?

In the late spring of 2011 the German government – a major proponent of nuclear energy beginning in the 1970’s – announced they would close all their nuclear powered generating stations by 2022.  Switzerland and Italy expressed similar sentiments, contributing to the perception that world reaction to the trouble in Japan could seal the fate of nuclear power.

Flash forward to December 2011 and energy experts in Germany are raising questions about the obvious – how is Germany going to replace the 20% of its power needs currently met by nuclear?

The truth for Germany and especially for developing countries is there are few large scale viable alternatives.  Solar, wind, and geothermal have for decades been long on promise and short on performance.

China also announced a hold on the development of new nuclear reactors in response to the safety concerns raised by the Fukushima disaster, but not on plants already under construction.  World wide there are currently 63 new nuclear plants under construction, with an anticipated additional 156 to go into service by 2030.

At the end of 2011 the Chinese government approved a five year nuclear safety plan with rules covering uranium mining standards and operating requirements for nuclear power generating reactors.  The Chinese need nuclear to meet their exploding demand for electricity.  Industry experts think the approval of this safety plan will soon be followed by a new long-term nuclear development plan.

China is not alone in moving back into new nuclear construction.  On 22 December 2011 the U.S. Nuclear Regulatory Commission (NRC) formally approved the latest version of Westinghouse Electric’s AP1000 reactor design, paving the way for new construction, as well as the replacement of aging existing plants.  

Great Britain intends to build 12 additional nuclear plants by 2020. And what of Australia’s new customer, India?  Currently India gets 3% of its electrical power from nuclear plants.  They intend to increase that to 25% by 2050.

The International Atomic Energy Association sees no drop in demand for nuclear power.  Their estimates for new nuclear plant construction over the next 20 years range from a low of 90 to a high of 350.

Maybe the crowd is wrong on this one.

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