For months, environmentalists have been spooked by rumours of another radiation leak at China’s Daya Bay nuclear plant. But that won’t change China’s determination to go nuclear. Indeed, China’s National Energy Administration plans to bring around 100GW of nuclear power online by 2020. That is more than Britain’s total installed capacity (almost 90GW).
Daya Bay was China’s first large nuclear station, commissioned in 1994. The French basically built the plant while the Chinese watched. How times have changed – now the Chinese need very little foreign help. They are even rumoured to be helping other countries, such as Pakistan, develop nuclear power. But one part of the equation still worries China – uranium production. So it buys and stockpiles.
According to Macquarie Commodities Research, Chinese imports of uranium are up 380% so far this year. China has snapped up 10,906 tonnes of contained uranium (tU) from a global market of 70,000 tU. This has helped to push up the price to $60/lb, from $40/lb earlier in the year. And with Chinese domestic production of uranium stuck at 800 tU per year, Macquarie is convinced that it will continue to be an active importer.
But this is no longer just a China story – Russia plans to add 43.4GW of nuclear energy by 2030, including the world’s first commercial floating nuclear power plant. Meanwhile, India, which currently generates a paltry 4.6GW from nuclear energy, plans to add 58GW by 2038. Overall, the International Atomic Energy Agency says that more than 60 countries, mostly from the developing world, are interested in launching nuclear projects. Globally, there were 55 reactors under construction at the start of 2010 – the highest figure since 1992.
Like most fuels, the problem with uranium is how to get hold of it. Uranium is not a scarce metal per se. But as the recent furore surrounding rare-earth metals (which are also pretty common) demonstrates, it takes time for mines to respond to sudden changes in price.
Existing uranium mines only meet about four-fifths of world demand. The rest is met by recycling uranium from other sources, such as stockpiles held by utilities and decommissioned missiles. According to the World Nuclear Association, “civil stockpiles are now largely depleted” while output from military sources is expected to decline slowly. Meanwhile, world uranium demand is forecast to increase by 33% by 2020. On the flipside, countries such as Kazakhstan and Namibia should increase production this year. And more mines will come online during the next ten years. But it will take time to deliver a guaranteed new supply. Some newer mines have not been tapped until now as they contain low-grade uranium, or are expensive to develop.
Sure, these factors have not sprung up overnight. Indeed, MoneyWeek has been tipping the nuclear renaissance for the last decade. And uranium has already had one bull run this decade – in 2006/7. Prices reached $140/lb before sliding back. But that volatility was “mainly due to speculation”, says David Fuller of Fuller Money. “However, the big difference this time is that China is leading a stockpiling programme; many more nuclear reactors are scheduled to come online from 2012 onwards; there are far fewer Cold War missiles to decommission and the cost of production is rising.” We look at three uranium plays below.
The best bets in the sector
Cameco (TSX:CCO) is the world’s largest uranium producer and a long-time MoneyWeek favourite. Since we last tipped it, the firm has upped production and cut its costs. Cameco plans to increase production from existing assets by 2018. And this week it signed a contract to supply China with 13,000 tU of uranium. Trading on a forward p/e of 26.8, it’s not cheap, but then neither is the sector.
Another option is to buy a play on the metal itself. Uranium Participation Corporation (TSX: U) buys uranium directly and stores it in processing facilities to give investors exposure to the spot price. It’s the closest thing to a pure play that aims to reduce company or country-specific risk. The corporation remains at least 85% invested in uranium. Its stated aim is to benefit from the long-term appreciation of the uranium price. RBC Capital Markets estimates that this could hit $80/lb in three years, albeit with some big wobbles along the way.
Finally, you can get indirect exposure via an exchange-traded fund. The Global X Funds Uranium ETF (NYSE Arca: URA) tracks the performance of “the largest and most liquid” miners. The fund is trading at a 2% discount to net asset value and has total annual operating expenses of 0.69%.
• This article was originally published in MoneyWeek magazine issue number 514 on 26 November 2010, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.