Is the tide turning for uranium miners?
Uranium at the moment is an unloved commodity. After a uranium boom in the mid-2000's where the uranium price jumped almost seven-fold in the space of a few years, the price quickly reversed and has been trending downwards ever since. The share prices of ASX listed uranium miners, such as Berkeley Energia (BKY), Paladin Energy (PDN) or Peninsula Energy (PEN) have suffered as a result. What has caused such volatility in uranium prices?
During the uranium boom in the mid-2000's the story was that in order to combat global warming, uranium would be the fuel of the future (much like the story surrounding lithium today). Nuclear power generation produces no carbon dioxide or other greenhouse gas emissions and is therefore considered a 'clean' fuel in this sense. Of course, the radioactive uranium waste is problematic as this must be stored carefully and remains radioactive for a very long time. Nevertheless, people assumed that nuclear was most viable solution to our global warming problem and therefore uranium would be in high demand. At the time, the price of uranium miners increased rapidly along with the uranium price. The BKY share price went from around $0.10 to above $2.00 in a short space of time around 2005/2006. Unfortunately for those who didn't sell, it went all the way back down almost as quickly as it rose.
Today, BKY shares are trading at $0.78, and have increased substantially over the past year. Although spot uranium prices are at 10 year lows, BKY still expects to be profitable when its mine comes online. PEN shares are currently trading near multi-year lows however they are just starting production and expect to substantially increase revenues, and hopefully profits, over the coming months and years. Interestingly, both of these companies have their mining operations outside of Australia. This may be a reflection of the fact that there are heavy government restrictions on uranium mining in Australia notwithstanding the fact that there are some states that do support mining.
The Fukushima nuclear disaster in Japan did no favours for the uranium price or for uranium miners. In the aftermath of the disaster, Japan shut down virtually all of its other nuclear power stations and it even prompted Germany to decide to phase out its nuclear power. Obviously this put a dent in the worldwide demand for uranium and downward pressure on the price. On the other hand, both China and India still have aggressive plans for expanding their nuclear power generation. China expects to commission up to eight and India up to six new reactors each year as these countries (particularly China) struggle to deal with pollution and air quality issues. Many other countries, including Russia, UAE, South Africa and Saudi Arabia all have plans to expand their nuclear capacity in the coming years.
As an unloved industry, there is the potential for finding value there. The real question is what the catalyst will be for higher prices in the future. Most uranium sales are made through long term contracts but in recent years, far fewer contracts have been entered into than previously. In the next couple of years, old contracts will begin to expire so we are set to see a return to more normal contracting levels which may put upward pressure on the price. Long term contract arrangements also provide a certain level of security for the uranium miners. PEN, for example, has forward contracts covering a substantial portion of their future production over the next 10 years. These contracts are at prices significantly above the spot price and therefore de-risk the project from the point of view of uranium prices.
As an investment a uranium miner would be considered relatively high risk. Nevertheless, it is often in these out of favour industries where one can find good value and it does appear that demand growth for uranium will continue with the large number of new reactors planned over the next 10-20 years.
This article was written by William O'Loughlin – Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via email@example.com or by phoning +612 8302 3600.