Uranium Equities Lagging in Recovery

The full impact of the Japanese earthquake and tsunami is yet to be determined. However, the immediate downside pressure on uranium mining, exploration and development companies and even spot uranium prices has been considerable.

News from Japan

Last week, the Tokyo Electric Power Company (TEPCO) (TYO:9501) published a 6- to 9-month plan for dealing with its disabled Fukushima reactors. Details for cooling reactors, cooling and removing spent fuel, managing contaminated water, minimizing the release of radioactive materials to atmosphere, and preparing for the return of evacuees are all included in the plan. TEPCO’s plan does not, however, mention removal of fuel from the reactors. On Monday, Japan’s largest power company announced plans to save about $659 million a year by reducing annual remuneration for board members by 50 percent, while decreasing pay for managers and workers by 25 percent and 20 percent respectively, and by not hiring new graduates next fiscal year.

Broader implications

For investors and industry stakeholders larger questions remain as to what result the crisis will have on the rate of nuclear power expansion elsewhere in the world and the associated impact on uranium demand.

The answer to both questions may not be evident for 12 months or even longer; however, it appears likely that the nuclear expansion trajectory will be flatter, due to the possibility of constrained reactor life extensions, and increased reactor capital expenditures driven by an expectation of increased regulatory requirements and associated increased construction time.

Spot market uranium

On April 26, Patricia Mohr Vice-President, Economics and Commodity Market Specialist at Scotiabank indicated, “While uranium prices will likely remain soft until the Fukushima-Daiichi plant is fully stabilized, prices should start to pick up again by late 2011.” Scotiabank has just released its monthly Commodity Price Index for March, which measures price trends in 32 of Canada’s major exports, rising by 1.3 percent representing the ninth consecutive monthly gain. The level is currently 50.9 percent above the April 2009 low with the All Items Index now only 18.5 percent below the all-time peak in July 2008 (dating back to its inception in 1972). Ms. Mohr further suggested, “The biggest impact of this crisis will likely be the faster adoption of new reactor technology, such as passive self-regulating reactors, not requiring cooling.”

Share price movements

An interesting divergence between the spot market uranium price and uranium exploration, development and mining companies has emerged with share prices underperforming the physical uranium prices in the recovery. Uranium prices declined roughly 26 percent in the immediate days following the earthquake, from about $68 per pound to about $50. Spot market uranium prices have recovered relatively quickly, with the current range reported at $57.25 a pound, down less than 16 percent.

Employing a quantitative analysis of the Uranium Stocks Index, every constituent within the industry has experienced a retreat in share prices since the March 11 disaster. This is contrasted with the broader TSX/S&P and the Australian Stock Market which have both shown growth of 1.7 and 5.2 percent, respectively. The range of the downside pressure on uranium equities within the index varies from just over 5 percent to 60 percent; however, less than 10 percent of index constituents demonstrated only single digit share price depreciation. The average uranium equity has declined 34.4 percent, with the majority of share prices weakening more than 30 percent. The effect on uranium mining companies with larger market capitalization has generally been slightly more favourable with Cameco (TSX:CCO) (NYSE:CCJ), Paladin Energy Ltd. (TSX:PDN) (ASX:PDN) and Extract Resource Limited (ASX:EXT) demonstrating share price declines just over 20 percent.

Both RBC Dominion Securities and Resource Capital Research estimate many of the uranium equities are trading below their respective Net Asset Values (NAV), with the potential for some investors to gain exposure at a discounted price point. A few of the largest implied discounts include Berkeley Resources Limited (ASX:BKY), Energy Resources of Australia Limited (ASX:ERA), Uranium One (TSX:UUU) and Ur-Energy (TSX:URE).