Uranium Price Held Captive by Japan

While long-term uranium prospects remain for the most part bullish, near-term disruptions from Japan appear to have stagnated uranium spot market prices. Uranium producers’ share prices have significantly outpaced the uranium spot market price on a year to date basis.

Relatively strong economic news out of Japan could mean the government will be more anxious to safely restart nuclear operations, which have all but been temporarily halted.

Nuclear power production slightly down last year

According to World Nuclear News, global nuclear power production contracted by 4.3 percent last year, mainly as a result of the temporary halt in Japan following the Fukushima accident, and Germany’s reactionary response of shutting down some of its aging fleet.

One other reactor in the United Kingdom was shut down following 43 years of commercial operation. Nuclear electricity generation had increased in the previous year.

Japan had 57.4 percent of its nuclear power generating operations offline for inspections or equipment replacement by the end of last year. The full impact of Japan’s suspension of nuclear operations is expected next month, as the last plant will be halted in May. Over the year, the instant loss of capacity and the gradual shut downs caused Japan’s nuclear electricity generation to fall by 44.3 percent.

Offsetting some of the drop in demand, a total of six new nuclear power reactors were connected to the world’s electricity grids, including three units in China and one each in India, Russia, and Iran.

Contract perspective

Richard Schodde, Managing Director at MinEx Consulting, discussed the market’s inefficiency with Uranium Investing News, commenting “in terms of physical demand for uranium, the shut downs in Japan obviously affect demand in short term – as reflected by the fall in price in the spot market.” As the value of uranium depends completely on its ability to generate nuclear power, Schodde points out, “however, one should not forget that most uranium is sold under long-term contract, so the spot prices are less relevant for valuing the long-term earnings for existing (and potential) future producers. My only concern is that at the prevailing spot price of around $60 per pound, the contract prices may not be high enough to incentivise enough new projects into the market.”

Long-term outlook

Abraham Bailin, Morningstar ETF specialist, explained that he believes nuclear power solutions are positive for the future, stating “if you look at the fundamentals of nuclear versus some of the fossil fuels that we use today, it is absolutely clean, cheap, and cost effective. It is a power that is able to power our cities, unlike wind or solar that are very intermittent in nature. When you are lining it up with current available fuel sources that are able to really pump out enough energy to take care of our major metropolitan areas, nuclear definitely has a good looking future.”

Over 80 new nuclear power reactors are expected to be commissioned globally over the next five years, with 61 currently under construction. The current total of new reactors planned or proposed is 491, nine more than pre-Fukushima.

Impact for junior uranium exploration companies

The investment climate should improve as the value of underlying uranium deposits gradually returns to a more reasonable level to reflect longer-term supply and demand dynamics. Schodde explains that, “in the next couple of years spot prices will snap back to closer to a long-term contract price. The catalyst will probably be a realization that the Russian HEU [highly enriched uranium] sales agreement really has come to an end in 2013. This, plus further news on the overall strength of buying by the Chinese in advance of their commissioning of new power stations there.”

Junior mining exploration companies will benefit considerably from these improved uranium market prices. Major exploration budgets will increase, with interest and capital investment likely reflecting higher valuations for junior exploration companies and the potential for mergers or industry consolidation.

Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.