Article / 07 November 2014 at 5:35 GMT

Case for yellow cake heats up

Business writer and editor
Australia
  • The Nuclear Regulatory Agency has given Sendai’s reactors the seal of approval
  • If the uranium price keeps rising, expect politicians in countries that dig up yellow cake to start expounding its benefits
  • Toro Energy and A-Cap Resources are literally sitting on projects and waiting for the price to appreciate

By Adam Courtenay

As ever in commodity markets, from little things bigger things can grow. One of the little things that happened in the past week is the decision made by Satsumasendai, a town 970 kilometres south-west of Tokyo, to agree in principle to restart the Sendai nuclear power plant.

It doesn’t mean that these nuclear reactors, shut off since Fukushima reactor disaster in 2011, will be  immediately operational. Far from it. Plenty of other officials have to give their consent, and the two reactors at Sendai will have to be tested to the highest standards of safety before they are again producing power. But they have passed one hurdle – the Nuclear Regulatory Agency has given Sendai’s reactors the seal of approval, which means they are now considered safe enough to weather a natural disasters such as the one at Fukushima.

Uranium is not everybody’s cup of tea – but like it or not, it remains part of commodity realpolitik. While Australia’s Prime Minister Tony Abbott keeps telling “Team Australia” (his words, not mine) that coal will be part of the energy equation for decades to come, he’s not stupid enough to mention uranium – not just yet. But if the price keeps going the way it appears to be going, expect politicians in countries that dig up yellow cake to start expounding its benefits.
 
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Fukushima after the disaster: Not something the industry wishes to see repeated. But safely generated nuclear power is vital to cost-conscious Japan. Photo: Thinkstock

 
Unlike just about every had commodity at the moment, uranium’s price troubles were not created by supply-demand dynamics but are largely circumstantial. Uranium oxide sold at a record $137 a pound in mid-2007. By the time of Fukishima it was over $70 a pound, and by April this year, it had fallen 49% from there to less than $30. Natural disasters, followed by nuclear fallout, tend to do that to prices. The question now is who is prepared to break the political stalemate. With the price now at around $35 to $37, that's nowhere near high enough for politicians to start spruiking uranium. Historically speaking, it's still very low.

But uranium prices are up 25% in the past three months and some analysts are quietly saying it is the perfect entry point for investors to get back into the uranium market. Canada’s Cameco, the world’s biggest publicly traded uranium company, forecasts annual demand to increase by up to 40% over the next 10 years to the 230 million to 240 million pound range.


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One analyst, David Talbot of Dundee Capital Markets, said in a research note that the shutdown of nuclear power plants had hit Japan’s economy hard, and a “tipping point could be on the cards”. “I think the time has come when residents of Japan get tired of paying $100 million a day in keeping these reactors offline. Their GDP growth is stagnating,” he said.

Cost, reliability benefits

It makes sense, but nobody is saying anything out loud. But Cameco president and chief executive Tim Gitzel did say last week that there were billions of dollars being invested in nuclear around the world. “For countries like Japan, it’s vital to their economy and industries that want to remain cost-competitive. For China and other rapidly expanding economies, it’s critical for meeting ever-increasing energy needs and tackling air quality issues. For the US, it’s important for energy security and for energy diversity.”

As well as this, he said, it is one of the most important tools to provide “safe, clean, reliable and affordable base-load energy and to combat climate change’’.

So the stage is set for a nuclear recovery and if the present troubles with natural gas supply from Russia continue, the demand may get even hotter. The fundamentals look that way, but the politics isn’t quite there yet. Two Australian listed companies, Toro Energy and A-Cap Resources, are literally sitting on their projects, waiting for the price of uranium to hit the profitable $60 to $70 a pound level before they start their big digs. They’ve produced nothing as yet, but their share prices have been advancing in expectation of bumper production.
 
So here’s the tip for early 2015, when the two Sendai reactors are expected to be operational. Once that happens, expect uranium to become a politically acceptable metal. Of course, by the time Team Australia hears about it, the price action may well be over.

-- Edited by Robert Ryan

Adam Courtenay is a business writer and editor on TradingFloor.com, the online content platform for social trading leader Saxo Bank.

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