China's push for energy security is igniting a boom in the country's nuclear power plant construction, rekindling demand for uranium and leading its price higher.
China held its first International Nuclear Symposium on November 24-25 in Beijing. The meeting was packed with nuclear industry heavyweights scrambling for new contracts after the Red Dragon announced its intentions to spend $511 billion to build as many as 245 reactors in the next two decades – nearly doubling previous plans.
"Money is not an issue, which is different from the rest of the world. The Chinese have the capacity to deliver and they are deadly serious about achieving it," Steve Kidd, director of strategy and research at the London-based World Nuclear Association (WNA), told Bloomberg News.
President Hu Jintao said China aims to generate at least 15% of its energy from non-fossil fuels by 2020. Although the Chinese have invested heavily in wind farms and solar arrays, nuclear power is the only source of energy that could reach his goal.
"Developing clean, low-carbon energy is an international priority," Zhao Chengkun, vice-president of the China Nuclear Energy Association told Bloomberg. "Nuclear is recognized as the only energy source that can be used on a mass scale to achieve this."
And China's not the only country eager to join the nuclear party. The list of nations with the largest number of planned and proposed reactors includes India with 60 on the drawing boards; Russia with 44; the United States with 31; Ukraine with 22; and South Africa with 15.
The new plants will consume 32,900 tons of nuclear fuel according to a Morgan Stanley (NYSE: MS) report. That's almost half of the demand from the world's 443 commercial reactors.
China Stockpiles Uranium
For its part, China will be importing a lot more uranium. China will boost its imports by a factor of four to 50-60 million pounds a year by 2020, or 25-30% of total global demand, which stands at 190 million pounds in 2010, according to forecasts from UxC Consulting.
China only produces about 2 million pounds a year domestically, forcing the country to move aggressively to secure uranium supplies. State nuclear groups China National Nuclear Corporation (CNNC) and China Guangdong Nuclear Power Corporation (CGNPC) have signed long-term supply agreements with foreign miners, as well as pursuing joint ventures.
- France's Areva (PINK: ARVCF) will supply 52 million pounds to CGNPC by 2020.
- Canada's Cameco Corp. (NYSE: CCJ), the world's larges miner of yellowcake, will sell CGNPC 25 million pounds along with 23 million pounds to CNNC over the next 10 years.
- The state-owned nuclear power company in Kazakhstan will supply CGNPC with 63 million pounds by 2020.
China has stockpiled 17,000 tons of uranium over the last five years and may buy at least 35,000 tons more over the next decade to ensure the country has adequate supplies, Max Layton of Macquarie Bank Ltd. told Bloomberg.
China has been buying on the spot market, as well. Its imports so far this year have been equivalent to 20-25% of global uranium consumption, Layton told The FT.
These contracts will tie up considerable quantities of uranium, meaning there will be even less uranium for the rest of the world players.
"What seems to be happening is that it seems China is getting ahead of anybody else and building up a strategic stockpile before the Americans, Japan or Korea need to do their restocking," Ralph Profiti, an analyst at Credit Suisse Group AG (NYSE: CS) in Toronto, told The FT.
China's buying binge has contributed to a sharp rally in spot uranium prices. Spot uranium is now sitting at $61 a pound, a 50% improvement since June when it hovered at just over $40 a pound
"The Chinese bumped long-term forecasts for their nuclear build-out and although there is actually no physical demand it has totally changed the psychology," Laramide chief executive Marc Henderson told Bloomberg. "There has been a major movement in the spot price since September and I don't think anybody foresaw it."
Production shortfalls, which have forced miners to buy material on the spot market to meet their long-term contracts, have also tightened the market.
Supplies Boosted by Megatons to Megawatts
The supply profile for uranium is unique. In the short run, there appears to be plenty of uranium to go around. The long run, though, is another question entirely.
Since peaking at $136 a pound in July 2007, uranium prices tumbled 69% as companies boosted production, according to Saskatoon, Saskatchewan-based Cameco. At least 27 mines in nine countries began operating in the past 10 years, adding as much as 65 million pounds a year to global output, according to the firm's data.
But current uranium demand outstrips mined production by about 100 million pounds per year. The balance of the uranium comes from aboveground supplies – utility stockpiles, nuclear breeders and surprisingly, nuclear weapons.
After the Soviet Union imploded, the U.S. – under a pact known as Megatons to Megawatts — agreed with Russia to turn weapons-grade material from 20,000 warheads into nuclear fuel for use in commercial reactors.
The military materials supply about 50% of U.S. reactor fuel, according to the WNA.
"The United States is dependent on Russia for a significant portion of [its] nuclear energy. I don't think a lot of Americans know that," Robert E. Ebel, a nuclear analyst at the Center for Strategic and International Studies told the Council on Foreign Relations.
World uranium supplies were more than adequate as the Soviet-era warheads were scrapped, contributing to the drop in prices. But the agreement will run only through 2013 and soon after that, a serious supply shortage could develop.
Barring a disruption in production, supply is going to be in balance with demand until 2015, Russell Fryer, of Greenwich, Connecticut-based Baobab Asset Management whose investments include miners of the metal, told Bloomberg in an interview.
"After that, there will be a deficit because there won't be enough mines and current supply will diminish," he said.
In addition to the finite Cold War supply, uranium has its own version of peak oil. Virtually all the cheap and easy uranium deposits have been tapped. What's left are the hard and dangerous deposits located in politically unstable parts of the world, like Kazakhstan and Niger.
All of this is complicated by a flood at Cameco's Cigar Lake mine – the world's largest undeveloped high-grade uranium deposit with 232 million pounds of yellowcake. Damages from the flood will halt the start of production until 2011 – at the earliest. A fire at Australia's Olympic Dam mine is further constraining supplies.
Based on demand forecasts, mines will need to pump out 144 million pounds of yellowcake per year by 2020, nearly double current output. That's not going to happen, except at much higher uranium prices.
It's likely prospectors will redouble their efforts to find new deposits if prices continue to rise. But it typically takes up to 10 years from discovery to production to bring a large sized mine on line.
As Uranium Goes, So Go Miners' Stocks
All together, these factors are likely to push up the price of long-term uranium supply contracts, which account for the large majority of trade in the commodity.
Paladin Energy (PINK: PALAF), a uranium producer with mines in Namibia and Malawi, said in a filing that "initial base prices" for new long-term uranium contracts had "risen markedly," currently standing "at or above $80 per pound," according to The FT.
Also, refined uranium is only a minuscule part of a power plant's overall cost. It takes an upfront investment of about $2 billion to build a new nuclear power plant.
When you add in the maintenance and labor costs, laying out $100 a pound for uranium to keep your plant running is a really a drop in the financial bucket. Indeed, some analysts estimate that the price of uranium could skyrocket to $2,000 a pound and still be viewed as a viable energy source for plant operators.
And history shows that as prices for uranium go up the prices for the stocks of uranium companies go along for the ride.
If you want a pure play on an increase in the price of uranium itself, Cameco might be worth a look. It's the largest producer of uranium in the United States. The blue-chip miner announced recently that it had approved a 43% increase in its annual cash dividend and that it remains confident in the long-term potential for uranium.
If you're looking for more safety and diversification, there is a uranium exchange traded fund – Uranium Participation Corp. (TSE: U) – trading on the Toronto Stock Exchange.
Rio Tinto PLC (NYSE ADR: RTP) and BHP Billiton Ltd. (NYSE ADR: BHP) could also fill the bill. Both have huge mining operations with large uranium deposits. Both have skilled management teams and offer engineering savvy. And both stand to reap substantial profits from any price surge in yellow cake.
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