Uranium sector does it tough
The Fukushima disaster cast a pall over the wider sector that is yet to recede, but better times could be ahead for the mining companies and their investors, writes Peter Ker.
The Fukushima disaster cast a pall over the wider sector that is yet to recede, but better times could be ahead for the mining companies and their investors, writes Peter Ker. AS THE Friday afternoon shadows grew longer, Michael Jones thought the $10 million deal was in the bag. The Impact Minerals boss had spent months negotiating a farm-in to the company's uranium deposit in Botswana, and finally the planets looked set to align."We were on the verge of what would've been a significant deal for us," he said, declining to name the suitor."They were going to leverage off their share price for the cash involved in that deal."But just as the working week was drawing to a close that March afternoon, the deal suddenly changed.Seven towering waves, each 15 metres high, smashed into the eastern coast of Japan, claiming thousands of lives, homes and towns.A nuclear power station was famously among the collateral damage and, while he was safe in Perth, Jones knew that he, too, would be affected by the catastrophe."I thought this is just gonna be a disaster for us," he recalled.With a partial meltdown under way at the Fukushima power station, the uranium sector would soon be swamped by the killer tsunamis, and Impact's Botswana deal was swept away with it. "It basically disappeared over that weekend," said Jones.One year on, the Fukushima disaster continues to weigh heavily on the industry, but an increasing number of investors believe the time is right to wade back into the choppy waters of the uranium sector.IT'S NO secret that uranium stocks fell off a cliff in the wake of the Fukushima incident.More than $1.5 billion was wiped off the value of ASX-listed uranium plays on the first day of trading after the disaster.Paladin Energy and ERA lost more than $1 billion of that, and within six months both companies aided by troubles in Europe and a few self-inflicted wounds had shrunk to barely 20 per cent of their former selves.The spot price for uranium technically sold as uranium oxide fell sharply, and a round of impairment charges swept through the industry.But the impact was most profound at the junior end of the market, where the fallout from Fukushima fundamentally changed companies.In an unfortunate collision between marketing and timing, Renaissance Uranium listed just three months before Fukushima as a "pure-play" uranium stock.Within months those ambitions had changed, and managing director David Christensen now describes the company as a "broad-based minerals exploration company".Renaissance is not the only uranium play now scouring its tenements for traces of other minerals to help pay the bills until uranium recovers.Before Fukushima, Thundelarra Exploration had been devoting about 75 per cent of its time and money to developing uranium assets, but these days the company spends more time talking about copper and gold."We have scaled right back on uranium . . . the company will be spending 10 per cent or 15 per cent of its effort on uranium this year and the rest would be predominantly copper and gold," said Brett Lambert, who stood down as managing director of Thundelarra this week to return to the gold sector. "From a technical perspective it's not the right thing to do, but from a market reality it's the only way to go forward."The trend repeated through the many company presentations at last month's Paydirt Uranium Conference in Adelaide, prompting one industry veteran to quip that copper and gold had never before enjoyed so much airtime at a conference devoted to uranium.Many analysts and funds managers believe the punishment handed out to the uranium sector in the wake of Fukushima was overly severe.Investment firm Martin Place Securities keeps an index of 26 ASX-listed uranium stocks, which excludes the diversified majors such as Rio Tinto and BHP Billiton in a bid to get an even purer account of movements in the uranium sector.MPS research head Greg Barns said the combined enterprise value of the index was $11.4 billion in February 2011, yet by October 2011 the same set of companies were only worth $4.5 billion, an erosion in value of close to 60 per cent.Over that same period, the uranium spot price fell by a comparatively modest 32 per cent, while the long-term uranium price considered the most relevant guide given it is the benchmark at which most uranium suppliers sell their product fell by closer to 15 per cent.Mr Barns said claims of an overreaction from investors become even more compelling when you consider that many of those companies have continued drilling since Fukushima, and can now point to larger, better understood, more proven deposits of uranium in the ground."Given there was an increase in resource over that period that makes them very, very cheap right now . . . It's like David Jones having a fire sale."One of the ironies about 2011 becoming an annus horribilis for uranium stocks is that aside from Fukushima it was a year of encouraging regulatory reform for the sector within Australia.The federal Labor Party relaxed its opposition to exporting uranium to India, while government approvals were also finalised for mining the world's largest uranium deposit at Olympic Dam in South Australia. Final approval from the BHP board stands as the last remaining hurdle for that project.The trend has continued into 2012, with the New South Wales government planning to overturn a 26-year ban on uranium exploration, while the Western Australian Labor Party also appears to be softening its hardline stance against uranium mines.Beyond Australian shores, the regulatory reaction to Fukushima was a mixed bag.Decisions by Germany and Switzerland to accelerate the decommissioning of their ageing reactors (20 in all) attracted large amounts of publicity, despite the fact the resulting gap in power supply may eventually be filled by nuclear power imported from neighbouring countries.Italy also voted against reviving its nuclear industry, which has been dormant since 1987.But faith in the sector has proved more resilient elsewhere. Japan is still operating two of its 54 reactors and will make a political decision in coming months over whether to restart those made idle after the Fukushima tragedy. The Japanese government is creating a new nuclear watchdog and has ordered nuclear power companies to conduct new "stress tests" on their reactors that must be passed before reactors can be restarted.Pressure for a restart is already mounting from Japanese business groups, which want more reactors working ahead of the northern summer, in a bid to avoid the electricity rationing experienced last year.Earlier this month American regulators approved the US's first new nuclear power station in more than 30 years, while pro-nuclear governments in France and Britain announced a new pact to jointly foster nuclear power development.While those sorts of news snippets from the developed world tend to dominate media coverage, the most important decisions for the industry are being taken in the developing world, where according to the International Energy Agency 61 new reactors are under construction in 13 developing nations. That represents more than 90 per cent of the reactors under construction worldwide.The portrait of nuclear intent looms even larger if the number of "proposed" new reactors is taken into account.The IEA says there are 38 nations "proposing" to build new reactors, and if all keep to their published plans, the number of reactors will swell from 434 today, to 820 by 2030.Not surprisingly, China is the driving force, with 27 reactors under construction and plans in place to build a similar number again between 2015 and 2020.Approvals for that second tranche are on hold pending a review of the Fukushima incident and while the findings have not been published they are widely expected to declare that China's nuclear build must go on.Those expectations were boosted this week when a senior Chinese nuclear official was quoted as saying China was "very likely" to approve new reactors "this year".This aggressive nuclear expansion in countries such as China, Russia, Korea, India and the United Arab Emirates is the most important of several "fundamentals" that make uranium bulls so confident the sector will rebound in the near future.The story is built on a notion that nuclear will be the electricity source of choice in a future where nations will want energy sources free of greenhouse gas emissions.The pitch is strengthened by the imminent demise of a program that saw old nuclear weapons converted into fuel for civil nuclear power plants.Created by the US and Russia at the end of the Cold War, the program is expected to end in 2013, meaning about 10 per cent of the current nuclear fuel supply will disappear and need to be replaced.Another factor expected to perversely stoke uranium demand in the short term is the 2011 slump in uranium prices: the depressed market conditions have meant the development of new mines has slowed, potentially exacerbating the imbalance between supply and demand expected to emerge in coming years.Investment bank JP Morgan believes this phenomenon could see the spot price for uranium rise by more than 60 per cent between now and 2014, while a recent survey of five analysts predicted a 15 per cent rally in the spot price this year alone.BHP Billiton's plan to expand Olympic Dam has long stood as a bogyman over the industry, threatening to flood the uranium market with supply and pull down prices.But most analysts believe the long development times on that project mean uranium will not be produced there until 2019 at the earliest, and even then in a staggered way.Several organisations with the luxury of investing on long-term horizons Chinese state-owned enterprises and major miners such as Rio Tinto seem convinced by the uranium bulls, having taken advantage of the Fukushima downturn to seize on uranium assets.As the spot price was hitting its lowest point around October and November, Rio Tinto won an aggressive bidding war for a modestly sized uranium deposit owned by Canada's Hathor Exploration.Chinese and Russian companies also were happy to wield the chequebook during 2011, targeting ASX-listed uranium plays such as Mantra, Extract Resources and Bannerman Resources with varying degrees of success.Action at the big end of town is one thing, but evidence has also emerged that smaller, more specialist investors have put their money back into uranium.Melbourne-based fund manager L1 Capital held no stock in Paladin Energy four months ago, but now ranks as the company's second-biggest shareholder with 5.28 per cent.Alliance Resources has also watched its share price more than quadruple over summer, although some of that is thought to be speculation the company will emerge victorious and wealthier from an ongoing legal stoush.Alliance managing director Steve Johnston said the identity of the buyers was not known, but there was no doubt the entire sector was being watched closely by "sophisticated investors gearing up" ahead of the anticipated supply shortage in 2013.So after a year of purgatory, is the renaissance of the uranium sector afoot?Greg Barns thinks so, saying the bottom of the market passed shortly before Christmas and "outstanding value" is now offered by several ASX-listed uranium plays."I can't see the uranium price staying this low for long," he said.Austock analyst Andrew Shearer agrees, saying many investors have underestimated the coming shortfall in uranium supply."Most interest in the sector has come from end-users seeking to secure long-term supply. The equity sector has been slow to follow but we are now starting to see a glimmer of renewed interest," he said."This now presents an opportunity for early movers back into the sector."Mr Shearer said the market was eagerly awaiting two key signals: the restarting of reactors in Japan and official confirmation from China that its nuclear building program will continue despite Fukushima.But mining industry stalwart Warwick Grigor is less optimistic, believing the memories of Fukushima are too fresh for most investors."I think this nuclear winter that we are putting up with at the moment is going to go on longer than the optimists are suggesting," he said.Grigor, who runs an investment advisory business and also sits on the board of uranium play Peninsula Energy, agrees that nuclear is the logical future power source for a world wanting to reduce its carbon emissions, but he said such decisions are not always based on logic."We are dealing with a world where common sense doesn't rule. Even though there is horrendous pollution occurring every day from coal-fired power stations, that is not enough to make some people overcome that psychological fear of nuclear power plants," he said."Fukushima scarred a lot of people, so even though they can see the merits of nuclear power, they can also see they could lose 75 per cent of their investment if, by some act of god, there's a problem with another reactor."Grigor said there could be a sweet-spot in the market for those companies already producing or close to producing uranium, and he said those with multiple mines were best placed.But he said such companies would prove to be the exceptions, and there was no justification for being bullish about the local uranium sector as a whole. "I would say 90 per cent of the uranium hopefuls out there are going to find that the road is just too hard for them," he said.WHETHER uranium's future turns out to be boom or bust, Richard Henning reckons we will be closer to knowing the answer within six months.His company, Stonehenge Metals, is the type of uranium explorer hurt most by Fukushima. Despite owning the biggest uranium deposit in South Korea a nation that sources 40 per cent of its power from nuclear Stonehenge's share price plummeted from 24? in February 2011 to 2? by November.Things have barely improved to the current share price of just under 4?."Our project is still going strong so at some point we are going to have to go back to the market to sustain that level of activity," he said.Henning said many small companies had spent the past year draining their cash reserves as they tried to ride out the Fukushima storm, and they simply would not be able to continue in that vein through another year."A lot of the juniors who are in the same position as us are going to have to raise capital somewhere in the next six months, there's no question," he said."You either raise the capital or you look at some form of merger or acquisition to build your balance sheet . . . either that or they just close shop and wait for something else to occur."Mr Grigor agreed, saying mergers and acquisitions were likely to dominate the uranium sector in the months ahead."I do think the sector needs a lot of rationalisation," he said.One way or another, the choppy seas of the uranium sector won't be calming down for some time yet.