Uranium's meltdown

No other metal has burned investors more deeply than uranium. And, in case there are investors who believe the nuclear fuel could soon recover after six-years of decline, think again because uranium’s time in the doghouse is not over.

The “U-problem” is simple. Supply exceeds demand. Demand is not growing as it was once forecast to do, and there is an abundance of mothballed supply.

Uranium mining and exploration companies, naturally, would prefer that this truth does not leak out, in the same way they would prefer that radioactive water would stop leaking from Japan’s Fukushima power plant that was destroyed in a 2011 tsunami.

Unfortunately for the miners, Fukushima was a coup-de-grace for an industry already reeling from a series of near-fatal blows that started with the Three Mile Island meltdown in the United States in 1979. Things got worse at the 1986 Chernobyl disaster in Ukraine, and worse still at Fukushima.

While those first two events were occurring, there was an outbreak of civility between the US and Russia. This sounded good, but it actually did more harm than the meltdowns because it unleashed a flood of surplus Russian weapons-grade uranium, which was converted for use in the power generation industry.

It might be considered black humour, but what’s happened to uranium is the equivalent of three funerals and a wedding (with apologies to a movie of almost the same name).

On a more serious note there is nothing funny about what happened to the uranium industry, though it is amusing to hear its champions persist in trying to talk it up as if nothing untoward has happened; a variation of “it’ll be okay in the morning”.

Obviously it will not be okay in the morning – a point acknowledged by BHP chief executive Andrew Mackenzie when commenting this week on the problems associated with the company’s Olympic Dam expansion project – because there are two other mini-disasters unfolding for the uranium industry. They are:

• The failure of the “Peak Oil” theory to deliver a promised shortage of liquid fuels as the US shale oil and gas boom accelerates, and Russia and Saudi Arabia plan their entry into the latest development of the petroleum industry, and
• The steady march of governments around the world towards alternative energy sources, preferably renewables such as solar and wind.

The fate of one company best tells the uranium story from an Australian perspective, because it was little more than six years ago that Paladin Energy was a rising star with plans to become a globally significant producer of fuel for what was expected to be a boom in nuclear power plant construction.

Rather than a rising star, Paladin became a shooting star. Its share price has crashed to Earth, delivering a 95% wipe-out for the unfortunate investors who acquired Paladin shares in February 2007, at their peak of $10.44, only to see them hit a multi-year low of 50.5c last week, and to now be trading at 51c.

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It has been the same story with uranium itself, with the short-term price stuck at around $US35 a pound (and the long-term contract price at around $US42.30/lb) – both close to $US100/lb below the all-time peak of $US138/lb reached in early 2007.

Paladin’s problems, which included heavy annual losses ($421 million last financial year and $173 million previously) are symptomatic of the uranium industry; long on promise and short on delivery.

According to the thin ranks of the once-loud uranium cheer squad, there is an improvement on the way. This time around it will be the result of the supply of surplus Russian material coming to an end, forcing the world’s nuclear reactor fleet to switch back to freshly-mined material.

The problem with that forecast is that it’s been made several times before during the 20 years that the Russians have been harvesting cash from the US by selling weapons-grade uranium.

Perhaps, just perhaps, the Russian surplus has finally run down but that alone will not solve the problem, which is two-fold:

• Demand (like supply) has also failed to meet projections, with Japan only just re-starting some, but not all, of its reactors that were switched off after Fukushima, and
• France and Germany are determinedly pushing ahead into a nuclear-free future, which will probably see more of their fleet mothballed despite enormous pressure building in the European energy sector.

U-Bugs, who come from the same kennel as Gold Bugs, refuse to acknowledge any of these points about excess supply and lagging demand.

As true believers in a nuclear-powered future (or a return to the Gold Standard – pick your own dream) they persist in pointing to nuclear power plant building programs in China, Russia and other energy-hungry countries.

In time, though perhaps not in this century, the U-bugs and the Gold Bugs might both be proven right, though that is of no comfort to an investor contemplating a flutter on a uranium stock. That’s because both gold and uranium have intense competition – the US dollar is killing gold, and energy alternatives (plus excess supply and slow growth in demand) are killing uranium.

Earlier this month the grandfather of the latest incarnation of the Australian uranium industry, Paladin Energy founder and chief executive John Borshoff, let a cat out of the U-bag in an interview with The Australian newspaper.

While persisting with the argument that Russia’s weapons material is running out, he also put a price on what it would take to encourage development of new uranium mines.

“We have a situation where the uranium price is collapsing and all attempts to build new greenfield mines to correct an emerging supply issue are essentially at a standstill,” Borshoff said.

“This standstill will remain until the price of at least $US70 a pound or higher is reached to galvanise some action.”

In other words, the price of uranium (whether sold long-term or short-term) has to double for the industry to get back on its feet and reach a point where new supply can be commercially developed.

And therein can be found the ultimate problem for uranium and its believers. Very few commodity watchers, if any, expect the price of uranium to recover quickly.

J.P. Morgan, an investment bank, last week published its uranium forecast for next year, and for the longer term. It sees the price for uranium sold under long-term contracts rising from its current $US42.60/lb to $US45.60/lb by the year, and then reaching $US67.50/lb by the end of next year.

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The long-term price forecast, however, is $US60/lb – $US10/lb short of what Borshoff believes is needed to spark new mine developments.

The outlook is so bleak that it’s hard to find any buy tips on U-stocks. Paladin has a “sell, high-risk” against its name from Citi. Underperform from Merrill Lynch and three neutral/hold tips from J.P. Morgan, UBS and Deutsche.

So, if called by a uranium bull, remind him that the “buy uranium now” tip has been wrong for six years, and will probably remain wrong for another six. If supply/demand conditions improve, there is always a chance of another reactor disaster which could wipe your investment out overnight.