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Commodities
Nuclear energy is here to stay
Nicholas Way - August 6, 2007
Nuclear energy is here to stay. And Australian mining companies are queuing up. Nicholas Way reports
As political decisions go, this one was truly asinine. The Labor Party’s long-held position to have a three mines uranium policy failed every test of what should constitute good public policy. On uranium, Labor was half-pregnant – and everyone knew it.
Labor, which could form the next government if the opinion polls are any guide, has finally extradited itself from this non-policy; new mines will be allowed to open and uranium exported, although some state Labor governments – notably Queensland and Western Australia – still have issues with the policy and say they won’t comply.
But that decision will not be the end of the issue for Labor. Far from it; Prime Minister John Howard has ensured that. Howard appointed a taskforce, which was headed by former Telstra chief executive Ziggy Switkowski, to examine all aspects of nuclear energy, and the report supported an expanded uranium mining industry and even gave qualified backing for domestic uranium processing and nuclear power. It’s an issue that needs rational debate.
The thinking behind the Switkowski report was quite simple; in an era when global warming is the pre-eminent environmental issue, nuclear energy offers the tantalizingly attractive option of having zero carbon emissions. Certainly it’s an argument that’s echoing similar public policy debates overseas about the use of nuclear energy.
Anyone doubting that statement should have a look at BHP Billiton’s half-yearly results presentation in February – BHP has direct exposure to uranium via its acquisition of the Roxby Downs mine in South Australia – when management gave an overview of the industry. There are no less than 27 nuclear plants under construction – most in the world’s two most populous countries, industrializing China and India – and another 80 are planned. [South Korea, Japan and China dominate the planning list.]
But just as significantly there are 440 uranium plants operating globally, mostly in Europe and the US. This is an industry on an exponential growth path.
Predictably, that growth has been flowing into the uranium price. In 2002 it was selling around $US10 a pound; in recent weeks the spot price approached $US140 a pound, although it has subsequently come back from those highs. [Utilities lock in much lower prices with long-term contracts.] No analysts, however, are predicting any serious retreat from what’s been a strong price rise.
As the US energy newsletter “Energy and Capital” explains, it’s not just an issue if growing demand, critical as that factor is. It says: “Production from the world’s uranium mines now supplies only about 60% of the requirements of the world’s nuclear power utilities, leaving a wide gap between production and demand.
“The world’s 440 reactors have a combined capacity of about 370,000 mega-watts that require about 77,000 tonnes of uranium a year. Yet in 2006, mines supplied only about 50,000 tonnes of uranium. The shortfall has been made up largely from government stockpiles and recycled nuclear weapons. But these supplies are running thin and won’t last much longer.
“The supply-demand balance for uranium is tighter than any other major commodity. And the flooding at Cigar Lake (the world’s largest undeveloped mine in Canada’s Saskatchewan province, it is predicted to produce 17% of world output) didn’t help.
“With a global building boom for nuclear power plants underway, demand for uranium is only going to rise, and with rising demand will come increased prices. And considering that the market had little breathing room in the first place, our investment position on uranium is ‘buy’. Simply put, investing in this commodity is a no-brainer.”
In this supply-demand equation the more realistic question about the Australian industry is: why have we lagged behind? And lagged we have; according to the broking house Wilson HTM, Australia sits on 40% of the world’s known uranium reserves but only meets 20% of world demand.
That’s a situation that is being addressed. Currently we only have two pure listed uranium plays – Energy Resources of Australia (64% owned by Rio Tinto) that operates the Ranger mine in the Northern Territory and Paladin Resources which is operating in the African countries of Namibia and Malawi – but waiting in the exploration wings are about 50 exploration companies.
That’s right – 50 companies. Most are not pure uranium plays, but that doesn’t alter the fact that there are a lot of exploration dollars out there chasing uranium, a fact that hasn’t been lost on investors. Companies such as Nova Energy, which is working ground in South Australia and Western Australia, has seen its share price rise from $1 to $3.50.
The diversified miner, Marathon Resources, has enjoyed an even better run, from 50 cents to $5 over the past year. Another worthy of a look is Uranex, which has prospects here and Tanzania and has enjoyed a 400% rise in its share price to about $1.60 in the past year.
Those explorers are a strong pointer to the future; the fact they are prospecting just as furiously in Queensland and Western Australia, suggests they believe political interference – unlike Labor’s former three mine policy – will have a short shelf life.
It’s not just the explorers lapping up investor attention. Energy Resources of Australia’s share price has risen from $4 three years ago to a peak of $28 earlier this year before settling back to be now trading around $20. A weaker share price was not surprising; its interim profit to June 30 2007 was $5.7 million, well down from last year’s corresponding number at $19.9 million.
But the explanation for this poorer result – it was significantly higher than the company’s prediction of a loss between $5 and $10 million – had nothing to do with the health of the industry and everything to do with deferred production and sales because of heavy rain at its Ranger mine in the Northern Territory. The broking firm Bell Potter is still predicting a $52 million profit for the full year to December 31 2007.
A few weeks ago “The Australian” newspaper exclusively reported that the Howard Government had uranium exports to India on its agenda, India’s refusal to join the non-proliferation pact notwithstanding. At the same time India and the US are on the cusp of an agreement that would give the former access to US nuclear fuel and equipment. These are just two more signs – if more signs are needed – that this industry is powering ahead.
Investors, take note.
More articles from this week's CompareShares newsletter:
Commodities: Nuclear power here to stay
Resident trader: Revenge trading
Lottery winners: The perils of sudden wealth
Superannuation: Getting behind the wheel
CFDs: Volatility highlights strengths and weaknesses
Politics: Backing a winner
Smart Investing: Rising debt levels an issue
Shares: Market depth explained
Stock of the week: ASB
Investing: Oil rising to the top… again
Gold: Gold vs the dollar
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Nicholas Way is a former senior journalist at Business Review Weekly (BRW), who writes investigative pieces on Australian listed companies.
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