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Future Demand for Cameco's Uranium Fuel Still Red-Hot, Despite Japan's Meltdown

The share price of miner Cameco closed lower again Thursday on fears long-term demand for uranium will slow in the aftermath of Japan's reactor meltdown (or near-meltdown). But investors are overreacting: Even a partial meltdown at the shattered facility is unlikely to halt insatiable worldwide hunger for more sources of electricity -- including nuclear energy.

Cameco (CCJ) fell another $1.54 per share, or 5.2 percent, closing at a six-month low in active trading on Thursday. The world's largest publicly-traded uranium miner has lost some 25 percent in market value, or $3.6 billion, since a magnitude 9.0 earthquake and subsequent tsunami battered the Fukushima Daiichi Power Plant in northeastern Japan last Friday.

As utility operator Tokyo Electric Power struggles to restart water pumps that will cool nuclear rods at two of the overheating reactors -- versus a "Chernobyl-style" option of burying the reactors in sand and concrete -- political fallout has already proven lethal for near-term uranium demand. Governments from Beijing to Berlin are voicing concerns over the safety of nuclear-powered operations in their respective countries, with some nations having announced plans to review or halt new nuclear development and construction:

Any slowdown in uranium demand will likely last no longer than six to 18 months. Notwithstanding legitimate fears of radiation poisoning from potential threats of nuclear accidents, economic growth plans in G8 nations and developing countries alike remain grounded in lessening dependence on fossil fuels.

Ergo, investor fears that the more than 100 new nuclear-power stations (net) -- planned or now being built worldwide (out to 2020) -- would be dumped (killing future demand for uranium fuel) is highly unlikely. With emerging economies running energy deficits, nuclear remains part of any growth equation that looks to diversify away from carbon-based options:

  • In Germany, nuclear power plants provide about 25% of the nation's electricity. Shutting down eight facilities, according to the World Nuclear Association (WNA), would curtail more than 13.7 terawatt-hours of power (TWh) -- lost market value of that power would be between €1.0 billion and €2.6 billion ($1.3 billion to $3.6 billion). Further, energy consumption demand would require the immediate build-out of (roughly) a 114 - megawatt solar farm for each TWh lost!
  • Developing countries like India and China are looking to lessen dependence on fossil fuels -taking the nuclear option of the table makes little economic sense. There are currently 106 nuclear reactors currently under construction, more than 75 percent of which are located in Asia, according to Cameco's 2010 annual report.
As of January 1, China operated 13 reactors, with construction planned or already underway for an additional 25 to 30 new plants. In a recent speech, Zhang Lijun, China's vice-minister for environment, sought to downplay the Fukushima disaster, saying: "China has to learn lessons from the accident in Japan but will not give up on nuclear energy."

In the second half 2010, the company signed long-term supply agreements with two Chinese utilities: the contracts specify total deliveries of 23 million pounds and 29 million pounds out to 2020 and 2025.

In addition to mothballing projects, the Japanese disaster could also drive up construction costs to build nuclear reactors -- which already exceed renewables like solar or wind turbines. For example, Gerson Lehrman Group analyst David Freeman pointed out that (prior to) the Fukushima incident, construction costs on several U.S. nuclear projects ranged from $8,071 per kilowatt hour (kW) to $10,181 kW.

By comparison, natural gas fired projects could be constructed for $750/kW to $1,400/kW, according to Freeman. His numbers are misleading, however, as Freeman failed to factor in production (operating) costs over the life of the plant. Given nuclear's higher capacity factor (lower fuel costs), nuclear could be significantly cheaper to operate than either wind, solar, or natural gas-based power options, according to a 2010 analysis published online at Nuclear Fissionary.

Although Cameco derives revenue across the nuclear spectrum, from uranium mining to electricity generation, the Saskatchewan-based company remains Canada's largest uranium producer, with about 64 percent of annual revenue (of $2.1 billion last year) coming from uranium consumption by reactor customers.

Chief executive Jerry Grandey said on a conference call Monday that the long-term effect from events in Japan would be "minimal," with revenue and profitably showing a negligible impact in 2011 from interruptions in deliveries to the Fukushima facility. Consumption was likely to increase (at the 53 other power plants) "to a greater degree" to offset a shutdown of the four targeted reactors.

In addition, Grandey said Cameco's customers in other Asian nations remained committed (public posturing aside) to their own nuclear program.

PR problems from the Japanese disaster, nuclear plant phase-out programs in several European countries, and failure of global economic accords to qualify nuclear power for greenhouse gas emission credits -- notwithstanding these challenges, long-term fundamentals on Cameco's uranium future are still glowing:

  • In 2010, Cameco supplied more than 22.8 million pounds of uranium -- about 13 percent of aggregate worldwide demand of 180 million pounds. Management opined in its 2010 annual report that global consumption could grow to about 230 million pounds per year by 2020 -- driven by existing facilities and growing Asian demand from new reactors coming online, particularly in China.
Another indicator of strong fundamentals and sustainable demand for uranium can be found in uranium prices: Albeit the spot price has fallen 10 percent in the last week to $60 a pound -- the biggest weekly drop since the worldwide financial crisis back in 2008 -- average spot prices remain significantly higher than the 2010 spot market price of $46.83 per pound.

Cameco is also fairly well insulated from pricing volatility, as it locks in more than 40 percent of annual production with fixed-price contracts (terms averaging 10-years duration, adjusted for inflation). Of significance, too, the majority of its current contract holdings were signed in 2003 to 2005, when market prices were much lower ($11 to $31 a pound). Those lower-priced contracts are beginning to expire, according to management, and are being supplanted in the contracts portfolio "with more favorably priced contracts."

In 2010, both (net) operating earnings and cash flow of $514.7 million and $507.1 million, respectively were higher than internal forecasts -- testimony to Cameco's conservative financial policies. Further, a peak at its 2010 year-end regulatory filing reflects a stable liquidity profile, which remained essentially unchanged from 2009, with cash equivalents totaling some $1.3 billion and long-term debt unchanged at $1.0 billion (most of its debt repayment schedules don't come a knocking until 2015 and beyond).

Cameco's one salient weakness is its heavy dependence on a few key assets for high-grade uranium, particularly the McArthur River mine (69.8% working interest) in Saskatchewan. Although this operation holds the world's largest and richest (high-grade) reserves -- with ore grades up to 100 times the world average -- it supplies more than 60 percent of annual volumes, leaving the company vulnerable should an unforeseen work stoppage come into play (e.g. labor strike or environmental disaster).

Notwithstanding near-term fallout from the Japanese reactor disaster, when the alleged radioactive clouds from Fukushima finally recede from the public's collective conscious, an insatiable demand for noncarbon-based fuels should ensure a "glowing" and profitable future for uranium producer Cameco.

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