Is it time to buy back into the nuclear power industry?
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MoneyWeek Editor
John Stepek Nov 17, 2011
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One investment in the energy sector has taken a harder pounding than any other this year – uranium.
The price of 'yellowcake' as it's sometimes called, has fallen from more than $70 per pound to around $50 to $55 since March.
And little wonder. The Fukushima disaster in Japan resulted in nuclear projects across the world being cancelled or delayed. Combined with rising costs, not to mention the generally weak global economy, this has been a painful year for uranium miners.
But now, some rare good news for the sector from Australia has some people getting excited about emerging market demand and uranium mining stocks again. After all, growing economies need ever-increasing amounts of energy – and nuclear is about the only realistic 'clean' (non-fossil fuel) source out there.
So is it time to buy back in? Or is there a better way to profit from growing demand for 'alternative' energies?
Australia wants to supply India with uranium
With the panic in the Eurozone hogging the headlines, you may have missed a rare piece of good news for uranium miners this week. Australian Prime Minister Julia Gillard is keen to end a decades-long ban on selling the metal to India.
Why the export ban? Because India is a nuclear power, but it's not signed up to the United Nations' Nuclear Non-Proliferation Treaty. The idea behind banning the export of uranium is to make it harder for India to expand its nuclear arsenal.
However, India has more pressing needs than warheads. Like China, its rapid growth means that it needs other sources of power, preferably 'cleaner' non-fossil fuels. The International Energy Agency reckons that India's energy demand could double by 2030 from 2007 levels. The ban also seems stupid given that Australia can still sell uranium to China and Russia.
Meanwhile, as the Wall Street Journal points out, Australia needs other markets for its uranium. The country accounts for 12-13% of global uranium exports. With Japan's uranium consumption set to fall by 50% next year, the addition of India as a potential market would be very welcome.
India isn't the only emerging market looking at building more nuclear plants. China has 27 plants under construction, while even resource-rich Brazil is planning to expand. It has two nuclear plants, and intends to build eight more over the next 19 years. The first of these will be switched on in 2015.
Simon Wensley at Rio Tinto tells the Financial Times: "The impact of Germany and other countries is grabbing the headlines, but it's really irrelevant to long-term demand. This is all about China." Indeed, "the only country that is not buying uranium at the same rate [as pre-Fukushima] is Japan."
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Reasons to be cautious
That all sounds very bullish. And it certainly isn't 'game over' for nuclear. These things turn in cycles, and the industry will come back into fashion with both investors and governments at some point in the future.
However, we wouldn't get too excited yet. With Japan and Germany cutting back on building nuclear plants, they'll have less demand for uranium. That means they may end up selling excess supplies of the metal on the market, which in turn would hit the uranium price and thus make miners' lives harder.
And even in the longer run, there is also always the risk that we'll see another Fukushima happen elsewhere in the world, which would send the industry back to square one again. The irony of course, is that all forms of energy extraction are dangerous. I don't have the data to hand, but I suspect strongly that in terms of lives lost as a direct result of the industry, nuclear ranks as much safer than any fossil fuel.
However, the idea of a nuclear meltdown spreading invisible particles of radiation far and wide terrifies us all a lot more than the notion of an oil-rig disaster. And that's something the nuclear industry will never be able to escape from.
A better bet than nuclear
The other problem with nuclear is finding good value ways to play it. Most of the big players in the sector are generally conglomerates (so they're not pure plays), or government-owned. There is talk that uranium enrichment group, Urenco, which is part-owned by the UK government, might be listed on the stock market. Put simply, the business turns uranium into fuel for nuclear plants. It would certainly be worth keeping an eye out for.
In all, the easiest way to play the sector is via the uranium miners. But I don't think it's worth the risk right now. Put it this way, if you want to take a punt with your money, it's much easier to make a case for gold miners than for uranium miners. If you do like the idea of investing in the sector, then one option is investment trust Geiger Counter (LSE: GCL). It trades at a discount to its net asset value (NAV) of 19%, and as David Fuller of Fullermoney points out, it has partly diversified into gold mining shares.
For now, in the 'alternative' energy sector, I'd be more interested in backing the boom in natural gas. With 'unconventional' reserves now more readily accessible than ever before, the International Energy Agency's predictions of a 'golden age for gas' don't seem overly optimistic.
Yes, the price of the raw material continues to slide, just as with uranium. But rather than focus on the producers themselves, a better bet is to look at the 'picks and shovels' plays that can profit from the industry's rapid growth. My colleague James McKeigue looked at some promising stocks in a recent issue of MoneyWeek magazine. If you're not already a subscriber, get your first three copies free here.
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