Exclusive: Nuclear power still a contender
Exclusive to resourceINTELLIGENCE
Rob Chang is an equity research analyst covering the metals and mining sector at Versant Partners. He has extensive financial market experience dating back to 1995 which has included roles such as being a member of a five-person team running a multi-strategy hedge fund, a base metals researcher at a large Canadian bank, a portfolio manager of resource funds/director of research at a boutique investment management company with $3 billion in assets, and as an equity analyst covering the global mining sector at an independent investment bank. Rob has a Master of Business Administration degree from the Rotman School of Management at the University of Toronto and holds a Chartered Investment Manager (CIM®) designation.
Resource Intelligence: We saw how the Fukushima nuclear incident in March 2011 affected uranium prices and share prices of uranium equities. Have you seen a change in attitude since?
Rob Chang: 2011 was certainly a difficult year for uranium equities as sector stalwarts such as Cameco Corp and Uranium One declined by over 50%. However, I am seeing a notable increase in institutional investor interest in uranium in 2012 and this has translated into the markets as uranium equities had a good start to the year.
RI: Some countries have stated their intention to abandon nuclear power while others are rethinking their nuclear policies following Fukushima. Where does nuclear energy stand in terms of source of energy worldwide?
RC: Nuclear energy currently accounts for 14% of the world’s electricity as a continuous, reliable source of base-load power. This is supplied by 440 nuclear reactors operating in 30 countries with 377,000 MWe of total capacity. Sixteen countries depend on nuclear power for at least 25% of their electricity. About 75% of France’s electricity is generated from nuclear, while Belgium, Bulgaria, Czech Republic, Hungary, Slovakia, South Korea, Sweden, Switzerland, Slovenia and Ukraine get one third or more. The USA has one-fifth of its electricity generated from nuclear. Among countries which do not host nuclear power plants, Italy gets about 10% of its power from nuclear, and Denmark about 8%.
RI: Can you imagine an energy mix for the world that does not include a significant nuclear component?
RC: I believe that nuclear energy is an important part of the global power mix. Unlike any other source of base load power, nuclear energy is the cleanest and safest to generate. The generation and consumption of nuclear energy causes virtually no pollution or greenhouse gases. The global economy is currently producing greenhouse gas emissions at a rate of 29 billion tonnes per year and much of it is coming from conventional fossil fuel sources. To avoid catastrophic climate change the world needs to reduce its dependence on fossil fuels and move towards nuclear power.
RI: If Fukushima did not happen, would you say the fundamentals in the uranium space are unchanged?
RC: I would. Except for a few drastic moves by a small handful of countries, most notably Germany, the fundamental supply and demand characteristics are unchanged. Nuclear reactors are still being built and uranium continues to be mined.
RI: Uranium equities staged a rally in January, the first since Fukushima. What’s your take on this?
RC: I believe this is a restart of what we saw last year prior to Fukushima. The fundamental supply and demand characteristics sparked interest in the uranium sector last year but that was abruptly halted by Fukushima. With a tough 2011 now in the books I believe investors are looking at the market for sectors with strong fundamentals and uranium continues to be one of the most compelling. For 2012 we forecast demand of 177 M lbs of U3O8 versus supply of only 147 M lbs.
RI: What are the growth drivers for the uranium industry?
RC: The primary uranium industry growth driver is the growth of electricity demand. As the world’s fastest growing economy, China is in the proverbial driver’s seat with 197 reactors that are either under construction, planned or proposed. India and Russia also have significant reactor development programs as well. Another key demand driver is the global movement towards low carbon emitting sources of electricity. Along with renewable sources such as solar, geothermal, wind, and hydro-electric, nuclear power generation is a preferred alternative to fossil fuel sources such as coal and natural gas.
RI: What is your outlook for the sector in the short and long term?
RC: Based on the strong supply and demand characteristics of uranium, I am positive over the short and long term for uranium. The only caveat is that we do not experience another three standard deviation event like what occurred at Fukushima. We also need investor sentiment to continue in the direction that it has started in 2012.
There are many opportunities in the uranium space as the majority of the sector is really beaten up and many companies are trading closer to their balance sheet cash levels than in the past. While we may not see the inflated valuations that we saw during the uranium bubble, there is tremendous value to be had at current levels.
RI: Please comment on the role of emerging economies as consumers of nuclear energy.
RC: Emerging economies will likely be the next wave of major consumers of nuclear energy. As these economies grow their demand for electricity will increase significantly. As we can see with the Chinese situation currently, a country can not simply build a plethora of coal-fired power plants as the resultant pollution from these facilities in an industrializing nation would significantly impact public health and the environment. As such, nuclear power figures to be a significant part of the plans of any developing nation.
RI: What advice would you give to investors considering uranium companies?
RC: As with any mining company, grade is king. The uranium industry is one of the most highly regulated in the mining space and the costs to explore, permit, develop, and operate a uranium mine are quite significant. The higher the grade of U3O8, the better a project stands a chance at actually becoming a mine.