Two years ago, a 9.1 earthquake off the coast of Japan caused a massive tsunami that wreaked havoc and destruction on the Land of the Rising Sun.
The effects were devastating and widespread. The nuclear power industry was hit particularly hard, as three cores at the Fukushima Daiichi nuclear power plant melted down.
The media went into full-force panic mode, and the scare tactics eclipsed even the great shark attack fear of the early 2000s…
People were outraged.
Germany, Japan, and Switzerland stated they would shut down their nuclear power plants, or let them fade away after their natural life cycle had ended. China put a moratorium on new permits.
The price of uranium plummeted from over $70 to $42.75 a pound. The market crushed the entire uranium sector. Some experts predicted it wouldn’t come back for decades…
They were wrong.
Things change and disasters fade from the headlines.
Lessons have been learned and knowledge gained as countries realized the fourth-generation power plants combined safety and power in ways the ones built in the 1970s and 80s didn’t.
The underlying facts support the benefits of nuclear power in countries that must import and burn fossil fuels.
China is less worried about the future negative effects of nuclear power because it is suffering a real-time environmental disaster derived from its use of coal-burning power plants.
Japan elected a new, pro-nuclear prime minister. He has reinstated two plants — with more to follow.
The United Kingdom just issued a permit for a new plant to be built in Hinkley Point. Last year, the United States approved a two-unit nuclear power plant to be built at the Vogtle complex in Georgia. China ended its moratorium and issued a new permit in December.
China continues to be the big mover in nuclear power plant generation, building 29 new plants with 51 planned and 120 proposed. China, like no other country, is using economies of scale and driving down cost to a third of what they pay in the West.
And China isn’t the only country going nuclear. There are plants proposed or under construction in places as varied as Saudi Arabia and Vietnam. India, Russia, the UAE, Ukraine, the UK, Canada, and South Korea are moving forward. Globally, there are 79 nuclear power plants under construction and another 180 or so in the planning stages.
In the next few years, more nuclear power plants will be built at a faster rate than during any other time in history.
Supply Dries Up
In addition to this growth, the sector is experiencing a cyclical downturn in uranium supply.
The low price coupled with the global recession and Fukushima fears means the supply of uranium has taken a hit. Companies that can’t make money when uranium is priced at $42 a pound have shut down: Miners including BHP Billiton (NYSE: BHP), Cameco Corp. (NYSE: CCJ), and Uranium One (SXRXK. Pinksheets) have closed mines or put off projects.
On top of this, a major M&A phenomenon is currently going on in the uranium sector as those with money are buying up those without.
At some point — very possibly within the next year or so — we will hit a tipping point with uranium supply and demand.
The current annual uranium demand is about 180 million pounds. Of this, 140 million pounds is mined. This leaves a 40 million pound shortfall, more or less, which until now has been made up with highly-enriched uranium that was bought by USEC Inc. (NYSE: USC) from Russia and resold.
USEC has a contract with Russia that started in 1999 to buy uranium from old Soviet weapons and sell it for use in nuclear power stations. This contract ends in 2013, as the supply has been used up.
Furthermore, due to the red tape, financing, and other difficulties in starting up new mines, it will take several years for now-closed uranium mines to resume operation, even if the price of uranium increases dramatically. This is a rather large barrier to entry.
Sum of All Fears
So there you have it: Nuclear energy — and uranium in particular — is a hated industry on Wall Street with almost no volume in the stocks.
Demand is rising and supply disruptions are coming this year. There are lots of buyouts, showing insiders thinks it’s undervalued. And there’s a huge barrier to entry for new supply.
One might speculate that the price of uranium could easily be trading twice as high in 2015 as it is today…
Uranium Participation Corp. (Pinksheets: URPTF) owns physical uranium oxide in concentrate (U308). This is the closest you can get to owning physical uranium.
The stock has been in an uptrend for the past six months (though it hasn’t broken out of its long-term downtrend). Volume is percolating, and the gap-ups in the chart over the past month or so suggest the sellers are out.
I’m not buying after this recent 20% run-up… but it’s starting to look good if it pulls back below $5.30.
All the best,