- Newsflow from Japan is finally improving: two Kyushu Electric reactors got the NRA safety clearance and could restart in coming months.
- Strong appetite for Japanese Utilities’ bonds suggests a pretty high confidence in the restart of reactors… at least from Japanese investors, who know Japan politics better than us.
- Another key positive is that the Japanese government is making the necessary moves to speed up the inspection and restart process of nuclear reactors.
- The pro-nuclear Tanaka will soon join the five-member panel of the NRA, in replacement of the hawkish Shimazaki.
- The gradual restart of reactors will be positive for sentiment and send uranium names such as Cameco higher.
Declining Japanese bond spreads bode well for the uranium price
In our June 11 SA article, we explained that the longer-than-expected nuclear restart process in Japan was weighing on the supply/demand dynamics of the uranium market and on uranium stocks such as Cameco (NYSE:CCJ).
Despite strong political support for nuclear energy in Japan, anti-nuclear activists won an important legal battle recently when a Fukui prefecture court forbade Kansai Electric Power from carrying out a plan to restart two idled nuclear reactors at Ohi north because of their earthquake vulnerability. The ruling may not remain in force for long as the Osaka Court of Appeal has rejected similar suits brought by citizens' groups but this shows that the restart process is more complex than initially expected.
Finally, we believe that the newsflow is improving. First, it was just announced that two Kyushu Electric reactors got the Nuclear Regulatory Authority (NRA) safety clearance. This could pave the way for them to come online before year-end and this could represent the long-awaited catalyst for the uranium price.
Interestingly, it looks like this positive newsflow was anticipated on Japanese financial markets: Kyushu Electric sold JPY20bn ($197m) in 10-year bonds last week at a 39bps spread, its lowest spread for such maturities since 2010. And Kansai Electric Power Co. and Shikoku Electric Power Co. are expected to follow the move and to offer notes in coming days as well.
According to Bank of America Merrill Lynch, Japanese utility bond spreads have declined from 202bps in June 2011 to 29bps, just slightly higher than the average Japanese corporate spread (22bps). This obviously suggests that confidence in a restart of Japanese reactors is strong among Japanese bonds investors (who are naturally close to the political situation in Japan)… while it's still very low among uranium investors. In our view, this bodes well for the uranium price.
Changes made to the NRA panel suggest that the Japanese government seeks to speed up the process
Second, it looks like the inspection and validation process of idled reactors by the NRA could accelerate soon in view of the recent changes made to the governing body of the nuclear regulator. The Japanese Diet approved two new commissioners for the five-member panel of the NRA.
One of them, Tanaka, is regarded as pro-nuclear, having close ties with utilities and stating only eight months after Fukushima that it could be safe to reconsider returning to nuclear energy… Interestingly, Tanaka will replace Shimazaki who is sees as "hawkish": Shimazaki notably stopped the restart of a reactor with vigorous safety demands.
In all, confidence in a gradual restart of reactors is likely to keep rising. This should be positive for sentiment and send both the uranium spot and term prices higher, even if Japanese utilities are unlikely to buy uranium before one or two years due to the large uranium stockpile in Japan (the country honored its purchase contracts post-Fukushima despite the reactor shutdowns).
Against this backdrop, we reiterate that Cameco is an attractive stock. The company is expected to make money even in the current environment as it is the lowest cost major producer and will consequently be in a comfortable position when uranium demand picks up and pricing improves, with a likely huge earnings leverage.