By Nathan Slaughter
A couple of weeks ago, I spelled out the case for rising uranium prices. Then, tragedy struck.
As you know, Northeast Japan suffered a devastating 9.0 magnitude earthquake on March 11, which unleashed a monster 30-foot tsunami that wiped out everything in its path.
At this point, my most immediate concern is with the survivors, not my own portfolio (I plan to contribute to humanitarian relief efforts and urge readers to do the same, if possible). That being said, ignoring the financial effect of this tragedy benefits nobody.
Here's what's going on...
Japan is one of the world's largest proponents of nuclear power, with a fleet of 55 reactors that generate about one-third of the country's electricity. Most of those reactors stayed out of harm's way, but a handful were directly in the path of the storm -- most notably Tokyo Electric's (TKECF.PK) Fukushima Daiichi complex.
Ordinarily, nuclear fuel inside a reactor is safely covered by more than 10 feet of water. But the plant's cooling system got damaged and backup emergency generators have failed. As a result, water levels have fallen, exposing the metal fuel rods and causing pressure to build.
If left unchecked, uranium pellets will melt through the reactor core at 2,000 degrees and potentially escape the thick concrete and steel outer containment shell. But that's a worst-case scenario. We haven't seen any major radioactive material leaks since the Chernobyl disaster 25 years ago (before reinforced containment walls were added).
There has been a non-stop stream of updates during the past 72 hours -- most of it suggesting the situation continues to deteriorate. Hydrogen explosions have rocked the facility (but fortunately occurred outside of containment vessels), so engineers have resorted to using sea water as a last-ditch effort to cool overheated reactors.
This is a fluid situation, but it appears that the worst will be averted. With each passing hour, the odds of a serious containment leak grow slimmer -- like an oven turned off, reactor cores remain hot initially, but gradually cool on their own.
Nevertheless, environmental groups opposed to nuclear energy have made their voices heard in recent days. Public sentiment in Germany has turned more hostile and Chancellor Angela Merkel backpedals on an earlier commitment to extend the life of Germany's existing nuclear fleet. There also has been some waffling from Switzerland and Thailand.
With the reputation of nuclear power taking another blow, uranium stocks have fallen off a cliff. Global X Uranium ETF (URA) tumbled 17% Monday, March 14, and another 14% since.
So does this sell-off create a great buying opportunity, or is it time to run for the exits? I say the former, for five main reasons.
- The knee-jerk reaction in uranium has been grossly overdone. Consider that the MSCI Japan Index (whose holdings are at the epicenter of this catastrophe) has fallen just about 10% since the disaster. The same happened for insurance companies on the hook for $60 billion in damage claims. Yet, uranium producers in North America with minimal ties plummeted 20% or more.
- Once the situation is under control, fear of the unknown (which always incites panic selling) will be gone. Many open-minded people will see Fukushima Daiichi not as a safety failure, but a testament to how far we've come. Under the most extreme circumstances, the containment system did exactly what it was designed to do.
- Uranium spot prices have fallen, but this is a temporary pullback. The available supply is unchanged from last week and global demand won't see much of a dent. The affected reactors use maybe 1,600 tons of uranium annually, a small 2% sliver of the world's total consumption.
- Current share prices are completely divorced from underlying fundamentals. Once the noise is gone, stocks will once again reflect earnings -- and while sales to Japan may slump, the world's other 435 reactors will be as hungry as ever for uranium fuel.
- The threat to future construction has been overstated. I don't think we'll see many projects scrapped, particularly those that are already underway. Most public opposition comes from anti-nuclear states in which we weren't expecting to see new investments anyway. And the real growth players (India and China) still appear fully on board.
After the tragic oil spill in the Gulf of Mexico, some naysayers said there would be a permanent ban on exploration -- but we're drilling again. Because at the end of the day, the world's energy needs outweigh the risk of an isolated incident. You don't make a bad situation worse by making hasty decisions to eliminate a key energy source.
This situation will play out much the same.
Policy makers will require that new reactors in seismically-active zones undergo rigorous safety studies. But they won't pull the plug because nuclear energy is cost-effective and contributes irreplaceable amounts of base load power to the grid. With just the loss of a handful of reactors, Tokyo Electric has been forced into rolling blackouts affecting nearly 50 million people.
While news outlets are quick to report that politicians such as Joe Lieberman are calling for a temporary halt in nuclear energy development, I'm far more interested in what Zhang Lijun has to say. Even in the wake of the disaster, China's Vice-Minister of Environmental Protection still proclaims that his country "will not change its determination and plan for developing nuclear power."
Disclosure: Neither Nathan Slaughter nor StreetAuthority, LLC hold positions in any securities mentioned in this article.