Cameco: Light At The End Of The Japanese Tunnel?

Summary

• 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