Is it Time to Invest in Uranium?

Is it Time to Invest in Uranium?

Japan was one of the world's most important consumers of uranium before the Fukushima disaster. After a total shutdown, there are signs that nuclear power may be coming back to the Asian nation. That's good news, but don't expect a complete resurgence.

Perfect storm
An earthquake that sets off a tsunami that leads to a nuclear meltdown; It's hard to envision a worse, worst-case scenario than Fukushima. Having lived through it, however, it's no wonder that Japan set about shutting all of its reactors until the island nation could come up with guidelines to increase the safety of its nuclear fleet.

Grant Isaac, the CFO of Cameco , the largest publicly traded uranium miner, explains that after the disaster, the Japanese "...went through a process of trying to understand what had happened. They went through a process of trying to build an appropriate fourth arm regulatory structure. They went through a process of looking at every reactor..."

Essentially, they took a hard second look to make the industry safer. With new regulations in place, "five utilities representing 14 reactors are currently in the restart approval process." So, nuclear is coming back to Japan. That's the good news for Cameco and fellow uranium miners like Rio Tinto (ADR) .

Not a full recovery
The bad news is that "54 reactors are not coming back online in Japan..." So while the market will recover, it isn't going to be what it once was. Cameco's view is that "two-thirds of [Japan's] reactors could come back online, but it will take time."

That's why coal miners like Cloud Peak Energy still have an opportunity to get into the market. Cloud Peak has sent batches of coal for Japanese utilities to test. With a large presence in South Korea, getting a foothold in Japan would be a good next step. Japan is, essentially, still looking for alternatives to nuclear power and expensive imported liquefied natural gas.

Cloud Peak has limited port capacity to export more coal, so it can only benefit just so much in the near term. But, if new ports open up as planned and the company's Crow Tribe coal deal pans out as expected, Japan could become an important part of the miner's business.

Seeing Cloud Peak's coal going to Japan, I can't help but wonder if Cameco is being too positive in its restart outlook. Probably not, because Japanese utilities are "taking delivery of the uranium they have under contract." You don't stockpile uranium unless you think you're going to use it. Cameco believes Japan has about 100 million pounds of uranium sitting around, 66% more than usual -- when the country had more reactors.

That's not the end of the world, but it means Rio Tinto and Cameco will have to wait for a return of Japan as a buyer. This helps explain why Rio's CEO, Sam Walsh, has stated that the company's energy business, which includes uranium, is "going to find it tough to get capital allocated" to it in the near term. Rio, however, is far more diverse than Cameco, so there's more internal competition for capital. Cameco, with only uranium on the docket, can, or perhaps has to, take a longer-term view.

But the outlook isn't so bad, with 69 nuclear-power plants currently under construction. Most of those units are in China and India, two high-growth nations in desperate need of new power sources. That's why the pure-play uranium miner is looking to ramp up production now.

Japan: A silver lining?
So Japan is a mixed blessing. Nuclear demand is likely to come back but only slowly and then after current stockpiles are worked off. But when Japan comes back to buy uranium, it's likely to see a tighter market than exists today. When that happens, it will be good news for Cameco and just might get Rio to loosen up its purse strings for energy again. Japan won't change the uranium market today, but it could have a notable impact down the line.

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