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One step forward, two steps back for uranium: report

Uranium investors are being urged to exercise caution in the short term due to three events which could affect the prices of the nuclear fuel and the companies that mine it, according to a recent report by Dundee Capital Markets.

The three catalysts, says the report by three sector specialists at Dundee, relate to the highly significant restarts of Japanese nuclear reactors shut down after the Fukushima accident in 2011, and the activities of Japanese electric utility TEPCO.

Regarding TEPCO, there are media reports saying that TEPCO wants to sell some of its uranium inventory in order to cut costs and to counteract uncertainty over the restart of idled nuclear plants. The sales could represent 15 percent of spot volumes, or 3 percent of the total amount of uranium traded last year, with many fearing that is enough to flood the market and put downward pressure on the price. However, Dundee counters that while the market may see a short-term impact, “mine production is well short of reactor requirements.”

The second driver that could affect the market negatively, is a recent decision by a Japanese court forbidding Kansai Electric Power (TSE:9503) from carrying out a plan to restart two idled nuclear reactors at Ohi north, near Osaka, because of their vulnerability to earthquakes.

The two reactors at issue in the suit, at Ohi power station, were restarted temporarily in 2012 and remain the only units in the country to have been put back in use after Fukushima. But they were taken offline again in September last year for maintenance.

The decision means the reactors will have to stay offline until Kansai Electric Power can prove to the court they are safe. According to Dundee, the news will affect investor sentiment more than demand, and “We also expect lawsuits and injunctions to be normal course of business going forward.”

The one positive uranium driver, as stated in the report, has to do with the approval of a fifth nuclear reactor and third nuclear power plant for restart. Dundee states that investor sentiment will be improved by the granting of safety approval for Shikoku’s Electric Power Co.’s Unit 3 at Ikata nuclear station in Ehime prefecture, after the plant enhanced safety measures to protect against earthquakes and tsunamis. Unit 3 is expected to startup in early 2016.

For investors, Dundee predicts short-term weakness in the uranium spot price and uranium stocks, and therefore recommends producers with fixed-price contracts, including Ur Energy (TSX:URE), Uranerz Energy (TSX:URZ), Energy Fuels (TSX:EFR) and Cameco (TSX:CCO). The firm advises to stay away from Paladin Energy (TSX:ASX:PDN) and sees uranium explorers as largely unaffected due to their longer time horizons.