Those investors who have suffered through the uranium sector’s miserable 2011 probably don’t have any optimism left, but the ones who can summon up a last skerrick of hope may just find reasons to believe the sector is heading for a brighter 2012.
The past 12 months have been wretched for the sector on just about every front. The Fukushima nuclear disaster in March set the tone for the rest of the year, with the Japanese incident triggering a global debate about the role of nuclear energy.
At the mine face, the performance of Australia’s key uranium stocks was just as bad. Energy Resources Australia has been pummelled over the operational problems at its Ranger uranium mine in the Northern Territory, while Perth-based Paladin Energy was marred by ramp-up delays and higher operating costs.
Both the price of uranium and the share prices of the companies producing it tumbled in the wake of Fukushima as the market came to terms with the disaster. In a poor year for share markets generally, the uranium sector was a standout underperformer.
The Merrill Lynch Uranium Equity Index, a basket of uranium stocks from around the world, is down more than 50 per cent for the year.
The pain for ERA and Paladin shareholders is even more acute, with the pair having overseen share price falls this year of 82 per cent and 66 per cent respectively.
Germany was quick to announce plans in the wake of Fukushima to phase out its nuclear capacity by 2022, while Japan is also reassessing whether it will lessen its reliance on nuclear energy in the future.
China, the world’s biggest source of uranium demand growth, has paused its major nuclear capacity expansion plans while it digests the lessons from the incident.
While the outlook for uranium demand has come under a cloud, there is at least one massive growth project that could significantly increase supply.
BHP Billiton has been making progress with its planned expansion of the massive Olympic Dam mine in South Australia, working steadily through the approvals process for the huge expansion, which will grow the world’s annual uranium output by an estimated 20 per cent.
Such a major commitment to lifting uranium production would typically be seen as an endorsement of the commodity’s outlook, but in the case of Olympic Dam the uranium is a by-product to the mine’s copper and gold production.
It means global uranium supply is set for a large increase that will up the risk of the market moving into oversupply.
So, is the uranium sector as doomed as the market seems to think it is?
Those investors who have held on to their uranium stocks during this ‘annus horribilis’ will be encouraged to hear that, perhaps, things are not quite as dire as they may seem.
While the short-term issues in the sector are real, those with a longer-term view have found more cause to be optimistic.
Most notably, companies with an eye on the future have seen the falls in uranium stock prices as an opportunity to buy.
Rio Tinto has been among the most active, pumping $342 million into ERA’s emergency rights issue and then outbidding Canada’s Cameco to acquire uranium play Hathor Exploration for $C654 million.
Chinese companies have also been actively scouting out assets. China Guangdong Nuclear Power is in talks over a potential $2.2 billion offer for South Perth-based Extract Resources and its Husab uranium deposit in Namibia, while Hanlong Mining had been eyeing a $140 million purchase of another Perth-based, Namibia-focused uranium company, Bannerman Resources.
Fat Prophets analyst David Lennox believes the uranium sector is through the worst of the post-Fukushima panic, with the spot price of uranium now beginning to recover.
“Uranium bottomed out at $US49 a pound in August this year and we believe the commodity has now entered a longer-term uptrend,” Mr Lennox said.
In his eyes, demand growth will continue to outpace supply.
“The populist decisions to reduce nuclear capacity within Europe will be insignificant next to the industry’s growth in China and India over the next decade,” he said.
According to Resource Capital Research, nuclear capacity and therefore uranium demand is set to grow well into the future despite the post-Fukushima reviews.
RCR says more than 84 new nuclear power reactors should be commissioned globally by 2017, with 62 currently under construction. Some 499 new reactors are currently planned or proposed around the world, including 171 in China, 57 in India, 44 in Russia, 34 in the United States and 13 in Ukraine.
While the knee-jerk political reactions in the wake of Fukushima have passed, the debate around carbon emissions has continued to rage. Nuclear remains one of the few methods of generating power on a large scale with little to no emissions, suggesting the sector still has a major role to play in moving to a lower-emission world.
Uranium prices already appear to be stabilising, so if the Australian-listed uranium miners can put their histories of operational under-performance behind them, 2012 may be a far more pleasing year for their shareholders.
