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The Return of Nuclear Power Means Uranium Long-term Investing Opportunity

Commodities / Uranium Apr 08, 2009 - 07:52 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleDon Miller writes: It's been 30 years since the meltdown of a reactor at the Three Mile Island nuclear power plant also caused a meltdown in the U.S. commercial nuclear power business.

Even though no one was seriously injured - and only a small amount of radiation leaked into the air above eastern Pennsylvania - the March 28, 1979 accident put the perils and mysterious nature of nuclear energy squarely in the spotlight and cast a pall over the industry from which it never recovered.


Indeed, TMI served as an industry epitaph. Not a single new commercial power plant has been ordered - let alone built - in the United States since the accident, and most experts believed the rabid anti-nuclear sentiment in the U.S. market would be impossible to overcome.

That was then, this is now.

Today - against a backdrop of deep-seeded and growing concerns about global warming and greenhouse gases emitted from fossil-fuel plants - the nuclear power industry is moving ahead with plans to build a string of new reactors in the U.S. market , The Washington Post reported.

In an effort to revive the moribund industry, utilities have applied to build more than 30 new reactors here in the United States, often at spots adjacent to existing plants.  And to meet global-warming goals, 42 reactors could be built the next two decades, according to the Electric Power Research Institute.

But even though a new Gallup Poll shows a record 59% of Americans favor nuclear energy, and the industry has made major safety advances, the industry faces significant financial and regulatory hurdles. That makes building any new plants in the U.S. something of a long shot - at least in the near term - if for no other reason than the fact that the U.S. Nuclear Regulatory Commission hasn't granted a single license for a nuclear power plant since the TMI accident.

That's about to change.

The New Realities

In the U.S. market, the appetite for electricity continues to soar. And that's just here. While electricity demand will “only” increase by 50% in the United States between now and 2030, demand will increase 400% in China and six-fold in India.

Overall, across the planet, electricity consumption is expected to double by 2030, increasing by 17 trillion kilowatt hours.

Renewable sources of energy won't be enough to make up the difference. While those renewable sources will be an important adjunct source of power - and will provide profitable investment plays for those who pick the right players - those renewable alternatives won't make a meaningful contribution to the world's energy needs before 2030, the International Energy Agency reported recently.

So no matter what happens in the United States, commercial nuclear power use will surge as other countries around the world - especially those that already use it - embraces nuclear energy as a more-viable solution to their energy needs.

Let's take a look at what's likely to happen in the industry today.

Nuclear Has Big Role in U.S. Energy Picture

Nuclear power is attractive to the energy industry because it produces electricity on a predictable, 24-hour basis - earning it the industry sobriquet of “base-load” power. Coal and hydroelectric plants are the only other power sources that also rate that label. Such alternatives as wind, solar or biofuels do not.

Prior to his election, U.S. President Barack Obama appeared to be lukewarm on commercial nuclear power.  While acknowledging that nuclear is one of several viable components of the nation's energy portfolio - the nation's current inventory of 104 commercial nuclear plants provides 20% of America's electricity - President Obama questioned its safety and emphasized a need to diversify the nation's energy mix with more wind, solar and other renewable sources.

And even though nuclear plants provide 70% of our non-carbon-generated electricity, President Obama said that the industry's waste-storage concerns had to be solved before the nation could build new plants.

Now, however, nuclear proponents are seeing some doors start to swing open inside the administration. Although the new administration has ruled out Yucca Mountain northwest of Las Vegas as a storage option for nuclear waste, U.S. Energy Secretary Steven Chu told Congress this month that nuclear “has to be [part of ] our energy future.” Waste, he said, can be stored at reactor sites “for decades.”

But just maintaining nuclear energy's current 20% share of generation would require building three reactors every two years - starting in 2016, the U.S. Department of Energy has said.

And to hold output steady, every one of the reactors currently being reviewed for approval by the NRC would have to come on line by 2030. The NRC says the first approvals could come by 2011. Given how long it takes to build a plant, the first one wouldn't hit the power grid until 2016.

Meanwhile, the cost of building a nuclear reactor has doubled in the past three years to as much as $8 billion, according to Moody's Investors Service ( MCO ). That's twice the cost of a coal-fired plant and is triple the cost of a natural-gas plant. The credit crisis has also prompted lenders to be careful with their cash, making it difficult to obtain financing.

Given that the last operating license for a nuclear plant in the United States was issued in 1978 - the approval process takes a minimum of 24 months after site approval, which can take years - expect lots of public comment and infighting in Washington as applications wind their way through the approval process at the NRC.

World Bets on Nuclear Innovation

While the United States wastes time doing the old “Washington two-step,” the rest of the world is racing ahead with plans to up the ante in the nuclear power game. There are currently 440 nuclear reactors in 31 countries that generate about 16% of the world's electricity. 

Uranium-fueled nuclear power is increasingly being viewed as the cleanest and most-reliable available alternative to such dirty-burning fossil fuels as coal and oil. In a twin bid to combat global warming and keep up with soaring demand for electricity, countries are rushing to build nuclear power plants. Under current projections, 630 reactors will be operating in 55 countries by 2030. That's a 43% increase in the number of reactors alone.

It's the new technologies those reactors are designed around that are aimed at allaying the public's perception about the safety of nuclear power.  Toshiba Plant & System Services ( TOSBF ), which has built 112 plants in the past 12 years (more than any other company), is working on a “mininuke,” according to Forbes magazine. Called the “4S” (short for S uper- S afe, S mall and S imple), it uses a bath of molten sodium to produce steam twice as hot as steam from water-cooled reactors.  The 4S can crank out as much as 50 megawatts of power, easily enough to fire up a small factory, or to service an entire town that's located off the main power grid.

On top of that, the mininuke can go 30 years without refueling, as opposed to typical reactors, which must be fed every 18 months. And the 4S will be safer, because the reactor core is located deep underground, meaning it's well protected against a terrorist attack or earthquakes.

China and South Africa are working on so-called “ pebble-bed reactors ,” one version of which is filled with 100,000 billiard-ball-sized spheres of coated uranium that are cooled by helium. That eliminates the need for enormous pressurized water-cooling systems and million-dollar containment domes, making them virtually meltdown-proof.

U.S. firms are also on the trail of smaller and safer designs. A Santa Fe, NM, company called Hyperion Power Generation Inc ., is working on a hot-tub sized design, which eliminates the need for the notoriously unstable uranium control rods. U.S. industrial giant General Electric Co. ( GE ) - long a global force in power generation - is working on new, more efficient designs, as well.

Yellow Cake Hard to Come By

No matter how you slice it, the fuel for the reactors in those plants all depend on a scarce commodity - uranium.  Flat out, there's just not enough “yellow cake” to go around.  It takes seven to 10 years to transform a uranium discovery into a fully operational mine. With that kind of lag time, it's clearly almost impossible for supply to keep up with demand.

Until recently, the market reflected the scarcity, rising as high as $137 a pound in 2007. But lately, despite the global shortages, uranium prices - in sympathy with other commodity prices - have nose-dived.

Prices have fallen to about $42 a pound, leading to a sharp decline in the share prices of mining companies, and eviscerating the financing for extraction projects. Six uranium mines in western Colorado and Utah were recently either put on hold or closed.

Some experts lay the blame for this current credit squeeze squarely at the feet of hedge funds - whom they blame for buying up uranium - as well as banks that are no longer willing to lend money.

“Hedge funds were selling off their uranium to raise cash, and the prices just plunged,” said George E.L. Glasier, chief executive officer of Energy Fuels Inc ., a Canadian junior miner. Energy Fuels recently put a Colorado mine project on hold as part of a “ capital preservation ” strategy brought on by the credit crunch.

But with the worldwide growth in the industry - and a classic supply/demand imbalance in the making - someone is eventually going to have to pay the price.  History shows that when uranium prices move higher, uranium stocks almost always hitch a ride north. So when uranium prices advance - most likely to new highs - expect mining stocks to advance in virtual lock step.

As for commercial nuclear power, safety improvements and other technological solutions make nuclear energy a viable energy source for the long term. Count on it to ultimately grab a big piece of the global energy pie - especially overseas.

So at least for now, notwithstanding expected global growth in the sector, the financial crisis and the mothballing of mines makes any uranium play a long-term proposition - with a hefty payoff for those with the patience to see it through.

Money Morning/The Money Map Report

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