Uranium and Japan

By the Casey Energy Team

The potential for a core meltdown at three of Japan’s nuclear reactors after a 9.0-magnitude earthquake and ensuing tsunami slammed the island nation is causing another onslaught, this one against every uranium-related stock in the world.

Stocks of uranium explorers, producers and nuclear-reactor builders, and the spot price of uranium all fell dramatically on March 14 and 15, the first days of trading following Japan’s disaster. As the country worked to keep three reactors at risk for meltdowns contained, the world’s largest pure uranium producer Cameco (T.CCO, N.CCJ) watched as its share price fell as much as 22.7% in Monday’s intra-day trading. By the end of the day the loss had softened to 12.7%, leaving the company at C$31.70. By mid-day Tuesday, Cameco shares had lost another C$2.29 to trade at C$29.41.

Uranium One (T.UUU), another major global uranium producer, fell harder, losing 27.7% on Monday. By midday on Tuesday, it had lost another 16.9% to sit near C$3.60. The world’s largest provider of nuclear equipment and services, France’s Areva (P.CEI), lost 9.6% on Monday and continued to fall Tuesday, sitting 9.2% down by the middle of the trading day.

The impact reverberated all the way down to uranium explorers: Athabasca Basin junior Hathor Exploration (V.HAT) dropped 28.3% on Monday and continued the drop Tuesday, 15.6% down at midday, while producer-explorer Denison Mines (T.DML) lost 22.3% on Monday and had lost another 11.3% by the middle of Tuesday.

The spot price of uranium, which is not traded on the open market but is represented by the average price of individual transactions, dropped 11% on Monday to close at US$60.75 per pound. By midday on Tuesday, it had plunged another 10.3% from there to sit at US$54.40 per pound.

Germany suspended an agreement to extend the life of its nuclear power stations, Switzerland put some nuclear power plant approvals on hold, Taiwan announced plans to study reductions in nuclear power output, and Senator Joe Lieberman said the U.S. should put the brakes on new nuclear power plants until the Japanese situation plays out. Other nations voiced continued support for nuclear power, including France, China, and India, all nations wherein nuclear power is important and new reactors are being built.

What does this all mean for uranium and nuclear power? To be blunt, there are two sides to this story: the objective, supply-and-demand side and the emotional, fear-of-nuclear-radiation side. Both are absolutely legitimate, because fear is a major factor in the uranium arena.

That fear is certainly being stoked by news stories describing the situation as “the worst nuclear disaster since Chernobyl” and maps showing how winds could potentially carry radiation across the Pacific to North America. So before we get into uranium forecasts, let’s talk about what is actually happening within Japan’s damaged reactors.

There are serious cooling problems and the likelihood of partial core meltdowns at three reactors within the Fukushima Daiichi plant, which is 270 km north of Tokyo. On Saturday, a buildup of hydrogen gas caused a major explosion at the No. 1 reactor; the walls and roof of the building blew off, but the containment vessel around the reactor itself remained intact.

On Monday morning, the same thing happened at the No. 3 reactor. By Tuesday morning, the building housing reactor No. 2 exploded violently; this time the explosion seems to have inflicted some damage to the reactor’s suppression pool, which is a donut-shaped reservoir at the base of the containment vessel. Radiation levels spiked, then settled back to the low levels that have been the norm since the disaster started. On Tuesday night, a fire in the spent fuel pools near reactor No. 4 added to problems, but it was extinguished within a few hours.

Now efforts are focused on keeping the reactors cores submerged in water, to keep them cool. The main challenges are that coolant and pumping systems have been damaged, personnel are short, and power supplies are inconsistent, especially after the three explosions damaged the plants’ power systems. Cooling efforts have yielded rewards at reactors 1 and 3, where temperatures are now dropping. Reactor No. 2 is still very unstable, and temperatures are starting to rise in No. 4.

Despite everything, Japanese officials continued to express confidence that containment vessels will hold, keeping the high-level radiation that results from partial core meltdowns locked away. Operators have been venting steam that contains only low-level radiation. The reported levels have remained well below the maximum exposure limits set by the International Atomic Energy Agency.

The take-home message is this: if the 8-inch-thick steel walls of the containment vessels remain primarily intact, things should be fine, and that is what we expect based on the events to date. The vessels are designed to stay intact even if the cores explode. However, if we are unlucky and one or more of the vessels burst (beyond the small breach inflicted by the explosion at No. 2), highly radioactive gases would spread for hundreds of kilometers, with the worst contamination hitting in a 50-mile radius.

Really, no one should be mentioning Chernobyl because even the worst-case scenario at Fukushima would be nothing compared to Chernobyl. In the Ukrainian disaster, a nuclear reactor exploded while still in full operation, and its sub-standard containment unit was destroyed in the explosion, which meant radioactive gases and molten plutonium and uranium spilled into the surrounding countryside. Some 4,000 people would eventually die.

In Japan, the reactors are shut down and the containment vessels have already held for four days. Experts say that longevity bodes well. Provided the vessels do hold, the situation will be much more like the Three Mile Island incident. That is also a difficult comparison, however, because many people misunderstand that situation. At Three Mile Island, a stuck-open valve led to major coolant losses, which led to a partial meltdown in one reactor. High-level radiation was confined to the containment vessel, and little radioactive material actually escaped. (The real problem at Three Mile Island was lack of training and protocol to deal with the situation.)

Chernobyl instilled fear of nuclear reactors into the general population, and rightfully so. Three Mile Island was scary, and today’s precarious situation in Japan is also scary. But nuclear power is a mainstay of many countries’ green power plans and, provided this disaster does not escalate, that will remain the case.

For one thing, there are 65 nuclear power plants currently under construction, and the builders cannot back out of the long-term contracts they signed to supply those plants with uranium. And as we’ve written before, global uranium supplies are not projected to meet growing demand, so if economics prevail, the price will rebound and uranium equities with it.

If Japan’s nuclear troubles worsen significantly, however, fear may take over from economics. Governments wanting to reassure scared citizens will suspend nuclear power plans (as some have already) and institute heavy-handed permitting hurdles for new mines and reactors. In this scenario, uranium could drop back down into disfavor.

At Casey, we had already recommended that our subscribers take Casey Free Rides on most of our uranium equities. Why? Because more than anything else, we believe in minimizing risk. In investing, it really isn’t about how much you make – it’s about how much you don’t lose. And a day like today reminds us never to become complacent about any of our investments, because you never know when a totally unexpected event could derail an entire sector.

There will be opportunities to invest because of this terrible disaster but, to our eyes, the right choices are not yet clear. We need to wait, with our fingers crossed that Japan does not have to go through any more tragedy, to see what happens at Fukushima. Once that plays out, opportunities will arise and we will have our finger on the pulse for our Casey subscribers.

[With oil skyrocketing in the Middle East crisis and uranium falling out of favor due to Japan’s misfortune, alternative energies look brighter than ever. But wind and solar are too limited in implementation and output in the near term – however, a little-known renewable resource is perking up that is as efficient as oil and does not depend on the weather. Read more about the clean energy sector even Buffett invests in…]