"The nuclear industry is on the cusp of making a huge comeback," predicts Dr Dougie Youngson, energy analyst at brokers Ambrian. The domestic driving force behind uranium's re-emergence is the fact that the UK will lose 30 per cent of its current generating capacity by 2015 as ageing power plants are retired from service. With little new generating capacity currently being developed, the UK risks a power supply crunch in just six years’ time. "People should be worried about power shortages," cautions Dr Youngson.
North Sea reserves are dwindling fast
Domestic generating capacity is being lost just as North Sea gas reserves are dwindling rapidly. After enjoying decades of plentiful North Sea gas, few predicted the sharp decline in reserves that will see the UK shift from being a net exporter until 2004 to an importer of 50 per cent of its gas by 2010 and 80 per cent by 2018.
The ideal solution to Britain's energy needs would be the commercial evolution of renewable technologies, which would also help it meet its commitment to the European Union's target to generate 20 per cent of all electricity using renewable sources by 2020. However, wind generation is suffering problems and both wave and solar require technological leaps to make them commercially viable. First generation biofuels have disappointed and second generation fuels won’t be available for several years.
Clean coal not yet there
Coal-fired power is making a comeback but Dr Youngson warns: "Carbon reduction technologies are still not there and the capital expenditure required for full carbon capture and storage would add significantly to the cost of a power station."
The government is considering sanctioning a new coal-fired power station at Kingsnorth, which would help counter the near-term supply crunch. However, reverting to coal as a longer term solution would be to give up on the country’s commitments to reducing greenhouse gas emissions, which could be politically and environmentally unacceptable.
Gas risks supply uncertainties
Gas is cleaner than coal but is still polluting. However, the main drawback with gas is that with declining North Sea reserves, the UK is exposed to increasing insecurity of supply, as demonstrated by this winter’s Gazprom-Ukraine dispute that disrupted European gas supplies for the second time in three years.
UK supplies escaped disruption on this occasion, but with the country's limited gas storage capacity, a prolonged cold spell could lead to power shortages, initially to industry with power generation next at risk. Furthermore, traders routed gas to the continent during the dispute – despite the UK being a net gas importer - to take advantage of higher prices, which left domestic customers facing higher prices for their power.
Nuclear is the only option left
These factors, as Dr Youngson points out, leave nuclear as the only remaining viable option. After protracted legal wrangles, French energy giant EDF has finally completed the £12.5bn takeover of British Energy. EDF is now committed to the development of four new pressurised nuclear reactors on existing British Energy sites, which are projected to produce around 6,400 megawatts of generating capacity, enough to supply around 13 per cent of the UK's projected 2020 energy needs.
Short of the rapid development of 'capture and storage' technologies for coal-fired power stations, it is difficult to see how the UK will secure its future energy needs without a substantial increase in nuclear generating capacity. The strictures of the Kyoto protocols and associated EU commitments to cut greenhouse gas emissions only exacerbate the situation.
But not without drawbacks
Nuclear comes with drawbacks, however. Long memories inescapably link nuclear power stations with the 1986 Chernobyl disaster, and nimbyism protests can be expected to oppose any sites selected.
Nuclear power enjoys a far smoother ride in France, where EDF has proven its business model and nuclear generates 80 per cent of the country's power. As Dr Youngson explains: "The French understand power, they understand the nuclear sector and they understand uranium. Nuclear is a complete non-issue in France."
It's not just the UK that is set to boost its proportion of nuclear-generated energy. If EDF can successfully replicate its French nuclear model in the UK, it would be well placed to export this model further afield. What’s more, the International Atomic Energy Commission recently disclosed that around 45 member states have plans in place to either introduce nuclear power networks or to upgrade and expand existing ones.
Growing demand for uranium
This has obvious implications for the balance of supply and demand for uranium, the source element for nuclear power generation. The rate at which uranium fuel can be produced and reprocessed is already falling short of demand – and the gap is growing. It has been estimated that uranium demand has exceeded the supply of mined uranium since the early 1990s, with the shortfall having been made up from government and civilian inventories. However, the supply of uranium from decommissioned weapons is now believed to be largely exhausted. What's more, uranium mines have historically taken very long times to develop.
Global demand for uranium is expected to rise by over 18 per cent in the years leading up to 2025 as China, Korea and India develop nuclear power industries and the UK and US revert to nuclear. This could pose a major problem as some industry analysts believe that peak uranium (beyond which global production enters terminal decline) was reached as far back as 1980.
Opportunities for uranium miners
This creates an attractive backdrop for uranium miners. Charles Gibson, mining analyst at Edison Investment Research, identifies the cause of the supply shortage as countries imposing arbitrary production restrictions up until the early years of this century. "Australia restricted the number of operating uranium mines on political grounds; Canada had to restrict output because grades in mines were so high the resultant radiation posed a health risk to miners," he explains. From an economic perspective, nuclear power was much more expensive than fossil fuels, which resulted in little investment in new capacity.
This has all changed since 2000 with the advent of Al Gore's crusade against global warming. Mr Gibson shares Dr Youngson's view of the consensus that nuclear is now the only credible alternative to fossil fuels. What does this mean for uranium miners? Mr Gibson explains: "Extend the UK government’s rethink over second generation reactors over a few more countries and combine it with the historical lack of investment and everyone believes that the stage is set for a bull market."
Analysts at RBC Capital Markets concur with the bullish outlook for uranium. They highlight the renewed interest shown by power utilities and investors, which has resulted in record spot volumes in 2008 and the spot price rebounding off its recent lows. "The supply side remains at risk," they conclude, noting significant production cuts announced late last year. RBC analysts are forecasting an average spot uranium price for 2009 of $60 per pound, which compares with under $10 per pound in the late 1990s and over $100 per pound at its height.
Two junior explorers on London's Alternative Investment Market offer interesting investment opportunities:
Kalahari Minerals (KAH)
Kalahari's principal asset is its 39.59 per cent interest in Australia-listed Extract Resources, the owner of the Rossing South uranium project in Namibia. The recently announced Rossing South Zone 1 resource of 108m pounds substantially exceeded the company's stated upper target of 93m pounds. Extract aims to release the Zone 2 resource within the next six months.
Dr Brock Salier, mining analyst at brokers Ambrian, describes the new resource as "phenomenal". The grade also far exceeded expectations and is higher than at the adjacent Rossing mine (68.6 per cent owned by Rio Tinto). That's significant: the Rossing mine has been producing for over 30 years and accounts for approximately 8 per cent of annual world production.
Dr Salier estimates that resource expansions will continue regularly for several years and that the total resource could ultimately reach 300m pounds. "Compared with peers in Namibia," he asserts, "we firmly believe that Rossing South is the premier pre-production asset in the country."
Dr Salier believes that the quality of the Rossing South resource and its location in politically stable Namibia warrant a potentially significant takeover premium. Rio Tinto is the obvious suitor given its interest in the nearby Rossing mine, although enrichment and nuclear reactor firms are also likely to show an interest.
Such nuclear power companies enjoy high margins from uranium deposits, over and above the margins available through mining alone. These power companies make most of their profits on the sale of reactors, and reactors need a guaranteed uranium supply. As Dr Salier explains: "With reactors costing anywhere up to $8bn (£5.6bn), power companies make most profits downstream, so pay significant premiums to mining companies."
Niger Uranium (URU)
Through its acquisition of the Henkries project in South Africa, Niger Uranium transformed itself into a near-term producer. Henkries is a surface uranium deposit on which Anglo American carried out a feasibility study in 1979. Drawing on Anglo's previous evaluations of the project and the existing availability of power and water infrastructure from nearby mining operations, Niger is looking to fast-track production from Henkries. It is targeting first output in late 2011, which would represent South Africa's first open pit uranium production.
Niger is initially targeting upwards of 10-12m pounds of uranium at Henkries. However, it has picked up significant indicators in the untested southeast extension (Henkries South) that suggest this could increase substantially.
The Republic of Niger continues to be Africa's largest uranium producer and contributed 7.6 per cent of total world uranium production in 2007. Current uranium miners in the country include Areva (planning a new mine for 2009), Cameco and Chinese operators (planning to bring the Azelik deposit into production in 2010). Niger Uranium holds eight licences in Niger. Its exploration programme has identified 18 targets and the company plans to begin drilling in early 2009.
Underpinning the entire project portfolio, Niger holds a 16.6 per cent interest in Kalahari Minerals. The value of this holding, together with over $2m of cash that funds operations well into 2009, is worth more than the company’s market value.