Clock - Uranium Supply Crunch and Critical ... - Andrew Johns

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Canada Research | Page 4 of 87UraniumIndustry CatalystsInvestors should own positions in uranium equities ahead of a potential sector reboundin the latter half of 2012 and into 2013. Our long-standing positive outlook on uraniumsupply-demand fundamentals remains intact, as outlined in the ‘Uranium MarketOutlook’ section later in this report. Our recommended timing for investment is alsounderpinned by depressed valuations, seasonality and, most importantly, key industrycatalysts:Resumption of Chinese Government Approvals for New Reactors. On March 16, 2011,China revealed that it had paused nuclear power development in order to inspect itsplants and review safety protocols. Work on the 26 reactors that were already underconstruction was allowed to continue, but approvals for new reactors were halted. After14 months, China announced on May 31, 2012 that it reached a positive conclusion toits assessment and, in a meeting chaired by Premier Wen Jiabao, gave preliminaryapproval to a new nuclear safety plan.We believe this paves the way for China’s government to resume approvals of newreactor projects by year-end 2012. The restart in permitting should bolster confidence inChina’s planned aggressive ramp-up and spur Chinese utilities to resume buying in largequantities (imports were 31.5 Mlbs U3O8e in 2011A, -18% y/y). Recall, China remains byfar the largest source of future growth, with 197 reactors either under construction orplanned/potential (vs. 433 units currently installed worldwide).The Jiabao meeting also set installed capacity goals as part of a “Vision 2020” plan, butspecifics have yet to be released. We forecast China will reach 70 GW installed by 2020E(from 12 GW now; 8-year CAGR of 25%). This estimate reflects the likely slower andmore measured post-Fukushima approach to licensing and construction (from the briskapproval pace of 8 – 10 units/year in 2008 – 2010) and an under-staffed industry (DonHoffman, president of US utility Excel, stated China has 25% the number of experts itwill need in 2020E). This has not stopped the industry from preparing: CGNPC’s US$2.2bln acquisition of Extract Resources and its massive, 513 Mlbs Husab project in late-2011; a stated intention to import more uranium this year than last and to acquire moremines (China Daily, citing deputy director of the National Energy Administration inMarch 2012); and state-owned utility CNNC’s plans for an IPO to help finance fivenuclear projects worth US$27.2 bln (The Wall Street Journal, June 6, 2012).Further Restarts of Japanese Reactors. In March 2011, Japan shut down 11 reactorsimmediately and kept the remaining offline (to run stress tests) as they were switchedoff for regularly scheduled maintenance. All 50 operable reactors were offline untilKansai Electric’s Ohi number 3 and 4 reactors were fast-tracked. Without Ohi 3 and 4,Japan’s government projected black-outs in the country’s most nuclear-reliant industrialarea, Osaka and Kyoto, during peak summer demand.We believe further restarts are very likely for several reasons: (i) precedence: restarts atOhi may soften local opposition, the main hurdle for other reactors; (ii) economics:without nuclear supplying the usual level of 30% of electricity requirements, Japanspends a reported ~US$100 mln/day on fossil fuel imports – in part leading to thecountry’s first annual trade deficit in over three decades (US$54 bln in 2011) – and thegovernment projects the economy could shrink 5% by 2030; (iii) safety: the JapaneseAtomic Industry Forum projects a country-wide 12% electricity shortage this summerwithout restarts and four utilities are projecting blackouts during July – September; (iv)environment: World Nuclear News (WNN) states fossil fuel replacement energy haspushed carbon emissions 14% above 1990 levels; (v) operators’ confidence: steps takenby the reactor operators suggest they are very confident more reboots are on thehorizon.We expect China to resumeapproving new reactor projects byyear-endWe project 70 GW of installedcapacity in China by 2020E –globally, the largest source ofuranium demand growthAfter Ohi, the next Japanesereactors could restart in early2013ERaymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Uranium Canada Research | Page 5 of 87Cameco, Uranium One, and Kazatomprom have each stated their Japanese customersare continuing to take deliveries of uranium, albeit, with some deferrals. Cameco, asignificant supplier to Japan (17% of Cameco’s future sales, as of late-2011), statedJapan’s utilities continue to participate in funding for mine development andexploration, are upgrading their power plants, and have turned down offers to purchasetheir inventories – to the contrary, Cameco stated on its 1Q12 conference call that someutilities were actually looking to acquire more uranium.With these factors in mind, we are looking for the next batch of reactors in Japan to resumeoperations in early 2013E, once their stress test results have been accepted (likely a fewmonths after the establishment of the new nuclear regulator in September 2012E) and localapprovals secured. We believe uranium prices should benefit from these restarts given thereduced likelihood of inventory selling; we estimate Japanese utilities cumulatively holdone of the largest commercial uranium inventories globally, given a conservative mentalityof safeguarding against supply disruptions, coupled with the third largest reactor fleet inthe world. With future operations of reactors up in the air, this material has beensomewhat of an overhang in the market as, according to UxC and others, many buyerswere holding off on purchases to see if this uranium was going to become available.Restarts could remove the overhang, supporting prices in the near-term.Further out, we believe most of Japan’s reactors will start-up by 2017E. However, by thelate-2020s, nuclear’s share of Japan’s energy mix will likely settle towards 15% (low-30sGW). Our forecast reflects reports of the country’s new energy plan (Reuters, May 25,2011) and US EIA’s latest forecast for Japanese electricity generation growth(September 2011).Expiry of the Russian HEU Supply Agreement. Signed in 1993, the Russian HEUCommercial Agreement (or “Megatons to Megawatts”), is a 20-year deal to down-blend500 t of highly-enriched uranium (HEU) from Russian warheads into ~400 Mlbs U3O8-equivalent for use in reactors in the US and Europe. This deal ends in December 2013Eand the Russian government has repeatedly stated it has no interest in an extension. In2011A, this HEU-derived material comprised ~13% of 2011A total global uranium supply,and was heavily relied upon to bridge the gap between mine supply (~138 Mlbs) andtotal demand (~184 Mlbs). Once the deal ends, utilities will have to look at moretraditional sources (e.g. long-term contracts with producers or the spot market) to shoreup their future needs, which should put upward pressure on prices. We expect a marketresponse in advance of expiry of the agreement, which is scheduled for year-end 2013.SeasonalityHistorically, the annual World Nuclear Association (WNA) Symposium has been viewedas the kick-off to the uranium contracting season and often correlates with an uptick inuranium transaction volumes and prices, following the softer summer ‘doldrums’ (seeExhibit 4). This year’s conference will be held September 12 – 14 in London, UK.Exhibit 4: Monthly Average Spot Price Changes (Jan-02-current; absolute terms, US$)$3.0$2.0$1.0$0.0-$1.0-$2.0-$3.00.1-0.10.21.01.70.9-0.7-0.6-2.5Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecSource: Raymond James Ltd., UxC0.72.50.7These restarts should benefituranium prices in the near-term,by reducing the perceivedlikelihood of Japanese inventorysellingWe expect most Japanese reactorsback online by 2017EThe Russian HEU Agreement, 13%of global supply in 2011A, ends in2013 – utilities will have to relymore heavily on traditionalsources to meet their needsUranium prices have historicallyrallied in the fallRaymond James Ltd. | 2200 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
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