Atomic Resurgence

The Daily Reckoning PRESENTS: Three large-scale factors have turned the
tide in favor of nuclear energy: geopolitics, global warming and
developing world growth. In the below essay, Justice Litle explores all of
these factors - and more...

A HEALTHY GLOW
by Justice Litle

"The proposed reactors will be of an improved and simplified design,
pre-approved, more amenable to maintenance and operation than the
first-generation reactors designed before 1980... Some studies estimate
that more than 1,000 additional [reactors] will be needed in the next half
century."
 - Retired Los Alamos scientists William R. Stratton and Donald F.
Peterson
"You don't need a weatherman to know which way the wind blows."

- Bob Dylan

Cigar Lake, in Canada's Saskatchewan province, is home to one of the
richest uranium ore bodies on the planet. At 232 million pounds of proven
and probable reserves, the economic value of the find is nearly $14
billion by recent spot price.

Cigar Lake production was expected to save the day for hungry nuclear
power utilities - 103 of which operate in the United States. The plan was
to have 7-8 million pounds of production online by 2008, with as much as
18 million pounds a year not long after. Cigar Lake was expected to supply
50% of all new uranium production within five years.

Then the walls caved in. Literally.

Concrete-reinforced steel doors were in place to hold back the lake, but
an underground rockfall caused the doors to give way. Water rushed in at
1,500 cubic meters an hour; in due time, the mine was flooded.

The flood is a costly setback for Cameco (CCJ: NYSE), 50% joint owner of
the Cigar Lake mine, and a major headache for uranium buyers in general.
Kevin Bambrough of Sprott Asset Management believes American utilities
will be particularly squeezed.

"The delays... will create a sense of urgency for the next few years,"
Bambrough said. "It's almost the equivalent of the oil industry losing
Saudi Arabia."

Uranium prices are surveyed and quoted on a weekly basis by various
industry watchers. The recent move from $56 to $60 a pound was "the
largest weekly increase on record," according to Eric Webb of Ux
Consulting. Long-term forecasts of $75 and even $100 a pound now appear
justified; uranium would have to trade above $111 a pound to break its
inflation-adjusted highs from 1978.

This is more than just subterranean cave-in blues: The uranium spot price hasn't seen a down month since 2001. For years now, uranium producers have met just 60% of total annual demand - the other 40% coming from government
stockpiles and decommissioned nuclear warheads. This can go on for only so long.

The tightness of supply comes at a time of atomic resurgence. Three
large-scale factors have turned the tide in favor of nuclear energy:
geopolitics, global warming and developing world growth.

First, geopolitics: The unpleasant consequences of fossil fuel addiction
splash across the headlines every week. Mahmoud Ahmadinejad predicts the
collapse of Israel, the U.K. and the United States... Hugo Chavez vows to
defeat "the most powerful empire on Earth"... Vladimir Putin waves off
brutal assassinations while cranking up the Cold War rhetoric... and so
on.

All this and more is fueled by an unquenchable thirst for oil and gas.
Nuclear power may not offer a direct path to energy independence - we
can't put uranium rods in our gas tanks, as Peter Tertzakian observes -
but it is a big step in the right direction. (And if hybrid car sales
continue to skyrocket, drivers could conceivably "plug in" at night, when
traditional electricity demand is low.)

Second, global warming: The debate rages on; many still agree with Sen.
James Inhofe (R-Okla.), who called global warming the "greatest hoax ever
perpetrated on the American people." Yet political ideologies aside,
mounting evidence is getting harder to ignore. While China, North America
and Australia are endowed with huge deposits of thermal coal, the
consequences of accelerated coal use could be dire. (Air pollution factors
in too; filters in Lake Tahoe, your editor's beloved backyard, are already
clogging up with Chinese gunk.)

Whether the public accepts global warming or not, Western governments
surely do. The United States was arguably the last holdout, and with Sen.
Barbara Boxer (D-Calif.) succeeding Inhofe as chair of the Environment and
Public Works Committee, that domino has clearly fallen. Politics aside,
this is another feather in uranium's cap: Regime change in Washington,
combined with the urgent need to "do something" about global warming,
works in favor of nuclear energy.

The Democrats would no doubt like to rely more on greener solutions, like
solar and wind, but those industries are still too small to pack a
meaningful wallop. The green technologies of tomorrow hold great promise,
but they have not yet demonstrated an ability to perform at scale. Nuclear
power has already demonstrated its safety, scalability and 90%-plus
reliability, with next-gen technology like pebble bed reactors offering
improved maintenance and safety to boot.

The final factor driving a nuclear renaissance is developing world growth.
The historical correlation between energy use and economic growth is high;
when rapid industrialization kicks in for a developing world country, the
energy consumption path goes parabolic. Asia knows that relying on fossil
fuels to drive the next stage is a mug's game, for geopolitical,
environmental and financial reasons. Besides, there will already be enough
headaches as we try to fill up all those cars (hybrid diesels anyone?) and
enough pollution to deal with aside from new power plants. Fossil fuel use
is going to rise dramatically no matter what; nuclear power will help take
an edge off that pain. Let a hundred reactors bloom.

So where will the uranium to fuel a nuclear resurgence come from? With
government stockpiles covering 40% of present demand, the question looms
large.

For one, Cameco is confident that Cigar Lake will eventually be up and
running. The costs will be high, but that uranium is too valuable not to
be accessed - and Cameco should recoup its recovery costs and more in the long run.

An important future source could be Australia, home to 38% of the world's
low-cost uranium reserves. Surprisingly, for a country so rich in the
stuff, Australia does not operate a single nuclear power plant - yet. The
"lucky country" still relies on coal for 80% of electricity needs. Yet a
government report recommends adding nuclear to Australia's energy mix to
lower greenhouse gas emissions, and Prime Minister John Howard recently
called the rise of nuclear power in Australia "inevitable."

A commissioned study argues Australia could quadruple its export profits
by enriching and fabricating uranium at home, rather than shipping it
abroad unprocessed. Local environmentalists may protest against expanded
uranium trade, but friendly pressure from the United States could win
out... especially when combined with lucrative economic incentive.

Another country keen on nuclear power is Russia. Home to an estimated 15%
of world uranium reserves, Russia could yet go from exporter to importer
in the coming years. The official plan is to dramatically expand nuclear
power's share of the Russian energy mix, to 25% by 2020. Russian uranium
production will have to grow approximately 433%, from 3,000 tons a year to
16,000 tons, if domestic supply is to do the job.

On the positive side, existing government stockpiles of uranium can act as
a buffer against volatile demand. Construction costs make up the lion's
share of investment for a new plant, with ongoing fuel and maintenance
costs relatively small in comparison; the hitch is that a steady supply of
fuel - the uranium itself - should be locked up in advance, preferably via
ironclad contracts. This puts a lot of power in the hands of financiers,
who like to see a reasonably steady production stream before committing
funds. The financiers are thus relieved to know that governments are on
their side, with a willingness to act as swing supplier in the event of
temporary shortages. The U.S. government in particular is doing all it can
to get the nuclear resurgence jump-started, including making generous
offers of "regulatory insurance" to utilities who get the ball rolling.

All in all, the pieces are in place. The rise of safe, clean nuclear power
is in most everyone's best interest... except the petrocrats who want to
keep the world as addicted to fossil fuels as possible. Uranium producers
could have some very good years ahead.

Regards,

Justice Litle
for The Daily Reckoning

 

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