Twelve days ago, uranium equities were in free fall. Five days after Japan’s earthquake and tsunami, the leader of the uranium sector, Cameco (T.CCO), had lost 19% and would continue to drop all day to close almost 24% below its pre-Fukushima level. The price of uranium had fallen 27%. The world was suddenly full of nuclear physicists saying the reactors will blow, they won’t blow, it isn’t dangerous, but it could be deadly. Energy analysts were equally divergent: many proclaimed the end of the nuclear era, while others predicted a serious but short impact on the world’s view of nuclear power.
Moving ahead another six days, it seems like little has changed. On deeper inspection, though, things are quite different. Most importantly, the potential for a major catastrophe has decreased significantly. The Japanese are sparing no effort in their battle against overheating nuclear fuel and are oh-so-slowly being rewarded: one by one, the reactors are being cooled and contained. Fukushima is far from stable but, compared to that first week, there is now some confidence that we have averted a calamitous meltdown.
As most of us now know, there are six nuclear reactors at the Fukushima Daiichi plant. Three of those reactors – No. 4, 5 and 6 – were shut down when the earthquake hit, but the other three were in full operation. Reactors 1, 2 and 3 all turned themselves off when the ground started to shake, but then the tsunami wiped out the plant’s back-up diesel generators, leaving all six reactors unable to circulate the vital cooling water.
The six reactors then took turns grabbing headlines. In the first few days, one spectacular hydrogen explosion after another blew apart the buildings housing reactors 1, 2 and 3. A fire broke out in the spent fuel pool of reactor 4. Insufficient water left the fuel rods in the first three reactors exposed for various periods. Then the spent fuel pools at 5 and 6 started to heat up. Observers keep seeing white smoke emerge from the buildings. Workers keep being pulled back from their tasks because of radiation spikes. No one really knows whether any of the all-important containment vessels that seal each reactor off from the world are damaged.
From the available information, here is how things stand right now.
Reactor 1: The best-off of the three reactors that were operational when the quake hit. The core of the reactor is damaged (there has been some core meltdown), but it appears the containment vessel is intact. Controlling the temperature and pressure has been difficult, but the reactor is now considered relatively stable.
Reactor 2: TEPCO believes the containment vessel around reactor 2 was breached in the hydrogen explosion that blew the building apart. The breach cannot be a large gash, however, because the vessel still maintains high pressures. The core is also damaged. Water carrying high-level radiation is leaking from the reactor, the radiation either coming from the breach or from damaged vents and valves on the reactor.
Reactor 3: Currently the most concerning reactor at the plant, as water with high levels of radiation has flooded the turbine building. As with reactor 2, the radiation is either coming from a breach in the containment vessel or from broken valves and vents. If there is a breach, it must be small as the containment vessel is still holding pressure. Reactor 3 is also the only reactor at the plant that feeds on a combination of plutonium and uranium, a fuel known as MOX, which is considered more dangerous because plutonium accumulates more easily in the body.
Reactors 4-6: All considered stable. The only concern is the spent fuel pool at reactor 4, which is very full and might be damaged. At present it is stable and cooling slowly, but the threat there has not yet passed.
TEPCO workers are now working between a rock and a hard place. They have to keep pumping water into the reactors to keep the fuel rods covered, but they also need to pump out and safely contain the contaminated water that is seeping out of reactors 2 and 3. On Monday, that radioactive water had found its way into deep trenches that run around reactors 1, 2 and 3 carrying pipes and wiring. To complicate things, the condenser and storage tanks that are usually used for contaminated water are almost full.
They have restored power to much of the facility, though not all of the cooling circuits have been restarted because of damage or inaccessibility. From here, TEPCO faces a protracted battle to dry out the plant, restore power completely, and cool the whole thing down. That final step will take time – spent fuel rods take years to cool.
Some 70,000 people have been evacuated from a 20 km radius, while another 130,000 living within the next 10 km have been encouraged to leave because the region will not return to normalcy anytime soon. Authorities in Fukushima prefecture have screened almost 90,000 people for radiation exposure; of those, 98 tested above safety limits, but all were cleared once they removed their clothes and washed. Elevated levels of radiation have turned up in raw milk and 11 types of vegetables, while seven locations are under drinking water restrictions (six only concern infants).
More generally, the earthquake and tsunami have left 660,000 households without water and 209,000 without power. A quarter of a million people are displaced or homeless. The death toll has now climbed above 10,000, with more than 17,400 still missing.
What does it mean for uranium?
After absolutely tanking for three days, the price of uranium leveled off and then started to rebound. Showing unexpected resiliency, the spot price of a pound of U3O8 climbed from a low of $49.99 back up to $60. Most uranium equities followed suit, regaining on average a third of what they lost during the crisis’ early days.
These rebounds occurred despite a loud revival of anti-nuclear sentiments. In Germany, Chancellor Angela Merkel’s Christian Democrats lost power in an election in the country’s richest state, Baden-Wuerttemberg, in large part because of her pro-nuclear power stance (which she reversed following Fukushima). China’s nuclear power plans remain officially on hold. The public is scared, and rightfully so.
So why did uraniums rebound? Because the markets started responding to reason, rather than fear. Once a few days’ time had reduced the likelihood of a total catastrophe by just a bit, the markets decided that (1) nuclear power is safer, healthier and cleaner than coal-based energy, which is the only real alternative for large-scale baseload power generation in the rapidly developing parts of the world, and (2) the world will come to realize (1).
Marin was interviewed on BNN a few days into the Fukushima disaster, and his forecast was almost spot on (check it out here). He said the sector would take a major beating, but once the possibility of disaster abated slightly, the markets would step in to support uranium because the fundamentals remain strong. Recovery back to pre-Fukushima days would take a long time.
That is essentially what happened, though to be honest, the initial rebound was bigger than we foresaw, reflecting a globe with a slightly more developed understanding of nuclear power than it had even ten years ago. Nevertheless, the next part of Marin’s prognosis still holds. We do not think this is the start of a sustained climb in the uranium sector. Instead, we expect uranium prices and stocks to move sideways for some time. The world had become slightly more comfortable with nuclear power, but a scare like Fukushima will ignite a period of contemplation over safety standards for reactors and the use of nuclear power in general.
Much of the developed world – in particular Europe and the United States – will likely turn against nuclear power for a time. But the developed world barely matters when it comes to nuclear industry growth. It is the developing world that matters – 60 of the 65 reactors currently under construction are in the developing world, where governments are striving to connect millions of poor people to the electrical grid.
China alone is building 27 reactors, Russia is constructing 11, and India is building 5. Bulgaria, the Slovak Republic and Ukraine each have two reactors under construction. These countries need power, and they want to diversify their power sources as they build capacity, so they do not end up completely reliant on one commodity. Nuclear power figures prominently in their energy plans, and that will not change.
In addition, the nuclear industry’s safety record is actually pretty good. This is only the third serious accident in more than 65 years of nuclear power. No one died at Three Mile Island and for now the cost of life at Fukushima is limited (five people have died, in the hydrogen explosions and in a crane accident). Chernobyl was certainly deadly, but it was human error, not a fault in the system, that was to blame there.
By contrast, thousands of people lose their lives every year in the fossil fuel industry, in coal mine accidents, oil rig explosions, drilling mishaps, pipeline blasts, refinery fires, and tanker accidents, not to mention from a raft of illnesses caused by smog and soot.
The uranium sector has been dealt a major setback, but at its core the sector is still very strong. Even in the G7 world, nuclear power figures prominently in clean-energy plans and, while those plans may now be slowed, they will return unless there is another major accident. Uranium demand will still outstrip supply in the long term.
As for our subscribers, they had already recouped the initial investments on all their uranium equities, so every uranium holding held no downside risk while still carrying upside potential. It’s a formula we call “taking a Casey Free Ride” and – since we consider risk minimization the most important aspect of speculative investing – it’s something we do a lot.
During the first week of the Fukushima crisis, we updated our Alert Service subscribers regularly, letting them know what was happening to uranium and why, and most importantly what they should do about it. We are happy with how we played the sector before and during this major event.
