Sunday, March 13, 2011

The Nuclear Tsunami - Uranium Short Opportunity

The massive 8.9 magnitude earthquake and tsunami that struck Japan on Friday dealt a severe blow to the nuclear industry in Japan. Four nuclear power plants have been shut down, and at least one reactor is at risk of a full blown meltdown. Radiation has been leaking and the backup cooling systems are no longer operational. TEPCO, the nuclear operator, has resorted to pumping seawater as a last ditch effort to keep some of their reactors cooled. Over 200,000 people have been evacuated and a number of people have been exposed to harmful radiation levels.

The International Atomic Energy Agency (IAEA) has classified the incident as a 4 out of 7. However the potential still exists for that classification to rise. For comparison purposes, Three Mile Island (1979) was a 5 and Chernobyl (1986) was a 7.

I wrote on Friday about the impact of the plant shutdowns on global natural gas prices (The Natural Gas Tsunami). Japan's lost nuclear generation will have to made up primarily with natural gas. Since Japan imports virtually all of its natural gas, the demand for LNG and the price of global natural gas should both rise. Note that the one exception to this is US natural gas prices since the US imports very little LNG and has no existing capability to export it.

But what about the direct impact on the nuclear industry and on uranium itself?

For those investing in Japan, clearly TEPCO would be a company to avoid.

But the nuclear disaster in Japan also has some questioning the safety of nuclear generation here at home. There are currently 104 reactors operating in the US. And while no new plants have been commissioned in more than 30 years, there are currently 24 new plants in various stages of planning with the first expected to come on line in 2018. At a very minimum, these events will force a closer look at the design and safety of these new plants, as well as increased scrutiny toward all existing plants in the US. Sen. Joe Lieberman has already responded by saying that he believes the US should halt permits for new nuclear power plants until they can determine what went wrong in Japan.

Exelon (EXC) and Entergy (ETR) are the two largest nuclear operators in the US. While each of these stocks have shown decent gains year-to-date, they're both still trading near the lower end of multi-year ranges.

In the short-term these could be decent shorts for aggressive sellers. However, at first glance valuations for both EXC and ETR appear fairly reasonable vs. the S&P 500. Their p/e's are both between 10-11 and they're each yielding between 4.5-5.0%. I think each of these name could see a 5-10% drop from current levels, but I wouldn't necessarily be looking for a lot more out of the trade.

I like the idea of shorting the nuclear operators, but the better trade in my opinion would be shorting the uranium miners and/or uranium itself.

On Friday I sold two of my uranium holdings, both at small losses. I tweeted those trades at the time. The charts for most uranium companies had already begun weakening prior to the earthquake, with many already breaking below key support levels.

The price of uranium started coming off its highs in February on reports of several large sell orders after rising from about $40/lb to almost $75/lb in less than a year. Then in early March the US government announced it was planning to sell 4.2 million lbs of uranium from government stockpiles between 2011-2013. The spot price was last reported at $66.50/lb.

With the potential upside already likely capped in the short term, the nuclear shut downs in Japan now make a fairly strong case for a further drop in the price of both uranium and uranium miners. However Friday's reaction was interesting. Most of the uranium miners closed the day well off their lows with several names actually posting gains for the session. I think this provides an opportunity to short some of these companies with the potential for significant downside in price.

Some names to consider would be:

Cameco (CCJ, CCO.TO)
Paladin (PDN.TO)
Denison (DNN, DML.TO)
Uranium One (UUU.TO)
Ur-Energy (URE.TO)
Global X Uranium ETF (URA)

No comments:

Post a Comment