The Labor Party has given the go ahead to sell uranium, and according to Merrill Lynch the timing is good. The Fukushima meltdown has certainly dented sentiment around uranium and only a fool would think it will have no effect, but energy remains the best one way bet in the global economy. In particular China’s demand will be extreme, which will have underpin demand — even if parts of Europe manage to reduce their dependence on nuclear. Merill makes the point that the spot price is going nowhere, but this is not a great indicator. Merrill likes Paladin and Extract:
The market in our view is heavily discounting timing and economic risk associated with new supply. M&A momentum is a leading indicator. We maintain our real long-term price of $55/lb = $63/lb nominal in 2017. Paladin Energy and Extract Resources (Buy rated) are our preferred sector exposure. Cameco and Uranium One kept at Neutral, Energy Resources of Australia stays Underperform.
Japan will also be restarting demand, according to Merrill. These are big jumps in forecast demand:
Only 9 of Japan’s 48 commercial reactors (excl. Fukushima Daiichi) remain online. Lack of clarity on the likely timing of restarts continues to hamper sentiment. Satisfactory results from stress tests and safety reviews plus declaration of cold shutdown at Fukushima (targeting year end) will be important turning points. Economy and Trade Ministry estimates highlight that a complete nuclear fleet shutdown would add up to US$40b/annum directly to Japan’s energy costs. Weak macro and a strong yen is compounding problems for Industry – we don’t see the current situation as sustainable through 2012. Our forecast capacity factor rebounds to 43% next year, 60% in 2013 (avg pre-Fukushima factor ~66%).
Merrill believes the structure of supply also points to higher prices, especially with the heavy dependence on Kazakhstan and the ageing of the Ranger and Rossing mines. The Japanese disaster may have created a buying opportunity, even if the negative sentiment, even fear, is real enough:
We remain constructive on underlying uranium fundamentals. Any reports of nuclear disenchantment globally (particularly in Europe) is gaining considerable air time at present but we believe growth rates are assured (albeit slower than pre-Fukushima).