The nuclear power industry took a huge hit last year, when Japan suffered the double disaster of earthquake and tsunami. Producing power via nuclear means became taboo and many analysts and investors considered the sector "dead money," as both citizens and policy makers debated the safety of the power source. However, despite nuclear power and uranium's current hated-state, the long-term outlook remains rosy for the power generator. For long-termed investors, it could offer a deep bargain in the commodities space.
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A Mired of Positive Factors
Last year's tsunami and resulting meltdown at TEPCO's Fukushima reactor set forth unprecedented changes across the world's nuclear sector. Japan begun phasing out the fuel source and as of this May, the nation shut down its last nuclear reactor. This marks the first time since the 1970s that the island nation has been nuclear power-free. Likewise, Germany has announced a complete phase-out of its nuclear plants by 2022. Other developed nations have been following suit. These phase-outs have had a negative impact on both uranium prices and nuclear sector equities.
However, things may be looking up for the sector. Rising nuclear plant construction across Emerging and Southeast Asia is putting a wrench in the supply-demand function of the fuel. Currently, there are 435 nuclear reactors operating. These plants consume about 190 million pounds worth of uranium each year. Yet, worldwide production is currently only around 150 million pounds. The remainder of that supply is the U.S.-Russian Highly Enriched Uranium (HEU) Purchase Agreement. That program is designed to dismantle Cold War-era nuclear missiles and use the warheads for reactor fuel.
However, the HEU program is scheduled to end in 2013. At the same time, the World Nuclear Energy Association shows that there are more than 60 new reactors currently under construction, 150 in planning stages and an additional 330 have been proposed. That certainly put pressures on uranium pricing.
Additionally, strong demand could come from an unlikely source: Japan. While the nation has upped its usage of LNG for power generation, many analysts predict that won't be enough. The nation received more than 30% of its power requirements from nuclear energy and the prospects of a hot, humid summer without air conditioning could be the catalyst needed to restart individual nuclear power plants. The World Economic Forum predicts that Nuclear energy will continue to play an important role in Japan's energy mix for the foreseeable future.
SEE: The Economic Reason Behind Nuclear Power
Picking up Some Bargains
With the world continuing to add reactor capacity at a rapid pace and supplies of the fuel already pressured, investors may want to consider the nuclear sector for a portfolio. The Market Vectors Uranium+Nuclear Energy ETF (ARCA:NLR) is still the go-to broad-based fund in the sector. The ETF tracks a basket of 22 different firms associated across the nuclear value chain. This includes nuclear-heavy utilities like Exelon (NYSE:EXC), uranium miners like Denison Mines (NYSE:DNN) as well as reactor builders like Mitsubishi Heavy Industries (OTCBB:MHVYF). Overall, the ETF has managed has underperformed its rival, the iShares S&P Global Nuclear Energy (Nasdaq:NUCL) by more than 4% this year.
With uranium prices set to potentially double over the few next years, investors may want to hone in on the opportunity in the miners. Industry leader Cameco (NYSE:CCJ) remains a beaten down value. Canada's recently signed deal to begin exporting uranium ore to China will allow Cameco to deliver more than 50 million pounds of uranium to China by 2025. Cameco's recent bidding war with Rio Tinto (NYSE:RIO) for Hathor Exploration, also highlights the continued need for new sources of supply. Junior miners like Uranium Energy Corp (NYSE:UEC) and Uranerz Energy (NYSE:URZ) could see their share prices rise as consolidation continues.
SEE: Building An All-ETF Portfolio
The Bottom Line
While the Fukushima disaster certainly changed the nuclear energy landscape in the short term, the long term picture continues to be rosy. Demand and power plant construction is continuing at a rapid pace, while supplies for uranium continue to dwindle. However, the sector remains in the bargain bin. For investors, now could be the time to strike, either through broad funds or miners like Uranium Resources (Nasdaq:URRE).
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.