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Why uranium stocks are jumping today - and what it means for the long term

A helicopter flies past Japan's quake-damaked Fukushima Daiichi No.1 nuclear reactor

KIM KYUNG-HOON/Kim Kyung-Hoon/Reuters

Uranium stocks are up sharply today as investors react to news that brings Japan closer to restarting nuclear reactors left idled after the Fukushima disaster in 2011.

But analysts are warning that a return to lasting bullish sentiment for uranium may still be a way off.

Japan's nuclear regulator, the Nuclear Regulatory Authority (NRA), has confirmed the safety of two reactors at the Sendai nuclear power plant in northern Japan. The reactors were on a shortlist for priority screening due to the local utility's willingness towards implementing safety measures that are among the most strict in the world.

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"Today's safety approval marks a major step towards eventual restarts. It is probably the most significant since formation of the NRA itself," commented Dundee Securities analyst David Talbot in a note.

But while the news is positive for uranium stocks today, the uranium price may be slower to react. "Only when a number of reactors in Japan actually get back to consuming uranium, do we expect the nuclear industry to resume contracting and sourcing uranium," said Mr. Talbot. "This would be expected to drive uranium prices higher."

Although many analysts over the last few years have expressed optimism that uranium prices are due for a recovery, investors have been left waiting. Some analysts in recent weeks lowered their short- to medium-term forecasts for the fuel source, citing an ongoing uranium supply glut that's unlikely to be resolved until more reactors come online. Morgan Stanley, for instance, reduced its 2014 price forecast earlier this month by 21 per cent to $30.81 a pound, and slashed its 2015 estimate by 21 per cent to $36.

Uranium prices have fallen about 60 per cent since the meltdown at the Fukushima plant in March 2011, including a continued slide this year. According to Ux Consulting Co., the uranium price dropped to $28 (U.S.) a pound in mid-May, the lowest since May 2005.

Japan's federal government is pro-nuclear, and Prime Minister Abe's Cabinet approved a Basic Energy Plan in April that reaffirms the country's commitment to nuclear energy as an electricity source.

But this week's approval from the Nuclear Regulatory Authority does not approve their restart; its job is to check whether reactors meet safety requirements. The final green light must come from local governments. The NRA also needs to undergo a month of public consultation before granting final approval.

"We believe that 13 of the first 19 reactors under application to the NRA have some support, and ultimately that two-thirds of the 48 idled reactors could return to operation. Timing remains unknown. But local approvals may prove to be one of the most difficult hurdles yet. With today's news expect a new round of anti-nuclear protests," Mr. Talbot said.

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Cantor Fitzgerald analyst Rob Chang believes the two Sendai nuclear reactors will become operational by the end of 2014 or early 2015. "While in and of itself this specific set of restarts will not provide a meaningful change to the global supply and demand picture, the return to nuclear electricity for what was once the world's third-largest consumer of uranium is an important milestone that many have been looking for," Mr. Chang said in a note. He notes that the current spot price for uranium is well below the marginal cost of production of $40.

In early afternoon trading, Cameco shares were up 3.2 per cent on the TSX, Denison Mines was up 2.2 per cent, and Paladin Energy was up 9.3 per cent.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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