Canada Uranium Bonds Tops as Nuclear Cold Turkey Seen Pipe Dream

  • Toronto-based uranium miner has returned 35% this year
  • China's thirst for electricity leads to 136 reactor proposals

Pragmatism is winning out over wishful thinking as demand for nuclear power comes roaring back from the Fukushima disaster, powering the bonds of Canadian uranium producers to top returns among their beleaguered commodity peers.

Uranium One Inc., the world’s third-largest uranium producer, is the best performer this year in the Bank of America Merrill Lynch U.S. High Yield Metals and Mining Index. The Toronto-headquartered firm, acquired in 2013 by Rosatom Corp., Russia’s state-owned nuclear firm, has returned 35 percent to investors this year. Cameco Corp., the largest uranium producer in Canada and second-largest in the world, has C$1.5 billion ($1.15 billion) worth of bonds all trading around or above par.

The price of the commodity is poised to jump in the next six to 12 months as China aggressively ramps up construction of nuclear reactors and utilities around the world renegotiate contracts with uranium producers, Rob Chang, a metals and mining research analyst at Cantor Fitzgerald LP, said by phone from Toronto.

"Everyone in the industry knows there’s not enough being produced to satisfy upcoming demand," Chang said.

‘Gigantic Increase’

The anticipated rebound will be driven in part by a paucity of supply as countries idled their nuclear reactors and looked for alternative energy sources following the 2011 earthquake and tsunami which destroyed Japan’s Fukushima reactor, claiming more than 15,000 lives. Nearly five years later, no country has gone "cold turkey" on nuclear, even Japan has started up its reactors again, he said.

"It’s a gigantic increase in consumption led by China but many other countries as well," he said. "Even the Middle East are building reactors. Oil countries are even building reactors, so that’s pretty significant."

China has 29 operable nuclear reactors and 22 under construction, 43 planned and 136 proposed, according World Nuclear Association data on Nov. 1. Japan has 43 operable reactors, 3 reactors under construction, 9 planned and 3 proposed. Globally, are 324 reactors proposed, compared with 301 a year ago.

(View a map of proposed nuclear reactors around the world.)

Price Forecast

Uranium annual consumption is currently 179 million pounds globally and annual mine production is about 152 million pounds, with the shortfall currently covered by stockpiled uranium from the post-Fukushima reactor shutdown, Chang said. Demand is expected to grow to 228 million pounds by 2020, he said.

Producers with contracts supplying nuclear power plants currently get around $50 per pound for their uranium, compared with about $35 on the market, which allows them to break even or make a slight profit, Chang said.

As utility companies renegotiate four- to five-year supply contracts with producers, prices could rise to $70 per pound by 2020 after the industry burns through stockpiles, David Sadowski, an equity analyst at Raymond James Ltd., said by phone from Vancouver.

Cameco, rated investment grade at BBB+ by Standard & Poor’s, has relatively stable profitability and credit ratios, analyst Jarrett Bilous wrote in the most recent rating decision.

Kazakhstan Risk

The majority of Uranium One’s operations are located in Kazakhstan, said Bilous. Standard & Poor’s analyst rates the company B+, four notches below investment grade, which implies an ability to meet debt obligations but with more vulnerability to non-payment.

The company is considered a government-related entity with a moderate amount of government support, which gives Uranium One one higher credit-ranking notch than if it were rated on its own, he said by phone from Toronto. He also highlighted the company’s improved operating efficiency and strong cash-cost position as a positive credit factor in the last rating review.

However, the company has a weak business-risk profile due to limited operating diversity, high exposure to uranium-price volatility and Kazakhstan country risk.

‘Right Moment’

The company’s high leverage -- about $900 million in outstanding bonds, according to data compiled by Bloomberg -- and cash flow subordinate to the debt holders of their joint-venture partners also weigh on the rating, Bilous said.

"We are continuously monitoring our portfolio worldwide and attempting to mitigate our risks," Feroz Ashraf, chief executive officer at Uranium One, said in an email.

Institutional investors are starting to become more knowledgeable about uranium companies and “waiting for the right moment to deploy,” Chang of Cantor Fitzgerald said. “The question for many people is a matter of when.”

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