How Japan’s Nuclear Disaster has Affected Global Sentiment

Eric Fry Reporting from Laguna Beach, California... Chris Mayer, editor of Mayer's Special Situations, shared this bit of investment wisdom with his subscribers yesterday: "Charlie Munger, the long-time Vice Chairman of Berkshire Hathaway, says there are three buckets where investment ideas go: 'Yes,' 'No' and 'Too Hard.' I think uranium is too hard." We would not quarrel with that logic; and we certainly would not quarrel with Chris's caution. As an early, and indefatigable, bull on uranium, Chris led his subscribers to some very large gains in the sector. After yesterday's selloff, some of those gains were much smaller than they had been. Nevertheless, Chris told his subscribers to "hit the bid" on two of the uranium plays he had recommended. "I think we should sell our two uranium holdings," Chris wrote. "We'll book a 73% gain on Kalahari Minerals (KAH:lsx) and a 10% gain on Paladin Energy (PDN:tsx; PALAF:pink sheets). The latter is down 23% today. Once, we were up 70% on the name. So this is a disappointment. But Kalahari is a very nice win for a stock we held little more than a year." Uranium is "too hard" indeed. On the other hand, nothing is very easy these days. Following the Nikkei's vertical plunge during the last two days, most stock markets around the globe also posted minus signs. From the highs of March 11 - the day the 9.0 quake struck - to the lows of today, Japan's Nikkei Index plunged more than 20%. The would-be buyers of Japanese stocks apparently decided that widespread devastation and smoldering nuclear power plants are not bullish phenomena. Following the Nikkei's example, the MSCI EAFE Index of international stocks dropped 7% during the last three trading sessions and erased its gains for the year-to-date. Here in the States, stocks are also wobbling. But buying interest seems to await every selloff. On Monday morning, the Dow Jones Industrial Average sliced through 12,000 immediately after the opening bell and fell as much as 140 points. But as the lunchtime hour was drawing to a close - about the time the third martinis were making their way to the lunch tables - investors regained their bravado. No tsunami carnage or atomic plumes were going to get in the way of their "Buy" orders! Nosirree! And no Middle East civil wars were either. After all, Warren Buffet bought Lubrizol. That had to count for something, right? By day's end, the Dow had trimmed its losses to a mere 51 points, while nearly reclaiming the 12,000 mark. In this morning's trading session, the Dow is attempting an encore. After tumbling nearly 300 points at the opening bell, the Dow has shaved its losses to only 150 points (as of this moment). Even so, the NASDAQ Composite Index has slipped into the loss column for the year-to-date, while the Dow and S&P 500 are flirting with a similar fate. Tomorrow is another day, of course. But tomorrow's news stories probably won't look dramatically different from today's. One possible exception may be the news stories circulating about the nuclear power industry. According to today's headlines, the post-quake crisis at several Japanese reactors is a "Three Mile Island event" that will stop the growth of nuclear power dead in its tracks. A gaggle of government officials around the world are saying as much...and we take them at their word, sort of. Obviously, the unfolding nuclear tragedy in Japan is not a non- event...as the harrowing volatility in global stock markets attests. The uranium sector, in particular, is in full meltdown mode: The ISE- CCM Global Uranium Stock Index has plummeted 27% during the last week. The price of uranium itself ("U308") is down a similar amount. Not a good week for the uranium bulls. But just maybe, tomorrow's headlines about the fate of nuclear power will not resemble today's. Just maybe, tomorrow's headlines will be less bearish. Our respected colleague, Chris Mayer, is not optimistic. "The nuclear power renaissance is dead," he says flatly in the column below. Chris makes a compelling argument. And it almost never pays to disagree with the man (which is why we almost never do). But we suspect that nuclear power will live to fight another day...and will do so within an "investable timeframe." As regular readers of The Daily Reckoning may recall, your editor named uranium as his "Trade of the Decade." Two months ago, this call looked brilliant (or lucky). Today, not so much. Two months ago, uranium and uranium stocks were both sitting atop plump 50% gains for the decade- to-date. But those gains have shriveled to single digits. So where to from here? Admittedly, given the crisis in Japan, uranium might not be the "Trade of 2011." But we think uranium investments still have a solid shot at performing well throughout the rest of the decade. In other words, we'll keep dancin' with the one who brung us - not just for sentimental reasons, but for stone-cold economic reasons. Environmental disasters notwithstanding, nuclear power remains an extremely competitive and compelling alternative to fossil-fuel-powered electricity generation. The opponents of nuclear power tend to portray the contrast between nukes and hydrocarbon-generated electricity as a choice between adopting a rabid hyena or a Golden Retriever puppy. But the contrast is not quite that extreme or simplistic. A more accurate metaphor might be choosing between sleeping under a guillotine blade every night or sleeping in an airport smoking lounge. As long as the blade never falls, that's a much better - and healthier - place to sleep. That's the nuclear industry's critical challenge: preventing that blade from falling, no matter what. The newest nuclear technologies purport to achieve exactly that. Meanwhile, the world's coal-fired power plants are continuously converting the earth's atmosphere into a smoking lounge. This reality will not change, which is one very big reason why the demise of nuclear power may have been greatly exaggerated. Nuclear power has played - and continues to play - an essential role in worldwide power generation. More to the point of this discussion, nuclear power's role is growing most rapidly in the economies of the world that are growing most rapidly. The Fukushima disaster won't change that trend. To be sure, the world's newfound anxieties about nuclear power are probably not nothing; but they may not be very much of anything. For starters, many of the "concerned" individuals who are voicing anti-nuke viewpoints are individuals who happen to have an additional agenda or two in their hip pockets. Many of these individuals are either members of an opposition party in their particular country or are members of some group that has long opposed nuclear power. In the midst of the crisis, no one wishes to oppose these dissident voices. But once the crisis passes, the dissident voices may have to yell a little louder if they wish to be heard...and these voices might have to yell really, really loudly if the price of crude oil surges toward $150 or $200 a barrel. Secondly, many of the folks who are issuing the harshest anti-nuke remarks reside in countries like Germany and the US that were already hostile to nuclear power. The map below, courtesy of the target="_blank">

So if you are an investor in uranium, do you really care that Germany might not renew some nuclear power licenses or that Switzerland will find a new way to stall construction of three new nuclear plants?
Even in the Developed World, the news for the nuclear industry is not all bad. At the very same moment that the Swiss and the Germans were pandering to their publics, the French, Spanish and Italians were promising full-speed ahead on their nuclear power programs.

"France will continue to rely on nuclear power," Bloomberg News reports. "Spain, which is extending the life of existing plants, said Fukushima won't hold back its nuclear policy. Italy's environment minister said the earthquake won't make the country reconsider to build new plants."

"We can't switch to renewables overnight," says French Environment Minister Nathalie Kosciusko-Morizet said. "For the foreseeable future, we will need nuclear."

So will the rest of the world. Net-net, the long-term prognosis for nuclear power may not be as grim as the near-term headlines suggest.

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The Daily Reckoning Presents Japan’s “Three Mile Island”

Chris Mayer

Japan's nuclear disaster is tragic on many levels. My focus here, though, will be on what it means for uranium investments and the world's energy markets.

The main worry is that the situation in Japan chills the industry in the same way Three Mile Island did in 1979. Will political pressures quash the nuclear renaissance? It's too early to know for sure how this will play out, but we can make some guesses.

First, some context...

Japan's disaster affected at least six nuclear reactors. In total, 11 reactors in Japan have had emergency shutdowns and will be offline for months. The focus right now is on the nuclear reactors at a 40-year-old power plant that are experiencing partial meltdowns. These reactors are at the Fukushima Daiichi power plant, run by Tokyo Electric Power Co. (TEPCO). There are six reactors in total on this site, ranging from 35 to 40 years old. The number 1 reactor is the second oldest in Japan and is 40 years old.

It's not certain how much radiation is escaping from the plant, but clearly, the news is going from bad to worse.

The shutdown of these reactors removes about one quarter of Japan's total nuclear generating capacity and 4% of its total electrical generating capacity. For TEPCO, the Fukushima site is about half of its nuclear capacity and about one-third of its total capacity.

To replace its lost nuclear power, TEPCO will likely make up the difference by importing more liquefied natural gas (LNG) and oil. This could create something of a shock in the energy markets, though it is hard to say. Yes, Japan has to replace lost energy sources. But it will have less demand as factories close and as economic activity grinds to a halt in some regions. As it is, Japan is the world's third-largest oil importer and second-largest LNG importer. In addition to LNG and oil, Japan will likely tap the coal markets to help make up the gap.

Then, too, there are political wild cards. If Japan orders its existing reactor fleet to shut down temporarily, the impact on global energy markets will be that much larger.

The political wild cards are the most worrisome thing for uranium investors - and not only in Japan. It didn't take long before a US politician - in this case, Rep. Ed Markey (D-MA.) - warned of "another Chernobyl" and predicted "the same thing could happen here." He called for an immediate suspension of licensing procedures for the new AP1000 reactors that have been crawling their way through the regulatory process for seven years.

Of course, the US is not the focus of the uranium story. The US hasn't built a new nuclear plant since 1979, after the Three Mile Island disaster. Even so, old reactors supply 20% of US electricity.

In Europe, too, opponents of nuclear power jumped on the issue. Germany's Chancellor Angela Merkel called for an immediate safety inspection of the country's 17 nuclear plants. And opponents called for Germany to abandon plans to extend the lives of 10 European reactors. They also wanted Germany to close its oldest plants. European regulators are supposed to meet early this week in Brussels.

Still, two-thirds of the 324 proposed new reactors will come from outside Europe or the US. The uranium story is mainly an Asian story. China, Vietnam and Thailand have over 100 nuclear plants on the drawing boards. What they do will mean a lot as far as the nuclear renaissance is concerned.

Already, Thailand's prime minister said that Japan's incident would "impact the decision of whether to build nuclear plants in Thailand." China, however, reaffirmed its commitments. But Asian power plants had not advanced smoothly, even before this whole disaster happened. About a year ago, Indonesia postponed its first nuclear plant after protests from villagers.

So this is where we are.

One of the great risks anyone investing in uranium takes on - the risk that another catastrophe sets the industry back - has finally unsheathed its sword.

How much will facts matter in the debate about nuclear power?

The fact is that all energy sources have risks, as The Wall Street Journal editorial column points out today. There are rig explosions, tanker spills and mining accidents. Still, nuclear has the most devastating consequences of error.

William Tucker outlines more facts in a column entitled, "Japan Does Not Face Another Chernobyl." He points out, "You can't have a 'runaway reactor,' nor can a reactor explode like a nuclear bomb. A commercial reactor is to a bomb what Vaseline is to napalm. Although both are made from petroleum jelly, only one of them has potentially explosive material."

He follows with some technical explanations about how new reactors do not share the design flaws of older reactors. His conclusion:

"What the Japanese earthquake has proved is that even the oldest containment structures can withstand the impact of one of the largest earthquakes in recorded history. The problem has been with the electrical pumps required to operate the cooling system. It would be tragic if the result of the Japanese accident were to prevent development of Generation III reactors, which eliminate this design flaw."

Still, I wonder how much facts will matter in this case. How much did logic and reason dictate what happened after the BP Horizon oil spill? The US government banned all drilling for a time. It didn't matter how safe your rig was. And a de facto moratorium still exists, with new drilling permits incredibly difficult to come by. Why would it be different with nuclear power?

I don't expect sudden enlightenment on the part of the public or politicians. I expect they will do what is easy and what plays well on TV. The easy thing to do is to quash development of new reactors, one way or another.

As I say, it's too early to know for sure how this will play out. Your guess is probably as good as mine. My guess is this: The nuclear renaissance is dead.

I think we should sell our two uranium holdings. We'll book a 73% gain on Kalahari Minerals (London:KAH) and a 10% gain on Paladin Energy (Toronto:PDN). The latter is down 23% today. Once, we were up 70% on the name. So this is a disappointment. But Kalahari is a very nice win for a stock we held little more than a year.

At the moment, I'm undecided on Cameco (NYSE:CCJ), which I recommended early last year to the subscribers of Capital & Crisis. It's the biggest and best-capitalized company in the uranium sector. We'll still need uranium to feed existing reactors. And not all planned reactors will die on the drawing boards. If you hold anything in uranium, this would be the one to hold.

I may be completely wrong about how the uranium story plays out. Maybe people look past Japan and continue to merrily build nuclear plants around the world. Somehow, I don't think that will happen. In any case, it seems prudent to book some gains and move on to easier ideas.

As Charlie Munger likes to say, there are three buckets where investment ideas go: "Yes," "No" and "Too Hard." I think uranium is too hard.

Regards,

Chris Mayer,
for The Daily Reckoning