Tuesday, July 24, 2012

Consolidation is Inevitable

The Nuclear Crisis in Japan on March 11, 2011 has in a way Provided enough fodder for The Industry which was Projected to Witness a surge in M&As. As Nuclear Projects Globally are Adopting ‘adjust and Improve’ Strategy Projects, The Inorganic mode will Gradually pick up...

Twenty five years after the Chernobyl disaster (Ukraine, April 26, 1986) and a month and a half after the Fukushima Daiiachi (Japan, March 11, 2011) nuclear crisis, the political and civil reactions globally have re-ignited the debate on nuclear concerns. Speaking strictly from an investment perspective, the nuclear debacle and the debate thereafter fuelled by extrapolation and sentiments have only helped add to the already existing volatility in the uranium industry. In a knee-jerk reaction to the aftermath of the nuclear crisis in Japan, the financial market’s view on the industry has turned negative with share price of miners such as Saskatoon (Saskatchewan, Canada) based Cameco Corporation (which accounts for approximately 16% of world production) registering a fall of 22.5% (between March 11, 2011 and April 25, 2011) and the NYSE listed Global X Uranium ETF declining almost the same, 22.4%, during the given time period.

However, while the industry is now set to trade primarily on news flow and not fundamentals and with the valuations eroding faster than ever, the state of affairs has given rise to new speculations and new possibilities opening doors for a lot more activities both in organic as well as inorganic modes of business. Nevertheless, given the equations in the industry dynamics (the speculation that investment in nuclear energy will decrease), where the free fall of the miners share price are yet to bottom out, takeover speculation are at an all time high. Statistics has it that the global M&A activity in 2011 is expected to total more than $3 trillion and consolidation in uranium space – as a fuel for the nuclear power industry – would certainly play a pivotal role.

At the same time, as Nomura International points out, the burgeoning construction of nuclear new-build in Asia and the concerns over fuel security to power these plants will in all probability increase the international merger and acquisition activity to ensure supplies of uranium. Estimates go on to suggest that around 200GW of nuclear power capacity are currently planned or under construction with India, Russia, China and South Korea as key drivers of uranium demand. What is to be noted at this juncture is the fact that by 2015 the global uranium mine production is projected to be pegged at approximately 86,393 tonne while the demand would increase to 91,719 tonne (a deficit of over 5300 tonne); and it is this growth in demand and the subsequent deficit that, for sure, will fuel growth competition for supplies. Though growth in uranium requirement is projected to witness a moderate growth of 1.6% annually between 2015 and 2030, growth in energy consumption may still accelerate depending upon the economic and population growth – the key determinants of the above mentioned global uranium consumption over the period to 2030. Apparently the brewing competition will play a vital role as far as consolidation in the industry is concerned. Amidst the fact that demand will slightly outstrip supply through 2015 taking prices to $80 per pound, it is clear that the requirements will have to be met through expansion of global uranium production, reasons enough as to why consolidation could be a possible way out.