Capital has been scarce in the junior natural resource sector for the past two years. Nowhere has this been more evident than in the Canadian uranium exploration sector. Financing for uranium exploration in 2011 and 2012 has been a small fraction of what it was in happier times; namely, 2005 through 2007. The global financial crisis, and a depressed natural resource sector, can explain some of it. However, when the aggregate annual financing in an economic segment goes from over $2.3 billion (all figures in Canadian dollars) down to $0.4 billion in the space of less than five years, a decrease of 82%, there is psychology involved.
From 2001 to 2007, the price of uranium increased from $7 per pound to $138 per pound on the spot market. There is a general consensus that the commodity was overbought, owing to participation from speculators, and that it should correct. What followed next was the global financial crisis, and a dramatic contraction of capital out of the global system. This may have caused the uranium price to overcorrect – down to $40 per pound by the first quarter of 2009 – however it did not seem to impact financing in this sector too badly. 2009 saw the largest capital inflow for uranium exploration in history: over $2.3 billion.
The price stayed in a range between $40 and $55 per pound until the third quarter of 2010, when the world finally seemed to realize that the fundamentals in the nuclear energy industry that prompted the 20-fold increase in the uranium price in the early part of the decade had not changed at all, but in fact had improved. The number of new projected reactor builds had increased, and all the existing builds were closer to being operational than three years prior. The uranium price escalated to $72 per pound, and seemed to be headed higher. That was when disaster struck in Japan. The earthquake and tsunami destroyed the Fukushima Dai-Ichi nuclear reactor complex in Japan on March 11, 2011. Suddenly, the price of uranium toppled, and capital fled this sector rapidly, not yet to return. Aggregate financing declined from $1.75 billion in 2010 to $0.94 billion in 2011 to $0.41 billion in 2012. See chart below.
Is the nuclear energy industry so negatively impacted by Fukushima so as to warrant this tremendous collapse? It seems unlikely, given that the number of proposed nuclear reactors builds is greater now than on March 10, 2011. Existing builds are now closer to operation than two years ago. The world has not rejected nuclear power, but embraced it even more tightly. There has been a short-term supply interruption, due to Japan’s decision, in an access of over-caution, to shut down all of their reactors in response to the Fukushima incident. The price of uranium has wallowed below $50 per pound for well over a year now, and “uncertainties” in the segment have kept capital away. The uncertainties refer to Japan’s decision to restart their reactors. There is nothing uncertain about that; the reactors will restart, and the Japanese government has stated as much publicly. The psychology has crept into political decisions as much as it has economic ones. Psychology is artificially keeping the uranium price depressed, and stopping capital from flowing into this sector. There will be a point of realization again, as in 2010, when the fundamentals can no longer be ignored.