IFR Asia 815 - September 28, 2013 | By Christopher Langner
China’s push to secure ample uranium supply is a boon for investors that buy bonds fuelling growth of the nation’s nuclear industry, even when the seller is not a highly rated credit.
That was the case last week when China General Nuclear Power sold a five-year dollar bond largely to develop the Husab Uranium Mine in Namibia, the third largest uranium-only mine in the world. The mine is jointly owned by CGNP, through a subsidiary, and Namibian government-owned Epangelo Mining.
The Reg S-only offering was priced at 220bp over the five-year Treasury yield on Friday.
China is under pressure to clean up its notoriously smoggy air, while continuing to meet its growing power needs. Increasingly, China is turning to nuclear power as the beat clean-fuel alternative to fuel the ongoing expansion of its economy.
The country had long relied on coal-fired power plants for energy, albeit at a cost to air quality. In 2007, China surpassed the US to become the world’s biggest emitter of greenhouse gases. It also had seven of the 10 most polluted cities in the world, according to the Asian Development Bank.
The public took notice and was not happy.
In response, China boosted clean-energy production, but efforts fell short of meeting its power needs, which continued to grow at a fast clip. Power consumption rose 8.8% year on year last month.
While China is now the world’s biggest producer of clean hydroelectric power, it still relies on fossil fuels, mainly coal, for roughly 80% of its power generation.
As a consequence, China turned to nuclear power. Last year, the country had 14.8 gigawatts of installed nuclear-generation capacity, enough to meet just 1.9% of China’s power needs, according to the National Development and Reform Commission.
However, the NDRC said China planned to increase that capacity by 20% this year alone, adding 3.24 gigawatts to the grid. The NDRC also expects to approve the construction of nine new nuclear power plants. By 2020, the country intended to see its nuclear capacity increased fourfold, it said. Weak issuer
At first blush, CGNP’s offering does not look like a dream deal. For one thing, not all investors are comfortable with the future of nuclear energy, partly due to concerns related to the disaster at Japan’s Fukushima nuclear power plant following the March 2011 earthquake and tsunami. Others have expressed concerns about potential military uses of uranium.
Also, on a standalone basis, the issuer only has a Ba2 rating from Moody’s, below investment grade. China Uranium, CGNP’s uranium mining and trading subsidiary, does not fare any better: “Given limited internal cash generation and the large development capex, China Uranium’s standalone financial profile is weak,” Fitch said.
A portfolio manager agreed: “They have huge capital expenditure needs. The sheer scale of what they are doing is off-putting.”
Last week’s bond offering, however, scored better. For deal purposes, Moody’s rated the company A3 and Fitch rated it Single A. Moody’s said its reason for the upgrade was CGNP’s “strategic importance to China’s nuclear energy policy”.
In other words, the voracious appetite for nuclear power can give investors confidence Beijing will support the funding needs of companies in the sector. The Chinese Government’s implicit backing is the reason these bonds were actually very safe, the portfolio manager said. “The sector is key for the country,” he said.
Indeed, CGNP is one company every analyst in Asia expects will receive full support from the central government. They said this was worth more than pristine cash flows. Specifically, it is because the planned nuclear power plants will need uranium, lots of it.
That is where international bond investors come in. Proceeds from CGNP’s dollar bonds will be used for mixed purposes, but the understanding among investors is that the deal will fund the development of the Husab mine in Namibia.
In its presentation to investors, CGNP said it had secured enough uranium production from various sources to fuel 30 plants for 30 years.
However, the supply will not be enough because China already has nearly 20 plants in operation with some 29 under construction. CGNP will have to buy and develop more uranium mines to meet this growing need.
Much of that growth will be funded with bonds. Since China wants to ensure it has a steady supply of uranium, it is widely expected to ensure that bondholders get their coupon and principal payments safely.
Given China’s growing need for clean energy, nuclear bonds from the country may, after all, be one of the safest investments in Asia.
PEN Price at posting:
2.7¢ Sentiment: Hold Disclosure: Held
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