is uranium down for the count?, page-11

from PDN's report 2 days ago:

Dear Fellow Shareholders

It is fair to say that the 2010/11 financial year will be remembered forever within the uranium industry. The tragic earthquake and tsunami event in Japan in March stimulated considerable misinformation and led many to what, I believe, is inaccurate speculation about the future of nuclear power, much of which has largely since been rectified.

Whilst we are convinced that there is a solid future for continued growth in nuclear power and uranium demand, investors remain cautious. Other global economic uncertainties, particularly concerning the US and Europe, have depressed global stock markets. Accordingly, the market for uranium shares has suffered multiple blows. Tellingly the term price for uranium oxide has remained relatively stable over this period, however the spot price has retracted somewhat. I encourage you to study the
commentary in this Annual Report on Paladin's view of the current and future uranium market, to understand how this shapes the Company's strategic plans. Nevertheless, it has been recognised by the Paladin Board and management that for the time being we are operating in a different paradigm in terms of how the investment market perceives the uranium industry. On the other hand, both the emerging nuclear economies and the existing nuclear power markets (except Germany) have affirmed their commitment to nuclear power.

......I found it quite amazing that within the first week of the earthquake [in Japan], even though information was scarce, politicians were jumping to conclusions and backtracking on nuclear, antagonists were positioning and the frenzy fed by misinformation and fear started to roll out. The phobia that radioactivity, and generally all things nuclear, generates and has always been irrational
and during this whole episode little attention was given to what could be considered low level or even moderate level radioactive releases of little danger to humans.

It is incredible for me that this nuclear power plant event took so much of the news traffic overshadowing the huge catastrophe that had happened and I think, much to the shame of the infotainment industries we call "news", marginalising the death and utter destruction this force of nature bought upon this region.

It is with this backdrop that we have watched the extraordinary high profile developments being played
out at the Fukushima nuclear power plant where equally extraordinary efforts to stabilise these units are ongoing, it appears with some success. A sideshow has developed which, although understandable as this is the nature of nuclear, nevertheless had a highly distractive impact. The
media frenzy and stakeholder positioning that has developed feeding on hyperbole and imagination, with very little leadership or cool heads, is apparent on a global scale and has not helped the situation. The Japanese on the one hand are being embraced by the world in dealing with the earthquake calamity and, on the other hand, are being isolated with the ignorance and fear that is being exhibited
by many.

I must preface my remarks stating that I am not an expert in reactor technology and so my comments here will be at a high level. What I am able to say, however, is that the plant withstood forces way beyond its design specifications and its main failure was the inability to withstand massive water inundation, knocking out the auxiliary power generation needed for cooling purposes. Unlike 3 Mile
Island and Chernobyl this was not operator error but a consequence of a force of nature. The Japanese operators are doing a remarkable job and in all likelihood it appears that these units will be stabilised although damage could well be sustained to the fuel rods. The plant in question was one of the earliest built in Japan and even this has, as far as is known, withstood forces way beyond design specifications and containment of the main chamber appears to have withheld and maintained its integrity.

As this all settles down the big issue that will confront Japan and all other economies is to continue producing enough electricity which is the foundation of economic wellbeing. The energy strategists of Japan, many years ago, made the decision that nuclear is essential and it will remain so when considered in terms of environmental, technological, safety and economic grounds. Renewables are
out of the question when it comes to baseload power and gas is already overloaded as the key offset to coal. It is my belief that Japan, as for all the nuclear industry, will learn from this, improve and move on. There are lessons to be learnt and this will further improve what is one of the safest industries in the world.

I come back to my airline industry analogy. With all the emotive fear about flying (which has some parallel to the phobia some have with nuclear) in the end, even if you have a serious airline crash or even several crashes at once, this will not stop the airline industry - it will learn, improve and move on - it will not go back to sailing ships for transport or dream of hot air balloons as being alternatives. The parallels in terms of managing risks are all there for us to see.

This leads me to questions of the nuclear industry outlook. I firmly believe that the outlook remains positive. The 440 reactors that exist today will continue to deliver electricity at optimal levels, the 60 odd reactors under construction will be built and those on schedule for construction starts, particularly those in the emerging nuclear economies [such as China, India and the UAE] along with Russia and Korea, will remain.

The peripheral players in all this, particularly with regard to new builds, are the US and Europe. The UK will posture a bit, *Germany will posture but there is no alternative - nuclear is in effect one of the safest industries in the world and will remain so and it is much needed and essential to assist with the massive amounts of new electricity growth that will be required. In terms of environmental performance, technological capability in delivering electricity, safety records and on economic and
strategic grounds it is a "must have" in the energy fuel mix required and there is no getting away from this fact. Nuclear has not got to the position that it has because it is loved, it has got there because of its enormous capability to deliver massive amounts of electricity in a carbon free and safe manner. There is no credible replacement for this.

Demand will not appreciably change and the uranium supply to fuel the current and new nuclear fleet becomes even more interesting in my opinion. Those of you who have heard me before know my position that uranium supply is in fundamental shortage. That the US may delay its build programmes(and there is clear evidence that some US utilities want to proceed and build new units) and that the
late arrived Germans may hold off a little longer does not change this dynamic. China, Korea, Japan, Middle East and Russia have reaffirmed their commitment to nuclear. In a strange way the current events could well exacerbate this shortage as skittish financial markets retreat which will likely arise leaving a good many juniors unsupported.

In the 1960's and 70's nuclear development was spearheaded by only 5 countries - the USA, USSR, France, Britain and Japan who in the end built 250 reactors between them and were basically the reason the nuclear boom started in the 70's. Not all the 30 countries that would eventually have
nuclear started together on day one.

This time we have China, India, the Middle East, Korea and Russia that will lead the charge with about 250 reactors planned by 2030 in addition to the 62 they already operate between them. You can bet, with this lot committed, the other countries will follow en masse as they did in the 70's and 80's. There may be a slight delay as these countries revisit and upgrade as a result of lessons learnt.

In the 70's when nuclear was regarded with great optimism, the projections were to build 1,000 reactors by the turn of the century. Supply from new mines increased rapidly in the 70's and utilities worldwide accumulated huge inventories in anticipation to support this predicted growth. Then 3 Mile Island - 1979 and Chernobyl - 1986 (in addition to economic factors) completely derailed this growth expectation causing the collapse of the uranium market. Suppliers went out of business, uranium miners merged and rationalised where possible in a bid to survive, others just abandoned their projects to welcome what was to become a truly bleak period for nuclear. Uranium prices collapsed
and the outlook for the whole industry turned dismal leaving only a handful of players and, for 25 years, a hopelessness existed as the nuclear industry stagnated.

It is my strong opinion that this reaction will not be repeated as the industry has matured and has an
excellent track record compared to other industries.

After the Japanese tsunami

In last year?s Annual Report we emphasised the resilience of the nuclear electricity industry in the wake of the global financial crisis and noted the strong growth of nuclear power worldwide. This year we have to address the outlook for nuclear power after the tsunami in Japan damaged the Fukushima plant which has raised some questions about the safety of nuclear power and led to a reappraisal of nuclear power programmes in some countries.

What happened as a result of the tsunami?

On 11 March 2011 the eastern coast of Japan's Honshu Island was devastated by a magnitude 9.0 earthquake centred about 130km offshore from the city of Sendai in Miyagi Prefecture. The earthquake was very severe and caused Japan to move a few metres eastward and the local coastline
subsided by half a metre. The subsequent tsunami, estimated to be 15 metres at the coastline, inundated about 560 square kilometres and caused the deaths of more than 20,000 people.

Eleven nuclear power reactors in the affected region were operating at the time of the earthquake and all shut down automatically at the time of the seismic shock. The reactors operated by Tohoku Electric Power Company and Japan Atomic Power Company were largely undamaged, but the four units at Tokyo Electric Power Company?s (TEPCO) Fukushima Daiichi plant were seriously compromised by
the tsunami floodwaters. Investigations have shown that units 1-3 escaped major earthquake damage but lost external power supply causing emergency generators in the basement of the turbine buildings to start and provide power to the vital cooling circuits. The primary tsunami wave hit the plants 41 minutes after the earthquake and drowned the emergency generators and swept away vital pumps and emergency systems. TEPCO engineers faced an unprecedented challenge to avoid excessive core temperatures causing possible ruptures to primary containment structures and also to manage degradation of on-site spent fuel storage ponds in an environment of destruction of vital infrastructure caused by the tsunami. Graphic television images of hydrogen explosions at three of the units flashed
around the world adding to the sense of disaster which threatened to overshadow the human toll of the tsunami on local communities.

Now, more than five months after the tsunami, TEPCO, with the assistance of nuclear companies worldwide, is making significant progress towards achieving cold shutdown of units 1-3 by January 2012 and maintaining adequate cooling of spent fuel storage ponds. The evacuation area around the
Fukushima plant is still in force, causing major disruption to tens of thousands of people, and radiation levels, while now low, are subject to strict monitoring.

Global impact

The immediate impact was an outpouring of dramatic and often hysterically exaggerated media coverage worldwide. The unique circumstances of the accident and the fact that "precautions" were often reported as "occurrences" led to comparisons with Chernobyl which were entirely unjustified.
Data has subsequently shown that total radiation releases (calculated as "iodine-131 equivalent") were between 10-15% of Chernobyl releases. Public anxiety was fuelled by a lack of high quality information in the early days of the crisis and a general ignorance of radiation risks and exposure
concepts amongst many in the media. In many countries anti-nuclear advocates used the accident as an opportunity to make their case against nuclear electricity without concerning themselves with many of the details. In this potent mix of perceived "nuclear disaster" there were immediate calls for the closure of nuclear plants regardless of their design or location and in some cases a demand for termination of national nuclear power programmes. The German government immediately re-instated
its nuclear phase-out policy, shutting permanently 8 reactors and mandating the closure of the remaining 9 plants by 2022. The Japanese government has also announced a review of the country's long-term reliance on nuclear power. In other countries a more pragmatic response is emerging.

Nuclear power today

The public reaction has jolted the civil nuclear industry and governments of nuclear electricity dependent countries into recognising that more has to be done to explain the real risk versus reward proposition of nuclear power. In particular, the real off-site consequences of a major reactor accident have to be better understood and explained. After a flurry of post-accident announcements about reviewing reactor safety and operations, most nuclear power countries have renewed their support for their own civil power programmes. This is because the case for nuclear power is still overwhelmingly compelling. The world's population is likely to exceed 9 billion people by 2050, entailing a tripling in demand for electricity. CO2 and climate change policies will increasingly constrain the use of highcarbon release fuels and, despite recent events, nuclear power is and remains a safe and efficient
source of large scale electricity production.

Status of nuclear power programmes post the events in Japan

We have updated the table we provided in last year's Annual Report to reflect the world, post the Japanese tsunami. This year there are 432 nuclear power plants in operation worldwide after Germany's permanent closure of 8 plants (last year, 440) providing 14% of the world's electricity in
2010 (last year, 14%). There are 61 new plants under construction (last year, 59), and 154 in the "planned" category (last year 149). The number of plants in the "proposed" category has fallen by 1 to 343. These numbers indicate that apart from the unique domestic issues affecting Japan and Germany, nuclear power will maintain its vital position as a major electricity source for today and well into the future.

Current market and long-term uranium outlook

The growth in uranium production slowed in 2010 to 53,663 mtU/139,512,409lbs (up only 6% from 50,772 mtU/131,996,423lbs in 2009) as the continued rise in Kazakhstan output (17,803 mtU/46,284,021lbs in 2010, up 27% from 14,020 mtU/36,449,024lbs in 2009) and the increasing
production from the Company's Kayelekera Mine Malawi (644 mtU/1,674,263lbs) was substantially offset by a significant production shortfall in Australia and smaller declines in Canada and Namibia.

We repeat our past assertions that pressures and constraints on the supply side of the industry are real and still unresolved. To the extent that investor appetite has been discouraged, we believe uranium supply will continue to be tight over the medium and longer term.

Uranium prices emerged from a depressed period during the year when the spot price moved from US$41.75/lb U3O8 in July to a peak of US$73.00/lb U3O8 in February 2011. The Japanese situation in March 2011 saw prices weaken, reaching a low of US$54.25/lb U3O8 in June 2011. The term uranium price strengthened from US$60/lb U3O8 to reach US$73/lb U3O8 in February 2011 before easing off to
US$68/lb U3O8 in May 2011. The Company continues to expect prices for both spot and term supply to resume their upwards trend once the short-term negative impact of the Fukushima accident has been fully absorbed and understood by the market.