The Uranium Story You Haven’t Heard

“No, no. It’s not like that. My worry isn’t this year’s or even next year’s, it’s a long-term worry.”

“Then it’s not worth calling a worry. We live in an atomic age, Mr. Wormold. Push a button — piff bang — where are we? Another Scotch, please.”

– Our Man in Havana, Graham Greene

You remember the nuclear disaster at Fukushima? It was a horrible human tragedy that is still playing out — and in ways I am sure you will be surprised to learn.

The disaster also set back the so-called nuclear renaissance that was then in swing. Uranium prices fell like a piano tumbling down a flight of stairs, only recently crashing down to five-year lows and laying waste to uranium stocks.

But it’s been over two years since the meltdown at Fukushima, and memory is short. Here is Barron’s over the weekend, on its optimistic appraisal of Cameco, the world’s largest publicly traded producer of uranium:

“Cameco shares recently rallied after stronger-than-expected third-quarter earnings, but are still flat for the year. They fetch just 15.2 times what the company has earned, well below its decade median of 24 times, and the low-cost producer generated net profit margins near 22% even when uranium prices slumped. Improving prices can only energize the stock.”

Among the “reasons for optimism,” Barron’s included “gradual progress toward the cleanup in Japan.”

Barron’s piece inspired me to write to you today. As a long-term investor, I am not tempted — at all — by the apparent bargain in uranium stocks.

I want to preface what follows by saying I get the bullish case for uranium and nuclear power. I was a bull for a time and took positions in uranium stocks in February 2010, just before they started to lift.

“Trading as if the world is always poorly managed and you can’t figure it out is right almost all the time…”

The incident at Fukushima made me reverse course. We sold our uranium stocks in March 2011, shortly after the disaster. We took a 70% gain on Kalahari and saved a slim 7% profit on Paladin Energy. Kalahari got bought out and no longer trades. But Paladin, which I recommended selling at $3.29, is today 39 cents. In my Capital & Crisis newsletter, I also saved a 10% gain on Cameco and sold at $30. Today, it’s $20.

As good as the uranium story sounds, I think there are bigger reasons to avoid the stocks as anything other than trades.

First, because the disaster at Fukushima could easily have an Act II that could be worse than anything we’ve seen so far.

The cleanup is not front-page news, but perhaps it should be. Here is a good summary of the challenges that remain, as reported by Kevin Zeese and Margaret Flowers in CounterPunch:

“There are three major problems at Fukushima: (1) Three reactor cores are missing; (2) radiated water has been leaking from the plant in mass quantities for 2.5 years; and (3) 11,000 spent nuclear fuel rods, perhaps the most dangerous things ever created by humans, are stored at the plant and need to be removed, 1,533 of those in a very precarious and dangerous position. Each of these three could result in dramatic radiation events, unlike any radiation exposure humans have ever experienced.”

All three pose significant dangers, but the biggest threat is from No. 3.

The spent fuel rods weigh 400 tons and are packed tightly together like cigarettes. They hold the radiation equivalent of the atomic bomb that went off at Hiroshima — times 14,000.

They now sit in a damaged, tilting building, which is vulnerable to collapse. They must be removed. If they hit each other or break, they could explode and release massive amounts of radiation. They might have to evacuate Tokyo in such a case.

As The Japan Times reports,

“The consequences could be far more severe than any nuclear accident the world has ever seen. If a fuel rod is dropped, breaks or becomes entangled while being removed, possible worst-case scenarios include a big explosion, a meltdown in the pool or a large fire. Any of these situations could lead to massive releases of deadly radionuclides into the atmosphere, putting much of Japan — including Tokyo and Yokohama — and even neighboring countries at serious risk.”

Aside from the terrible human costs of such an event — which I do not want to minimize — what do you think it would do to uranium stocks?

Besides, there are still ongoing effects of the disaster we are only now beginning to understand. See, for example, recent headlines about the damaged thyroids of California babies exposed to radiation that traveled 5,000 miles across the Pacific. Of course, the nuclear lobby is well-heeled and has its silver-tongued apologists who will do their best to discredit such stories. Beyond the despicable aspects of this, you should consider, from an investment point of view, the risk that the industry loses control of the public relations battle as more stories emerge — and legal consequences ensue.

The second reason I don’t want to own uranium stocks long term: Because there is certainly another Fukushima, another Three Mile Island, in the deck. We just don’t know when it will turn up.

Just look at the U.S., which produces more nuclear energy than any country on Earth. It has over 104 reactors. Most of them are old. Twenty-four of them have the same design at the Fukushima reactors.

The late Alexander Cockburn and Jeffrey St. Clair, again in CounterPunch, wrote in 2011 about the number of aging reactors on U.S. soil, several that sit on fault lines. They walk through a number of them, citing the age of the plants, past incidents and the potential for disaster.

The real takeaway for me, though, was the wisdom at the end:

“Look at the false predictions, the blunders. Remember the elemental truth that Nature bats last, and that folly and greed are ineluctable parts of the human condition.

“Why try to pretend that we live in a world where there are no force 8-9 earthquakes, tsunamis, dud machinery, forgetful workers, corner-cutting plant owners, immensely powerful corporations, permissive regulatory agencies, politicians and presidents trolling for campaign dollars?”

Yes, why indeed?

This reminds me of another bit of wisdom I heard from Paul Singer, the excellent investor behind the hedge fund Elliott Associates. He said this at the Grant’s conference this fall:

“Trading as if the world is always poorly managed and you can’t figure it out is right almost all the time… [However], never in my 37 years have I ever successfully timed a crash or a bear market, despite having a pretty good sense for what’s going on in the world.”

Human beings make many mistakes. We are a disaster-prone species, as any casual review of our bloody, imbecilic history will show. As an investor, is it not wiser to assume things will not go according to plan? Doesn’t it seem better to assume that bad things will happen? And with nuclear power, we have clear potential for such errors, not to mention a record of rare but devastating disasters. Timing is the only thing that is uncertain.

If you adopt this kind of thinking, then uranium stocks are a no-go as a long-term investment.

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