Elon Musk is a formidable visionary and entrepreneur. His most successful start-ups include PayPal, SpaceX and Tesla Motors Inc. Now, he has come up with a grand plan how to take the world off the power grid altogether. The secret sauce is Tesla's Infinitely Scalable Powerpack – electricity produced from solar panels, for consumption at night. The first factory – Gigafactory 1 – is planned to go live in 2017.
After the March 2011 Fukushima disaster in Japan, uranium prices plunged from $70 to $30. Australian pure-play uranium producers, such as Paladin Energy Ltd. (ASX: PDN) and Energy Resources of Australia Ltd. (ASX: ERA), were hit hard. Will Elon Musk's vision spell further disaster for the uranium industry?
Where is the world's electricity production heading?
The world is battling with two energy-related issues right now: reducing greenhouse gas emissions and generating enough electricity to support an ever-growing demand.
The International Energy Agency (IEA) estimates that out of a total world electricity production about 68% is generated by strong carbon polluters, such as coal, oil and natural gas. Nuclear comes in at about 11%, hydro at about 16% and the remaining 5% is made up of geothermal, solar, wind and others.
To reduce greenhouse gas emissions, electricity generators need to move away from carbon-rich sources. The two alternatives are renewables and nuclear. Both of these produce an order of magnitude less greenhouse gases than their carbon-rich counterparts, as the graph below shows.
Source: World Nuclear Association
The per capita electricity consumption in developed countries is substantially higher than in developing countries. As the standard of living in developing countries improves, the demand for goods such as cars, white goods and services will increase substantially. This in turn will require additional electricity and lots of it – let's face it, the long-term prosperity of the share market rides on this.
So why not go full-scale renewables and forget about nuclear?
The answer is simple; nuclear is the established, large-scale and low greenhouse gas emission technology for base-load electricity production. It has no such established and proven counterparts in the renewables sector.
The World Nuclear Association is expecting nuclear capacity to increase 60% by 2035. China alone is planning to quadruple its nuclear capacity and will bypass the capacity of the U.S. Even Japan is gathering necessary approvals to restart its plants as early as sometime this year. The table below shows the capacity expansion plans of the largest movers.
| Country | Operable Reactors | Reactors Under Construction | Planned Reactors | Proposed Reactors |
| China | 26 | 23 | 45 | 127 |
| India | 21 | 6 | 22 | 35 |
| Russia | 34 | 9 | 31 | 18 |
| USA | 99 | 5 | 5 | 17 |
Source: World Nuclear Association
So what about Paladin and Energy Resources?
Paladin and Energy Resources each have a market capitalisation of around $600-700 million, however at current uranium prices, both are unprofitable. Cost control/reduction measures have been implemented, such as shutting down – higher cost of production – mines.
Paladin has a cash position of $469.6 million versus $293 million for Energy Resources. However Energy Resources is less risky, as it carries no debt, something that Paladin has been struggling with for a while. Further, Energy Resources was profitable before the Fukushima disaster, where Paladin has yet to make a profit.
In my opinion, sooner or later, uranium prices will recover. If Paladin and Energy Resources maintain a strong focus on operational efficiency and cost control, both may become profitable. Investing in this space now is not for the faint-hearted, but if you have the stomach, I'd suggest building a small position.
Foolish takeaway
Don't be too concerned about unproven grand visions. The prosperity of economies of countries like the U.S., France, China and India depends heavily on reliable base-load electricity production. Nuclear energy production is here to stay for the foreseeable future. As uranium is the main ingredient, I am bullish on uranium demand. Don't run for the hills; be greedy when others are fearful.
