A Melman Minute — March 14, 2011

All Shockingly tragic images from Japan have been wending their way around the world since last Friday's mammoth earthquake and resultant tsunami, and we still do not have anything resembling an accurate, total picture regarding the ultimate impact of the events. However, we can say that there appear to be three directions toward which attention has become focused.

First, and in its own way most important, the humanitarian catastrophe is truly awesome. The death total already stands at several thousands and rescuers are only now beginning to reach a large number of towns and cities where the number of missing persons has been estimated in the many thousands. Literally millions of homes have been destroyed, the nation's railway, highway and electricity networks are in dire shape and millions of people are still unable to travel, work, prepare meals, enjoy power, etc.

One particular image sticks in our mind and that is a photo in this morning's Toronto Globe & Mail newspaper (Page A9) which shows an intact automobile resting on the third or fourth story of an apartment building. It is truly difficult to envision the wall of water which might have brought about such a result.

Second, economists are beginning to attempt an evaluation of the economic impact on the Japanese society as industrial plants have closed down, domestic municipalities are overwhelmed with the expense and complication of both rescue and infrastructure remediation, and analysts have only begun to scratch the surface of determining the negative impact on Japan's productive sector.

An article in this morning's Wall Street Journal summed up the situation when they reported, "...Much Japanese manufacturing slowed to a halt following Friday's earthquake and tsunami as auto, steel, electronics and other companies suspended operations. Major power outages, caused in part because of damaged nuclear rectors, and disruptions in supply networks contributed to the paralysis. Japanese authorities said coordinated power outages would begin Monday and last at least several weeks..."

With this level of fear and uncertainty in mind, it is not surprising that the Japanese Nikkei Index took a severe 'hit' in today's securities trading in Tokyo, plunging by over 630 points to break below the psychologically important 10,000 level and close near 9,600 - the lowest such close since mid-November of last year.

By the way, in true Keynesian fashion, the Japanese economic authorities are attempting to resolve the difficulties by creating walls of fiat currency, numbering in the many trillions of Yen, to "get the economy moving again." Sound familiar?

As a result of this second consideration, many commodity markets, specifically including crude oil, base metals and grains have been hit by heavy selling since the event, as demonstrated by the daily chart of the April 2011 Crude Oil contract which has fallen from a high of over $107 per barrel to just under $100 over the past few days. (NOTE: A portion of that decline had already taken place PRIOR to the earthquake.) Analysts are attributing much of this selling to expectations that general industrial and commercial demand for many commodity items will be sharply curtailed.

However, it is the third specific consideration that is capturing huge headlines around the world and which threatens to have a major impact on one of junior mining's most vibrant areas - uranium exploration and development. For many years, Canada has been a leading supplier of uranium "yellow-cake" to the nuclear industry and Cameco Corp (symbol: CCJ) has been among the most prominent such companies and, as can be seen, their stock has been driven sharply lower this AM and we must also report that several early-stage uranium exploration companies have encountered bouts of truly severe selling.

The great question, of course, is whether such selling is temporary in nature or whether it will endure beyond the short term..

However, at least for this morning, investors apparently are forming the opinion that the events in Japan may cause some countries to abandon plans for nuclear power plant construction and perhaps even temporarily close presently operating facilities for re-inspection and re-evaluation. As a matter of fact, just as this was being prepared, Switzerland announced that they were taking precisely such action regarding their own nuclear power generation.

What is truly clear for the nuclear power industry is that the visual images of explosions at Japan's triple nuclear facility, Fukushima Daiichi, are being sped around the globe, are being seen by literally billions of people, and those images cannot help but provide fuel for the anti-nuclear power side of the energy debate.

Having said that, it is also important to point out that, in our opinion, the long-term arguments for nuclear power generation remain valid. Nuclear power generation is pollution-free in terms of the fuel required to generate electricity, all the other alternatives such as hydroelectric, coal or petroleum-based generation have serious environmental and regulatory problems of their own and the long-term growth of previously marginal economic nations augers well for steadily increasing worldwide electric power demand over time.

Clearly, it will take some time for all these cross-currents to sort themselves out.

While the Japanese calamity has, of course, dominated the news wires, it must not be forgotten that two battles are shaping up in the US Congress. First, the debate for increasing the authorized national debt limit is now entering its critical stage as the present limit will expire in less than one month at the present rate of accumulating debt. At the same moment and for the first time in decades, it appears there is a serious debate taking place about how to finally rein in the explosive decades-long growth in the size and intervention of America's federal government.

It should be interesting.

Financial markets have been selling off this morning and, as of 8:50 AM PDT, both the Dow Industrials and Canada's TSX Index were down by more than 100 points. Precious metals have retreated from earlier gains and are now close to unchanged while base metals are trading to the downside on balance with nickel and copper falling the furthest among the group. Mining share indexes are off by about one percent; crude oil prices have fallen to almost exactly $100 per barrel; the US Dollar Index is down by about 20 points; and long-term interest rates have moved lower as we are witnessing the usual influx of buy orders for U.S. government bonds during a period of crisis.

All quotes US$ unless otherwise noted.

Next "Melman Minute" scheduled for Wednesday, March 16, 2011

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