Uranium is the world's most important raw material

Uranium is the world's most important raw material

03 December 2021 from Mikael Syding

Demand for uranium is higher than production. This points to higher prices for the raw material with a resulting profit growth for the uranium companies. This could mean an opportunity for investors to buy uranium miners because the stock market has not valued the companies in accordance with this potential. This has certainly been the case for several years but old deposits, e.g. of nuclear uranium, have balanced the market and led to extremely low prices for a long time. Not least the Fukushima disaster in the spring of 2011 also lay like a wet blanket over the nuclear sector for almost ten years when the two major nuclear countries Japan and Germany eliminated large parts of the demand for uranium.

Now, however, the uranium deposits seem to have run out in several places; it became especially clear during the pandemic when it became difficult to transport uranium freely between warehouses and end users. This forces buyers and sellers to find a market price where supply and demand for uranium can be balanced. So far, however, the power plants have not become active in the futures market for nuclear fuel, which explains why the uranium price has so far "only" tripled. This is because the buyers, the power companies, have learned over a period of 15 years that it has always been better to take it easy to commit to buying in the spot market instead, ie a contract of approximately 9-12 months. Thus, the price of uranium can stay below 70-75 dollars per pound, which is the estimated level at which all existing uranium mines are profitable to keep going. This is despite the fact that the price should actually be pushed up to levels where it is reasonable to start new uranium mines with an all-in-cost of a maximum of 70-75 dollars per pound. To do this requires both a safety margin in the price and a probability that the price stays up there. In practice, this means levels of close to 100 dollars per pound, ie more than double today's level.

Already at today's prices, there are a number of uranium companies that make or are expected to make large profits. This includes, for example, GoviEx, which has estimated costs of around 25 dollars per pound when the first mine starts producing uranium in 2025. Should the uranium price be raised to the economically highest reasonable level of 100 dollars per pound for example, GoviEx will be extremely profitable and the share which is currently in 40 cents could be significantly higher than that. In addition, the company has more deposits of both uranium and silver which could be worth just as much. There are many interesting companies in the sector, such as Uranium Royalty Corporation or NexGen, but also large stable giants such as Cameco. The upside is of course much more limited in a company like Cameco, but on the other hand the business is already in place, the size verified, the customers verified and more. This allows you to invest in Cameco or a broader uranium index to gain exposure to the number of positive triggers in the market in the coming years. However, should the uranium price not rise as estimated or even fall again then profitability of the uranium companies may suffer. Also remember that uranium mining is not environmentally friendly as such and may be further restricted in the future.

To begin with, the Sprott Physical Uranium Trust (SPUT), which recently tripled its $ 3.5 billion funding mandate, will soon be listed on the NYSE in the United States. It will be both a continuation of the buying pressure for uranium, and a starting shot for American investors to become active in the sector. SPUT is almost alone behind restoring the balance in the uranium market, and soon it may lead to nuclear power plants becoming stressed enough to buy uranium more and more expensive in the semester.

Another trigger could be that the EU is in the process of changing its environmental classification policy, its so-called sustainability taxonomy, to include nuclear power as "sustainable". In 2021, the EU's internal consultant has concluded that nuclear power is not considered "dangerous", which was the last obstacle on the road to being classified as sustainable. During the autumn, two expert groups (named GOE and SCHEER) reviewed the EU’s Joint Research Center's report and also concluded that nuclear power is not dangerous according to the taxonomy criteria. It is these three reports that explicitly form the basis for the EU's decision that are expected shortly, probably even before the turn of the year.

The decision would mean a significantly increased inflow of capital to the sector. Energy is the world's most important raw material, but at the same time it is not entirely easy to invest in it. The oil sector, for example, is large and cheap, but it is not very environmentally friendly and thus out of reach of many funds. Power companies are both boring and risky at the same time, in addition often valued at high multiples as revenues are considered as safe as government bonds. If inflation picks up, the power companies' shares are the first to be pitted against the wall.

An exciting alternative to the energy sector, which also focuses on the environment, is emission rights. In step with an increased focus on reduced emissions and on the environmental goals from Climate Convention COP 26, it is possible to invest in emission rights. Feel free to read my previous guest article on Vontobel to get a little more detail on what and how you can buy to get the desired exposure. But in addition to this, the entire uranium sector is of great interest to those who want both secure potential returns and participate in an energy sector with no or low emissions, provided of course they are happy to support nuclear power with their investment. On that topic, I also personally exchanged electricity subscriptions to the company Kärnfull.se, which only delivers 100% nuclear power to its customers. It is a sign of the times that uranium and nuclear power could have a future ahead of them.

The development of small modular reactors is underway, which may involve many smaller nuclear power plants located near where they are needed. This leads to reduced risks per power plant at e.g. disasters, and at the same time more demand for uranium even if the design is made so that the fuel can be used more efficiently. Some have expressed concern that the 4th generation power plant where the fuel lasts 10 times longer will reduce the need for uranium, or that a transition to e.g. Thorium is to make uranium obsolete. I welcome that development.

At present, however, almost no such reactors are planned, but standard discussions and tests are expected to continue for many more years. It takes several years to plan and build a large nuclear power plant, and much longer to first agree on new technologies and standards, so there is limited risk of sudden surprises. Today, hundreds of power plants are being built and planned, almost all of which are based on today's so-called “3+” standard. These conventional power plants, together with the installed base, will need much more uranium than all current mines and planned mines together can produce. There is thus rather a risk of another extreme peak for the uranium price similar to that of 15 years ago than there is a risk of reduced demand leading to lower prices. Already $ 100 per pound could lift the sector's valuation 4x from $ 40 billion to $ 160 billion in a few years.

Of course, oil companies and electric car manufacturers such as Renault and Honda also look interesting but do not seem to have the same upside as the uranium sector. And now several triggers come at once.

@Mikael Syding

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27/01/2022 12:42:23


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