October 2021 (click here to download)
The term “energy crisis” has crept its way into several research reports and news articles across Wall Street in recent weeks. The Manager is not here to say if the term is being used accurately or not, but at the very least it is reflective of recent developments within energy’s commodity markets. Oil and natural gas are up 70% and 127% YTD in the US respectively, as oil attempts to work its way out of a deficit and natural gas markets struggle to build inventory ahead of winter. It makes one consider what other sources of energy we have that are both reliable and clean, as in decarbonised. Wind and solar have been popular and growing for years, but they are not always dependable. Another source that is coming back in favour after a decade of shrinking capacity is nuclear power and its mineral feedstock, uranium. Uranium is extremely clean and efficient.
According to Bank of America, one kilogramme (kg) of uranium produces about 50,000 kilowatt-hours (kWh) of carbonfree electricity compared to one kg of thermal coal producing just three kWh of carbon-producing electricity. Governments around the world are recognising nuclear power’s value as a carbon-free and reliable source of electrical power. Demand for electricity ultimately drives demand for uranium, and demand for electricity is showing no signs of slowing down (Figure 1).
Figure 1. Electricity Demand
As you can see there is a large opportunity for uranium and nuclear power to play a much larger role in the world’s production of electricity. Last week, 10 EU member states declared that nuclear power needs to be part of the European taxonomy going forward. Last month, Illinois approved $700 million in subsidies to prevent two nuclear power plants from shutting down.
These are two of many examples, but the drumbeat is getting louder. The American Jobs Plan proposes increased funding for the development and support of our nuclear fleet. China’s latest Five-Year Plan includes an initiative to double nuclear capacity by 2030 to 120 gigawatt electrical (GWe). As a frame of reference, global nuclear capacity today is 384GWe, according to Canaccord Genuity. Nuclear power development is now a global initiative.
Even more enticing from an investor’s point of view is the supply/demand imbalance that currently exists in the uranium market. After the nuclear disaster at Fukushima in 2011, demand for nuclear power plummeted and capacity utilisation dropped. Additionally, the uranium industry is concentrated with the top five producers controlling 70% of the market, and these producers have been very disciplined about bringing production back online. The largest producer in the world has announced extended production cuts of 20% through 2023. Add in the impact of the Covid pandemic, and we have a market that is short its primary feedstock (Figure 2).
Figure 2. Uranium Supply and Demand
The uranium miners are currently in a favourable position as uranium spot prices are believed to be well below prices that would incentivise idled capacity to restart. Prices need to increase anywhere from 25-45% to entice significant supply to come on the market. See Figure 3 for a historical price chart. Once that happens, it will take six to 18 months to ramp production. It seems the only way to meet the world’s increasing demand for nuclear energy is for uranium prices to increase from here. Higher-priced contracted volumes with utility customers are likely to lead to significant positive earnings revisions for uranium miners going forward.
Figure 3. Uranium Price History
Source: Ryan Lowery of Driehaus Capital Management LLC.
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