Uranium on the watch-list: think long term for best returns
One of the hottest tipped commodities in mining is uranium, which has been slowly recovering since its price crash in 2016. The rise can be attributed to a combination of factors, but mainly mine closures and a surge in the number of governments around the world committing to include nuclear energy in their energy mix.
Nuclear is necessary for clean energy transition
In the race to meet the reduced carbon emission targets, there are solid reasons for nuclear energy to stand as a more prominent energy source. Unlike other base-load energy alternatives, nuclear power emits no greenhouse gases and does not entail the environmental devastation of hydropower damming.
Despite growing efforts by nations to move towards cleaner energy sources, in 2016 65.3% of the electricity in the world was generated from coal, natural gas, or oil in thermal powerhouses. Only around a third of electricity came from emission-free alternatives, like hydro, nuclear or renewable alternatives.
According to the IEA, global energy demand is expected to increase by 25% between 2020 and 2035, so if governments are serious about meeting the clean energy targets, alternative, emission-free sources should be considered.
A 2018 study by the MIT showed evidence that in order to achieve low-carbon emissions at a reasonable cost and minimal social impact, a mix of different energy sources would be required, rather than concentrating production. The study concluded that excluding nuclear reactors would cost 2–4 times more than incorporating them, because uranium delivers extraordinary efficiency to nuclear reactors: one pound of uranium produces c. 22,600 kWh of non-emitting electricity (vs. one pound of coal which produces only 1.4 kWh of dirty energy).
Furthermore, an analysis by WNA, using data from OECD’s Nuclear Energy Agency (NEA) for various energy sources, gave compelling results that showed nuclear energy to be the cheapest alternative in four prominent countries: France, UK, USA, and South Korea.
China pushes for more nuclear energy production
China, the world’s largest energy growth market and one of the countries at the forefront of the clean energy revolution, is pushing for the construction of nuclear reactors across the country, Reuters has reported.
In additional to 45 nuclear reactors already in operation, China has 15 reactors in construction and has recently announced plans to dramatically ramp up nuclear as an energy source. The key to China’s nuclear ambitions lie in two factors: Premier Xi’s promise to make the skies blue again and the development of an indigenous reactor technology: the Hualong One reactor.
China’s devastating air pollution problems are well known, with an estimated 1 million deaths per year caused by air-particulate pollution in China alone. The impact on Chinese society — and the aspirations of Chinese workers, parents and students — is regarded by the Central Committee as a key social risk and led to Premier Li Keqiang famously vowing in 2017 that government would “make the skies blue again”.
The Hualong One, a Chinese designed and manufactured reactor, is currently under construction at Fuqing and Fangchenggang. Fuqing 5 and 6 are expected to start up in 2019 and 2020, as are Fangchenggang 3 and 4. The Hualong One promoted on the international market is called the HPR1000, two of which are under construction at Karachi in Pakistan.
“China has already become one of the small number of countries that has independently mastered third-generation nuclear power technology, and it has the conditions and comparative advantages to scale up and go into mass production,” said Huang Feng, a member of the expert committee of the China Nuclear Energy Association.
China recently foreshadowed the extent of its nuclear ambitions, at least in the medium term, through the approval of four new Hualong One reactors — after an approval hiatus of three years. To meet its 2030 clean energy and emission targets, Beijing is getting ready to commission eight reactors a year.
According to uranium expert, Brandon Munro, this growth could be the beginning of a larger program. Munro, who is CEO of Bannerman Resources Ltd, said, “I believe the Chinese nuclear program will need to ramp up even further by 2025. Firstly, China’s energy demand will continue to grow strongly as a result of increasing affluence and urbanisation of their population plus the electrification of transportation. Nuclear energy must play a big role — alongside renewables — in this demand growth. But, more importantly, China needs to displace its massive reliance on coal without sacrificing base-load stability. As the largest producer of hydro power in the world, the potential for additional hydro is mostly tapped out — which leaves only nuclear power to maintain base-load stability without emissions.”
Uranium in the spotlight
With more attention on nuclear energy, interest in natural uranium is growing. Putting nuclear reactors into operation requires time and planning, so natural uranium and other materials should be purchased years in advance to allow enough time to turn it into a finished fuel that can be used in the power plant.
Meanwhile, there is a downward trend in uranium supply. Experts believe that primary uranium production for 2019 will be closer to 130ml pounds, compared to the 154ml pounds produced in 2018 or 164ml in 2017.
As a result, uranium is placed as one of the top mining commodities with prices expected to rally in 2019, according to Mining.com.
Dominic Frisby, commodities expert at MoneyWeek, believes that returns on uranium will increase, but that investors should be patient: “Now is a better time to be watching than buying. Over the past two-and-a-bit years, we do have something of an uptrend. The 2017 lows were higher than the 2016 lows. The 2018 lows were higher than the 2017.”
“It may all take a long time to play out, but the fundamentals are certainly there for the price to go higher. “
One of the factors that may accelerate the price recovery is the emergence of specialist investment funds into the uranium space. Sensing an asymmetrical risk-return opportunity as uranium emerges from a deep bear market, investment funds are returning to both equities and the physical commodity. Numerous uranium equities-focussed investment funds have been launched in the last 12 months, including by investment managers Sachem Cove Partners, L2 Capital, Segra Capital, Tribeca Investment Partners and Oclaner Asset Management. Furthermore, the long-standing TSX-listed physical investment fund Uranium Participation Corp has been joined by new-comer Yellow Cake plc. Yellow Cake listed on LSE in 2018 and has since acquired 10 million pounds of U3O8, deepening the supply deficit further.
In April, Munro presented to the World Nuclear Fuel Cycle on the re-emergence of investment funds. Munro drew parallels with the uranium boom of 2005–2007, where the uranium price was supported by the purchasing appetite of several investment funds. In concluding, he presented a scenario that generated estimated demand by investment funds of 20 million pounds of U3O8 per annum for the next three years.
In the context of existing supply deficits, investment fund demand for physical uranium could have a massive impact on the uranium market. Unlike so many other dynamics in the uranium sector, the emergence of such players is observable — as long as investors are watching.
Brandon Munro will be a special guest on Cassiopeia Mining and Metals TV Show, discussing with PR Stefania Barbaglio @stefixy the uranium market and investment opportunity. Stay Tuned @Cassiopeia_ltd @_FinancialFox