The Bull Case for the Uranium Sector

Uranium is a common heavy metal and a concentrated source of energy, which is
found with a concentration of 2 to 4 parts per million, according to the World Nuclear
Association (WNA)
. According to the same source, currently it represents 10% of the
world’s energy and is produced by 440 reactors worldwide.

Even though most people and the media only talk and discuss about the problems and
disasters of the nuclear energy, its advantages probably remain unknown for most.

When compared to other sources of energy it produces more output per ton of mineral, the energy is produced with safety and no greenhouse gas emissions, according to the magazine Mining Technology. In addition, it is probably much cheaper than other sources of energy since the cost of running a nuclear power plant is low and it can produce a lot of energy with a small amount of Uranium.

The industry itself is highly concentrated on both the demand and supply side. On one hand, according to the WNA, 56% of the world uranium production is concentrated in Canada, Namibia, Australia, Kazakhstan and Niger, whilst 52% of the world’s consumption comes from USA, China, Japan and Russia. This concentration opens the industry to political risk whether it is between countries or within the country, like Australia (that owns 31% of the world’s Uranium reserves).

Regarding the price, since the beginning of 2020, the spot price of Uranium ranged between 24.63 and 33.93 per pound, whilst the Long-term Price used in contracts with utility companies ranged between 32.50 and 36.00 per pound, according to Cameco. Unlike other commodities, Uranium isn’t traded on an Exchange and the price has been in decline since the boom in 2007.

As an economics student aware of the hate around nuclear energy (due to the catastrophes and its military usage) I would argue that this decline in prices comes from lower demand. Although, the data does not tell the same story. As shown in this graph, the energy production was slashed by 2% on November 2011 after the Fukushima disaster in February and only went back to its previous level in 2015. Although, after that it has been constantly rising until 2018. On the other hand, the price has been declining since 2011 and stayed flat after 2015. Also, there are 11 countries (all in Europe) that get at least 30% of its electricity from nuclear energy with France getting an astonishing 70.6% of its energy from nuclear energy as of September 2020, according to the WNA. Emerging countries like China, India and Russia rely a lot on pollutive sources of energy, thus these three countries have plans and are building new reactors that will (at least) double its production over the next few years, according to the same source.

So, if the problem isn’t with demand then probably it is with supply. According to the FT, the Uranium market is suffering from the excess inventory before the Fukushima nuclear disaster and secondary supplies like sales from the government and reenrichment. Also, according to the magazine mining technology, nuclear energy competes with cheaper alternatives like natural gas whose price has also been in decline.

Although, this trend could change in the future since Cameco, one of the biggest producers, had to close its operations in Cigar Lake, Canada, due to the pandemic, according to a press release. This mine extracts 13% of the world’s Uranium consumption! According to the transcript from the Q2 2020 conference call, the mine restarted in September, but they won’t be able to compensate for the lost production in 2020 and there are risks to the production rate in 2021. Also, another long-term driver of the Uranium price is simply the cost of extraction and the sale price. As shown in the 2020 Kazatomprom Investor Handout, 40% of the world’s Uranium is produced between the current price and 50$. Since this graph considers cash costs then the current low prices are a short-term threat to companies that can’t produce at such competitive prices like Kazatomprom.

This article was published in our September 2020 Newsletter

João Ferraz, Msc in Finance

Published by lisboninvestmentsociety


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