TRENDING

OUR URANIUM INFLATION PLAY

PREPARED BY: Chris StanfordĀ 

DATE: 6/1/20

Nuclear energy presents a fascinating opportunity from an investment standpoint. Despite previous disasters such as Fukushima dampening global interest, recent advances have positioned nuclear energy as the most efficient alternative energy source, surpassing even solar power. Visionaries like Bill Gates have been urging the United States government to pursue further investment in this sector, leading to the establishment of companies like TerraPower, which aims to make nuclear reactors completely safe.

GLOBAL NUCLEAR REACTOR PROJECTS

In recent years, there has been a notable surge in global nuclear reactor projects. China, in particular, has set an ambitious goal of producing 58 gigawatts of nuclear energy by the year-end. While much of the innovation in this field is happening in Russia and China, the United States still holds the largest number of nuclear reactors. Recognizing the need to regain leadership in this industry for national security reasons, the Secretary of the Department of Energy emphasizes the importance of revitalizing America’s nuclear energy sector.

REVIVING THE U.S. NUCLEAR INDUSTRY

The United States has ceded its leadership in nuclear reactor construction to China and Russia, prompting concerns about national security. As a result, the U.S. has increased its efforts in uranium mining and production. Uranium plays a significant role in the nuclear industry, as it is the only naturally occurring material that can sustain a fission chain reaction, releasing substantial amounts of energy.

COVID RELATED SUPPLY CHAIN DISRUPTIONS

The COVID-19 pandemic has severely disrupted the supply chains of uranium miners, including major players like Cameco and Kazatomprom. While uranium demand remains relatively unaffected, mining facilities have been operating at limited capacity, impacting the global uranium supply. Cameco, heavily reliant on long-term contracts that require continuous delivery, has been forced to scale back operations. However, this disruption has led to declining uranium prices, making it an opportune time for investors.

THE MARGINAL COST CURVE

Despite the favorable market conditions for uranium, many miners have had to halt production due to the low prices. The current Nymex spot price for uranium sits at $30, significantly lower than the marginal cost for most miners, which ranges from $55 to $60. This pricing misalignment has forced miners to rethink their business models, creating potential opportunities for astute investors.

RISING CHINESE DEMAND

China’s commitment to address global warming and reduce emissions has sparked a surge in alternative energy investment. Currently ranked third in the number of nuclear reactors, China is rapidly gaining ground and is projected to surpass the United States within the next decade. This growth trajectory positions China as a key player in the nuclear energy sector.

CHANGES IN THE U.S.

In a bid to strengthen its domestic uranium industry, the U.S. Congress recently approved funding for a 10-year uranium reserve. Additionally, uranium producers have been advocating for a quota system that would cap the amount of uranium sourced from foreign suppliers. This development could prove advantageous for companies like Cameco, which operates in the U.S. alongside its Canadian operations.

INVESTMENT STRATEGY

It is essential to approach investments in the nuclear energy sector with caution. While the potential rewards are significant, the risks should not be underestimated. Allocating less than 5% of the total portfolio to this sector is a prudent approach. Investing in mid-cap uranium miners and the uranium index ($URA) offers exposure to the sector’s potential upside. However, it is crucial to view this investment as a high-risk, speculative play.

PRICING TARGETS

The current pricing dynamics in the uranium market present an opportunity for investors. With uranium miners forced to cut production, there is a likelihood of longer-term pricing impacts. Considering the marginal cost of mining uranium, which ranges from $45 to $60, it is reasonable to expect a price increase of 50% to 100% in the coming years. Realistic pricing targets align the risk-reward proposition and support the case for investing in uranium.

OUR OVERALL CONCLUSION

Nuclear energy, once again gaining traction globally, offers intriguing investment potential. While the United States aims to revive its nuclear industry and regain leadership, China’s rapid expansion in the sector presents a competitive landscape. The COVID-related disruptions, declining uranium prices, and changes in global dynamics provide opportunities for astute investors. However, due diligence, careful risk assessment, and prudent portfolio allocation are essential. By navigating this evolving landscape wisely, investors can position themselves to potentially unlock value in the nuclear energy sector.

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