Did you know that of the 140 pounds of Uranium included in the bomb that detonated above Hiroshima, only 1.38% underwent fission? Yet, that 1.38% was so powerful that it destroyed nearly all buildings within a 1-mile blast radius. A small amount of Uranium is extremely powerful and so is the market for Uranium producers.

So, when comparing base load power sources, it shouldn’t be a surprise that Uranium’s energy density is much higher than its competitors.

While its density makes Uranium an interesting option long-term, I think there are also a number of reasons to be bullish Yellow Cake now. Here’s why:

Demand:

1)Uranium is the ultimate ESG play

Nuclear power provides reliable, emissions-free, baseload power with the lowest amounts of material inputs.

Despite these obvious benefits, it is fair to say the political will for adopting Nuclear energy has been lacking (at least in the west). I believe that this is due to the fears held by both, major political parties. As per Arnold Kling’s idea, Liberals tend to fear oppression, while Conservatives tend to fear loss from change. Nuclear to its detriment occupies a place where historically neither party wanted to be and that’s been a problem.

The good news is that this looks be changing, as Joe Biden’s green energy platform specifically outlines funding and policy intended to accelerate the development of small module reactors. Also mentioned is the desire to lower development costs, increase safety, and improve disposal systems. This certainly has been a positive development that may catalyze the political malaise surrounding Nuclear. Moreover, Conservative Premiers in Canada have already outlined a goal to support the adoption of small modular reactors. It appears at least that Nuclear energy is now a bi-partisan issue, slowly gaining mainstream attention.

2)Higher Natural Gas prices

The cost of Nuclear power generation is currently higher than both Gas and Coal (see table below). However, if you include the carbon capture and storage costs it becomes cheaper than coal and within 10% of the cost of natural gas. If we see a structural increase in the price of Gas, I expect costs to come closer into alignment.

3) Reactors under construction

In addition to the other positive developments, there are currently a significant number of new rectors under construction (54) as well as 109 reactors planned and 330 more proposed worldwide. To boot, there has been further impetus in North America refurbish and extend the operating life of existing reactors which will also encourage future uranium demand.

Nuclear power plant construction and proposed.JPG

Supply:

If you thought the demand side for Uranium was compelling, the real action is on the supply side.

1)COVID-19

Firstly, the global pandemic resulted in Cameco shutting down its Cigar Lake mine not once but twice. In addition, Kazatomprom (the world’s largest producer) lowered resource development in 2020 which is expected to have a material effect on the company’s production in 2021. Given this loss of production, both began buying spot-price uranium to fulfill their existing supply contracts with utilities. In what other industry do you see the two largest producers not just limiting production but also eating up supply (??) from the spot market?

Like COVID did to many trends, it seems to have accelerated the Uranium bull market by cleansing the market of excess lbs.

2) All in sustaining cost of production

Currently, only half of the worldwide production has an all-in sustaining cost below $31. Consider a weakening $US dollar and rising input costs and this is likely to continue over time. Furthermore, it does not include the required rate of return that investors will demand to start up each additional project.

Based on annual demand of approximant 200M lbs. in 2020 – 2030, the price of Uranium must climb dramatically to incent producers to sign long-term supply contracts. Paladin’s Langer Heinrich incentive price is closer to $45/lb. and the industry will require it plus an additional 60 million pounds to match demand.

3) Secular bottom

After Fukashima, we saw the price of Uranium collapse after both Germany and Japan took draconian measures to slow the use of Nuclear power. While this is normally a kiss of death for explorations/development companies, it also caused the shuttering of major mines including Cameco’s McArthur River and Paladin’s Langer Heinrich. These mines will not be re-started unless they are able to contract at significantly higher prices than spot implies.

Yellow Cake PCL historical chart of price.JPG

As more and more utilities seek to contract/recontract long term supply agreements with producers, it will become ever more apparent that there will be not enough chairs when the music finally stops. I think this could cause a price squeeze not seen since 2007.

Investing in Uranium

Base on the above you probably guessed that I am very bullish on the Uranium sector. But similar to prior posts this is not a buy and never sell kind of investment, this is a trade. If that wasn’t already apparent from the chart above. You should be prepared to exit as the bull-market progresses. Like most value investors I can only hold something if I believe it has intrinsic value, when all the good news is priced in I will be a seller and I won’t think twice.

I’m playing this theme by buying a basket of Uranium producers, the main component being the Canadian ETF HURA.TO which effectively tracks the Solactive Global Uranium Index, thus giving me exposure to the two largest pure play producers in the space, Cameco and Kazatomprom (36%), as well as physical Uranium with Uranium Participation Corp. and Yellow Cake PLC (16%). The remainder of the fund is miners in various stages of development including NexGen Energy, Denison Mines, Energy Fuels, Paladin Energy, plus some associated businesses.

I like having broad exposure to the space and I plan to hold it for the next 1-4 years depending on the cycle. I also have additional exposure to my favorite brownfield project through Paladin Energy (PDN), and favorite greenfield project in NexGen Energy (NXE.TO).

Technicals

As shown above, the Uranium sector has already had a great run from the March lows by breaking out above the August highs of $10.65. Therefore, I do expect some take-back in the near-term. Based on its last consolidation zone a 38% retract of the recent move would be around the $12 level. That said, if the 11% pullback in May is any indication it won’t take much of a move down in price to incentivize buyers to flood back in.

Disc. I’m long HURA.TO, NXE.TO, PDN. As always this is not financial advice

Happy New Year!

The Dutch Explorer