Uranium may be the best trade in commodities as governments embrace nuclear power in the name of green energy
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(Kitco News) -
After years of arrested development and stagnant prices, green-energy-driven investment in nuclear power will push uranium prices to new heights in the very near term, and they could remain at historically high levels for years to come.
Kitco News spoke with four leading executives, speculators, analysts and traders, and they laid out their case for why uranium is the surest trade in commodities, and why uranium stocks could have the highest upside among equities.
Scott Melbye is Executive VP of Uranium Energy Corporation (UEC) and President of the Uranium Producers of America. Kitco News spoke with Melbye in August to get a big-picture overview of the state of the nuclear industry and the prospects for the uranium market.
Melbye told Kitco that the green energy transition has served to highlight like never before the importance of nuclear power as a 24/7 carbon-free electricity source. “That’s driving public opinion, it’s driving strong political support,” he said. “For the first time in my 40-year career, we're seeing the political left and right get on board.”
Decarbonization policies drive development
Melbye said the growing sense of urgency to respond to climate change is propelling demand for clean energy, and nuclear remains one of the few baseline sources of energy that can significantly reduce greenhouse gas emissions.
Nuclear energy represented 47% of America’s carbon-free electricity in 2022, according to the U.S. Department of Energy (DOE), but much of the infrastructure that delivers it is half a century old. The Vogtle Unit 3 facility in Georgia, which went into operation on July 31, is the first newly-constructed nuclear plant in the U.S. in over 30 years, but there are now multiple other projects in the works, including Unit 4, which will make Vogtle the largest single source of clean energy in the United States.
This is also the case in Canada, where the Federal Government’s plan to achieve a net-zero emissions grid by 2035 has created renewed interest in nuclear power development. Examples include the Darlington New Nuclear Project (DNNP), which involves the construction of up to 4 new nuclear reactors at the existing Darlington site, and the expansion of the Bruce Power LP power station in Tiverton, Ontario, which will be the largest nuclear power plant in the world upon completion.
Nuclear power: a global trend
These U.S. and Canadian projects are part of a global resurgence that the Stated Policies Scenario of the International Energy Agency (IEA) says could see installed nuclear capacity grow by over 43% between 2020 to 2050.
According to the World Nuclear Association (WNA), there are around 440 nuclear power reactors currently operating in 32 countries plus Taiwan, delivering about 10% of the world's electricity. The WNC said there are also around 60 reactors under construction around the world.
Green energy policies, and the new nuclear power plants they encourage, are expected to support strong and steady long-term demand growth for uranium. According to the WNA’s recently updated Uranium Markets overview, the market is expected to grow significantly over the next 10 years. “The Reference Scenario of the 2021 edition of the World Nuclear Association's Nuclear Fuel Report shows a 27% increase in uranium demand over 2021-30,” they wrote. For the decade 2031-2040, the growth rate is projected at 38%.
Inefficiency creates opportunity
On the supply side of the equation, the WNA’s estimates of uranium production show that it’s projected to lag well behind the market’s growing appetite in the coming years. Melbye said the uranium market is far less efficient than that of gold or silver, and this means that once prices break out, they can remain very elevated for years on end.
“Fukushima happened in 2010, but we really didn't see production start to drop off dramatically until 2016, 2017,” he said. “Since that time, you saw a 50, 60, 70 million pound a year gap in what we consume globally. It’s now around 195 million pounds, all the global reactor demand in a year. We're only producing around 144 million expected this year. So that kind of gap has existed for several years.”
Melbye said these shortfalls were made up by drawing on inventories and secondary supplies, which did balance the market during that period. “But we now see a situation where we've rapidly gone from an oversupplied, inventory-driven market to a production-driven market,” he said. “I think scarcity is going to be the name of the game in the spot market going forward, and higher uranium prices.”
He said this is already playing out in the spot market today.
“You're not seeing huge volumes being offered into the spot market,” he said. “Any sort of increases in demand, whether it's utilities or Sprott buying, or anyone coming into the market to buy significant volumes, we see real price impacts. It's been holding at the 56 to 57 dollar level, but we don't see anything that pushes it down, and we see numerous reasons why it is headed up, and could be considerably up.”
Supply will be constrained
“What we're all seeing, whether you're an analyst or you're a utility or you're a trader or a producer, everybody's seeing 2024, 25, 26 as a real supply squeeze developing.”
Melbye said over the next 10 years, the uranium supply shortfall could total half a billion pounds. “At this point, we don't have mine production slated to fill that demand,” he said, “That probably means eight to 10 new mines need to come online between now and 2030. That's a tall order.”
He said predictions of a supply squeeze as early as next year are no exaggeration. “Our industry is not like copper, gold or silver,” Melbye said. “It isn't an efficient market. You could have very significantly higher price signals in the spot market, in the long-term market, and the production response could be quite lagged, because there aren't a lot of mines sitting on the sidelines.”
Rick Rule: Uranium fundamentals show significant, safe upside
Strong and predictable demand growth coupled with constrained supply is an ideal scenario for investors, and some of the best-known commodities experts are recognizing uranium’s potential for big gains.
Rick Rule, founder of Rule Investment Media and a legendary commodities trader dating back to his time at Sprott, told Kitco News in May that he is very bullish on uranium, which he sees as the closest thing to a sure thing for investors.
“Uranium is probably my favorite commodity in terms of the certainty I have around the near and intermediate-term prospects,” he said.
Rule said that an increasing amount of demand is coming in the opaque term market, which traditionally is priced at a fairly substantial premium to spot. “The real market for uranium is transacting at higher prices but not high enough for the industry. It is suggested by the International Energy Agency that the fully loaded cost to produce a pound of uranium worldwide [..] is $60 a pound for existing production, and the incentive price for new production is $75 a pound.”
He said that with the substantial production shortfall, the incentive price is very much in play. “My suspicion is that the market reference price moves from $54 or $55 to 75 dollars a pound over a three- to four-year timeframe, maybe being frontloaded.”
Rule noted that even Japan, just 12 years removed from the Fukushima disaster, is restarting its nuclear infrastructure with the support of over 63 percent of the country’s electorate. “We're seeing increasing public favor for uranium and nuclear power really around the world, typified as an example by the co-founder of Greenpeace saying the only hope for a carbon-neutral mankind is, ironically, nuclear power.”
“The question now isn't when the uranium bull market will begin,” Rule said. “It's already begun.”
Melbye agrees with Rule’s essential argument, but sees the price situation a little bit differently. “Right now, we're trading around $56 a pound in the spot market,” he said. “$60 is an interesting threshold. For UEC, we've stated that we'll restart our mines in Texas and Wyoming at $60, because we've got costs per pound at under $40 a pound, so that's the level at which we're incentivized to restart our mine.”
He said miners like Cameco have a similar incentive price. “They've already begun that ramp-up because they're beginning to see those prices materialize,” he said. “But these are some of the world's most competitive mines. The incentive price for a broader set of new mines, particularly if they have big capital investments and they need to build a $1.5 to $2 billion mine and mill complex, that incentive price is at least $75 or $80. It has to be at least that, and probably higher, to see those huge capital investments being made. $56 a pound is really encouraging, but it's still not at the level that’s incentivized.”
Melbye said that even if uranium prices increase by over 50% from where they are today, the supply won’t be able to rebalance the market anytime soon. “You could have uranium prices increasing, to the $60, $70, $80 a pound level, and you can't bring on the mine quickly to take advantage of it,” he said. “The market equilibrium clearing price has never been met in uranium. We're either way below it, or way above it, because it cannot be efficient.”
He said uranium will see “very substantial price increases, and I think they're imminent. Maybe there's a game of chicken here, where utilities don't want to jump in and spook the market, but the supplies aren't really there,” he said. “If you wanted to buy a million pounds in the spot market, you'd have a hard time clearing it at the spot price.”
“That doesn't sound like an oversupplied market to me, it sounds like a very thin market on the offer side.”
Gareth Soloway: Technicals, geopolitics also support uranium prices
Gareth Soloway is another vocal proponent of uranium as an investment, and he sees the strong fundamentals being reinforced by bullish technical indicators.
“The case here is very simple,” Soloway told Kitco News in July. “We're seeing record temperatures all over the globe, there's going to be more and more people calling for alternate energy to gas, coal, and oil, but it's not feasible to make enough solar panels, nor is it cost-effective.”
Soloway pointed to geopolitical instability as another factor supporting higher uranium prices, with sixth-largest producer Russia facing sanctions that could last many years and number-seven producer Niger undergoing a coup on July 26.
“Niger is a good example of how things can happen politically around the world,” Melbye said. “That's a quarter of EU supply, traditionally, coming out of Niger, and it could be reduced or eliminated depending on how that country deals with its current issues.”
Melbye said he’s also very concerned about access to supply from Kazakhstan, the world’s number-one producer representing 40% of the global uranium supply.
“The Russians have been increasing their control and ownership of mines and supplies out of Kazakhstan to over 50%,” he said. “And then the other 50% is quickly being consumed through direct ownership and long-term contracts and transportation and a global trading hub that's been established in China. We could be in a situation in the not too distant future, where the world's largest producer isn't supplying to the West. It's supplying to their neighbors on both borders, the Chinese and Russians.”
Soloway said this all adds up to a very challenging market for the utilities, and a very attractive market for investors. “We could go much higher than the highs on the chart, and I think a revisiting of the high from 2021 is very possible,” he said. “You're talking potentially 50% upside on uranium just in the next 12 months.”
Melbye said the inflection point for uranium prices might even be reached within weeks. “I said going into the year that we would reach $60 a pound by year-end,” he said. “I think we could reach $60 a pound by the September World Nuclear Association meetings in London. $60 is pretty much imminent, it doesn't take much to get it there.”
He said how high prices go beyond the $60 mark is very hard to predict because uranium doesn’t behave like other commodities. “You could look at that theoretical equilibrium market-clearing price analysis that an economist would do, but it doesn't really apply,” he said. “Market demand is inelastic for uranium. You have a nuclear power plant, it has to run on uranium. It's not like solar where they're like, ‘okay silver is expensive, we're going to try with this, we're going to try with that.’ You can't. There's nothing else.”
And while many energy plants become nonviable when their input prices rise too high, which effectively caps potential price increases, this is another area where uranium is different. “The utilities don't like to hear this, but it's true: the cost of uranium as a percentage of the generating cost of electricity is quite low, it's 5% to 10%,” he said. “By comparison, electricity from natural gas, the gas is 75% of the cost of generation, so if gas prices go up, you very quickly price gas-fired electricity out of the market.”
“With uranium, you can have a doubling of the uranium price from $50 to $100,” Melbye said. “The utility, that cuts into their margins, but it's not going to make nuclear power uncompetitive. And that's a very important thing. If we have higher prices, it's not going to kill the golden goose here. You're still going to see nuclear be very competitive and continue to grow.”
Soloway also sees the uranium trade as very well-protected from downside risks associated with a potential recession, which is also very different from oil and gas. “I think it's somewhat immune, because it's not so much oil and oil consumption, but it's the political move, the pressure to move to a sustainable alternative to oil and gas,” he said. “I don't think it's going to be as affected by a global slowdown as people might think, and I think it's a very good place to potentially even protect yourself.”
Lobo Tiggre: Uranium is the only focus
Another notable proponent of the uranium bull-market thesis is Lobo Tiggre, Editor of The Independent Speculator, who told Kitco News in August that he too believes uranium is the place to be in a severe economic downturn.
He also believes that uranium stocks may have the highest upside. “Right now, the only stock on my shopping list is a uranium stock,” Tiggre said. “While uranium is not recession-proof, nothing is entirely, I think uranium is much more recession-resistant than other industrial minerals or energy minerals.”
Tiggre pointed out that uranium’s 16% gains in 2023 are significantly better than gold’s performance, which is up only 5% this year. “Uranium is having a good year and people are all pulling their hair out because the stocks aren't doing so great,” he said. “But at the end of the day, you can't have the metal keep going up without the stocks responding, and I don't see the metal going down significantly. I'm extremely bullish on the stocks even in the nearest term. I'm really very, very keen.”
Tiggre admitted that it's rare for him to be this excited about something like this. “I'm looking to expand my shopping list right now, in uranium only,” he said. “Looking at the trends, uranium is the most solid thesis I have right now, so that's where I'm looking to deploy cash.”