The fundamental investment case for uranium in 2023
As we get ready to close out what has been a tumultuous 2022 to say the least, I want to provide my view on where I believe the uranium sector will go next year and why I view it as one of the best risk/reward opportunities available in the market right now. Before I get into that however, I want to note that with the uranium sector being as small as it is (cumulative $35 billion market cap), the sector is prone to be affected in the near term by the overall market being in a risk-on or risk-off environment. Given the sheer strength of the fundamentals underpinning the uranium sector however, the sector can only be held back for so long. Everyone has their own view on where the broad equities market may head in 2023, however I believe that once liquidity returns to the uranium sector that the result will be a bull market to rival and perhaps exceed the previous bull market we saw between 2004 and 2007. The case for a strong upward trajectory for the price of uranium, and as a result also the underlying equities, is the strongest it has been in decades.
TLDR: Next year we will see a massive amount of demand come to the uranium market as the contracting cycle gets up and running and liquidity returns to the sector. The demand side picture for uranium is the strongest it has been in a long time and is getting stronger seemingly by week, while the supply side is not able to fill the gap at anything close to today’s ~$50 price point. The fuel cycle is showing the way higher and the price of physical uranium will follow. As the price resumes its upward trajectory, the underlying equities will go with it and put in strong performances. The fundamental underpinning for uranium for 2023 is unlike any other asset class I see in the current market.
As you may rightly be asking, what are these fundamentals and why should I care when nuclear power is a dying industry? Great question and let’s address the nuclear elephant in the room to start with, as nuclear power is once again being embraced by governments and people around the world. The real growth story when it comes to nuclear power can be found in Asia, which is where the vast majority of new nuclear power plants are under construction and being planned. This year we have seen various news stories that further underpin this nuclear power growth trajectory in Asia, so let’s look at some of the most important ones:
China, the largest builder of nuclear power plants in the world, is looking to target 10 new reactors a year for the foreseeable future and they have a 130-150 GW goal they want to reach by 2035. They have been building reactors on time and on budget and after speaking with CGN on multiple occasions, I am not betting against them reaching this target.
South-Korea originally planned to phase out nuclear power, but the new government is committed to keeping its massive 24.5 GW fleet in operation, as well as building another 4 GW of capacity the coming years.
Japan, who committed to phase out nuclear power after Fukushima happened, are now back on the proverbial nuclear horse and are targeting 22% of their grid to be powered by nuclear by 2030. Last year it was closer to 6% and the government is looking to speed up nuclear restarts and potential life extensions beyond 60 years of operational life for existing reactors. These restarts remove the bear case of Japanese inventory overhang that many uranium bears have touted over the past years and replaces the bear with a bull, as Japanese fuel buyers are now back in the market.
India recently noted that they plan to add 21 new nuclear reactors by 2031, which is another major driver of uranium demand going forward.
Now, all this growth would be great for the uranium investment thesis even if the western world would be phasing out nuclear power, but this is not the case. Plenty of supply/demand models had various western reactors being closed down and this would tune down some of the uranium demand, however that story has firmly changed over the past year. Instead of phasing out nuclear power, we are seeing the biggest uranium consumer in the world (the US) committing to its fleet of nuclear power plants in a way we have not really seen before. Nuclear power has bipartisan support in the US and we have already seen various plants being saved from early shutdowns (Byron, Dresden, Diablo Canyon). The government is doing what it can to keep existing reactors in operation and provide a path for life extensions for these reactors as well. If a utility knows that they can keep their reactors in operation for a longer period of time than initially believed, they will plan for this by securing the necessary fuel in order to ensure the reactor keeps running.
The same is true for Europe, where various countries are once again considering nuclear power as a real option in the middle of the ongoing energy crisis. With the EU taxonomy kicking into play next year, institutional capital is now free to consider nuclear power related investments and that will greatly aid the sector there. Frane is leading this charge with their large nuclear power fleet, but other countries such as the UK, Netherlands and several more are also committing to nuclear power and these reactors need fuel.
This fuel will be secured, whether uranium is trading at $50 or $150, as the fuel cost for running a reactor is only a relatively small part of the overall cost structure of a nuclear power plant (between 8-15%, depending on the math you use). A fuel buyer will never get fired for securing the fuel a reactor needs at a higher price, but he or she will likely get fired if that fuel is not secured and the reactors can’t keep running because of it. With that financial security in place to keep reactors running, existing demand will be kept in place and even grow as utilities plan for the future. This demand may not only come in the form of the securing of fuel via long term contracts however, but also via inventory restocking. Currently we are seeing US and European inventories sitting well below their usual targets (2 and 3 years’ worth of inventory respectively) and these inventories will need to be refilled. In a time when energy security is becoming more important than ever, I would not be surprised to see US and European utilities take a leaf out of the Japanese utility book and target higher on site inventories.
Still with me? Good. As has become clear from what I noted above, the demand picture of uranium is looking as robust as it has in decades. We are looking at a major supply/demand gap that keeps widening the further we look out into the future. Add to this the 25-35 million pounds swing from supply into demand via overfeeding, potential demand from next generation small modular reactors and demand from financial players entering the market (the Sprott physical uranium trust, the ANU fund, other financial entities that are interested) and we are left with a massive gap that is not getting filled at $50 per pound uranium. This all wouldn’t be a problem if there was a supply side that could ramp up production to meet all this demand, but that is simply not the case at current prices and the equilibrium price level needed to incentivize enough new production is now reaching the $80 area and going up as inflation and supply chain issues take their toll. Those aforementioned supply/demand models will be revised firmly over the coming months and when they are, it will become clear just how big this supply/demand gap is becoming.
The next question you may have is "what is needed to make the price of uranium resume its upward trajectory?". That is a great question and the answer comes down to term contracting and liquidity. Utilities secure their uranium via long term contracts, which can range as far out as 8-12 years. A contracting cycle is the main driver of uranium prices and as luck would have it, we are entering the first big contracting cycle since 2005 as we speak. Utilities are back in the market and these discussions can take months to conclude, but from what I have been hearing the discussions now include talks about longer timeframes and larger volumes of uranium. Utilities are also flexing up existing contracts right now, which should be taken note of. Around 120 million pounds have been contracted this year so far, but to get to replacement rate contracting we need to get that number to 180 million pounds and above. At the highs of the previous bull market we saw 110-120+% of replacement rate contracting and I believe we will get back there over the course of this contracting cycle in the coming years.
My view is that there is a good chance we start to get close to there next year (all else equal, because any disruption on the supply side may speed that up significantly) and as we move up to that number, the price discovery will push uranium prices strongly upward as lower cost producer contract their pounds and utilities move to the next cost quartile. Prices of UF6 and SWU have already been in a bull market for the past years and this bodes well for the price of physical uranium. I will not bore you all with a write-up on the nuclear fuel cycle and stretch this post out another 7 pages, but what I will say is that this price movement in enrichment and conversion is very important and very good to see. We have never seen a uranium bull market where other fuel cycle components did not move first and we will not see one now, which makes a strong run in the price of physical uranium very much a when and not an if question. If history is any guide, that 'when question' will be answered next year.
With a decade being tomorrow in the uranium space, if you look out towards 2035, run rate demand in the nuclear space is forecasted to be around 225 million pounds per year (however that could well be higher depending on prevailing circumstances around SMR development). If you take the existing production capacity and bring it all back to full capacity, including lower tier assets and those still in development, you are only looking at around 160-165 million pounds of primary production come 2035. Cameco’s Grant Isaac said it best recently: “In the last contracting cycle there was a lot more inventory, lot more secondary supply and a lot more new production being invested in, that is all not happening right now", while then also adding that “the uranium spot price has never been this high at the start of a contracting cycle before”. I have spoken to Grant recently and he couldn’t be more enthusiastic about where this sector is going, which should fill uranium investors with confidence.
Finally, there is demand from financial entities. In the last uranium bull market, it was the financial entities that were in part responsible for the price spike that happened. Well, these entities are back now and this time there appear to be more and with more capital to boot. A key difference this time as well, is that we have the Sprott physical uranium trust that has proven to be incredibly efficient at taking in capital flows and purchasing physical pounds. Financial entities now have access to more information about this opaque market and also most importantly a well-managed and liquid vehicle to play this uranium bull market and from what I have heard from CEO John Ciampaglia, who I will speak with again in January, there is a lot (when I say a lot, I mean A LOT) of capital on the sidelines waiting for liquidity to improve and a general risk-on environment to get into the Sprott physical uranium trust. When this liquidity returns and flows come in, the result is likely to come in the form of a major move higher for the price of uranium.
The combination of all these factors, from the growing supply/demand gap and upcoming contracting cycle to financial players in the market and the best fundamentals of any asset class I see in the market, make uranium more than worthy of consideration to be a part of your portfolio in my personal view. There is plenty more to be said about the bull case for uranium, but I believe the post is long enough as it is and I encourage everyone to look deeper into this sector and recognize the incredible opportunity that it is presenting right now. I hope that it proved to be informative and if you have any comments or questions, please let me know. I wish you all happy and healthy holidays and hopefully a fruitful 2023, cheers!