Published Date: July 9, 2024
Author: HANetf
The changing sentiment toward nuclear power is one element driving the first signs of a new uranium bull market. Uranium has had two previous bull markets in the last seven decades. The first was during the energy crisis of the 1970s, a phase of history that prompted a major wave of investment in nuclear power plants. The dynamics of the era were complex. The raging Cold War prompted countries to stockpile uranium just as hundreds of new nuclear power plants were under construction. The resulting bull market for uranium ran from 1973 to about 1978.
Supply and demand stabilized in the 1980s. Despite a movement for nuclear disarmament, the continued Cold War drove countries to keep stockpiling uranium. But higher uranium prices had prompted mining activity. Uranium traded in a range until around 2003, when an inflationary supercycle drove many commodities sharply higher through 2007. Markets also traded higher on a trending view that nuclear energy was soon facing a renaissance just as secondary supplies (i.e., defense stockpiles) were tapping out.[1]
The 2004-2007 bull market ended with the Global Financial Crisis (2008-2010) and was further reinforced by negative sentiment after the 2011 tsunami-driven accident at Fukushima.
Today, we believe that we are in the midst of a third bull market that has been building since 2016. The climate change movement set in action by the Paris Agreement has helped drive the uranium spot price up from its price lows in 2016.
Figure 9. New Uranium Bull Market in Development? (1968-2022)
Global demand for electricity is expected to climb almost 50% between 2019 and 2040, according to the IEA. In the developed world, much of this demand stems from technological innovation, such as a preference for electric vehicles and greater usage of electronics. In the developing world, tectonic demographic shifts are underway, driving higher incomes, population growth and the rise of middle classes, which translates into increased demand and consumption of new technologies.
Figure 10. Energy Demand is Expected to Increase 49% by 2040 (1990-2040e). Source: IEA World Energy Outlook 2022 Stated Policies.
To meet these expectations, many nuclear plants are currently under construction — but an even larger number are in the planning stage. Today, there are 435 nuclear power reactors in operation; 58 are currently in construction, primarily in China and across Europe and the Middle East, while another 104 reactors are planned for construction.
In terms of capacity and uranium usage, it’s also important to remember that many first- and second-generation reactors from the 1950s through the 1980s are smaller units producing around 400 to 500 megawatts of electricity (MWe). New reactors tend to be 1,000 or more MWe in capacity.
Figure 11. Worldwide Nuclear Power Plant Count: 434 in Operation and 154 Under Construction/Planned
As demand and nuclear reactor construction plans are driving spot uranium prices up, non-utilities buyers have returned to uranium markets. The same dynamics appeared in the last bull market during the commodity supercycle from 2004 to 2007, as non-utility buyers bought millions of pounds of uranium.
Global production of uranium has not kept pace with reactor requirements. Until recently, the production gap has had little effect on spot prices. In the Cold War era, countries were actively stockpiling uranium for defense readiness. However, since the end of the Cold War in 1989, uranium demand has been limited to nuclear power production. In the de-escalation era that followed the end of the Cold War, weapons stockpiles of enriched uranium were released for use in power plants. This supplied nuclear power plants for many years. In 2002, only 54% of power-plant uranium came from mining activity, with the lion’s share coming from secondary supply. Utilities worked through the excess supply. By 2012, 95% of power plant uranium was supplied by mining.[2]
Figure 12. Production Will Matter Now that Cold War Stockpiles of Uranium are Depleted (1945-2020)
Figure 13. Uranium Production/Demand Imbalance Could Grow (2021-2035e)
Uranium mining did pick up in the 2010s, but it remains below the level of current reactor demand by millions of pounds annually. The imbalance may likely persist. The International Atomic Energy Agency forecasts that uranium mining will not meet reactor demand in the next 15 years.
Figure 14. Uranium Production/Demand Imbalance Could Grow (2021-2035e)
In our view, the prevailing backdrop bodes well for uranium miners. We see three trends driving upside for miners in the years to come:
We expect to see an even more dramatic shift in energy policies of both developed and developing economies, expanding the outlook for nuclear power beyond what the present trajectory suggests.
Globally, nuclear power only represents about 10%[3] of electricity production today and more than 50% of zero-carbon emissions electricity.[4] As we noted earlier, renewable energy sources have added to electricity production to date; they have not replaced carbon-emitting production. Nuclear power is a clear frontrunner for replacing fossil fuel sources over time. Renewables have become much more competitive in cost, but they do not have the dependable capacity to take a significant share of the broader energy market.
Figure 15. Mining Equities Historically Outperform During Uranium Bull Markets (2004-2022) (Nuclear energy generates 10%1 of the world’s electricity and more than 50%2 of zero-carbon emissions electricity.)
As nuclear power gains a greater share of the worldwide energy market, the balance of capital across energy market names will also shift. Today, uranium miners represent just a tiny fraction of the market capitalization of all energy companies. Single company oil and gas conglomerates remain vastly larger than the entire uranium equity sector, in keeping with the relative share of their products in the electricity market.
Another way to consider the equity value of miners is in the outlook for mining activity. According to Sprott and WMC Energy, spot prices above ~$50-60* per pound begin to present an incentive for certain miners to expand their uranium production. Many other miners may likely require spot prices far north of that to economically ramp production or develop greenfield projects (new exploration on unmined terrain). In the emerging bull market, spot prices are beginning to approach these incentive ranges. Uranium miners may be poised to generate higher revenues and potential profits if and when mining production ramps.
Historically, the value of uranium miners is leveraged to the underlying price of uranium. Put another way, miners tend to outperform during physical uranium bull markets. Our outlook for uranium spot prices remains bullish for several reasons, both demand- and supply-driven, as we have discussed throughout this paper.
Figure 16. Mining Equities Historically Outperform During Uranium Bull Markets (2004-2022).
Source: Bloomberg and TradeTech LLC. Data from 1/1/2004 to 28/2/2022 reflecting longest available data. World Uranium Equities measured by the URAX Index, which tracks the performance of stocks globally that conduct business with uranium. URAX and Uranium Spot denominated in U.S. dollars. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Please note that all performance figures are showing net data.
Sources:
[1] https://www.world-nuclear.org/information-library/nuclear-fuel-cycle/uranium-resources/supply-of-uranium.aspx
[2] https://www.oecd-nea.org/jcms/pl_13870
[3] International Atomic Energy Agency (IAEA) as of 31/12/2019
[4] NEI.org as of 30/4/2020.
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