URANIUM’S new lease on life, granted by the European Union on July 6, should give fresh legs to already strong prices for the yellow powder metal. The European Parliament, the EU’s legislative wing, voted positively to include nuclear energy in the bloc’s green-energy taxonomy.
The World Nuclear Association (WNA), representative of, among others, uranium miners, welcomed this development with dollar bills flashing in its members’ eyes.
“It has listened to the science and recognised that sustainable investment in nuclear energy will help the European Union reach net-zero by 2050,” Sama Bilbao y León, the association’s director-general, said after the decision. “Now governments, investors, and industry must act urgently and accelerate the deployment of new nuclear capacity to achieve this goal.”
It’s not difficult to see why the EU opted to include nuclear energy, fuelled by uranium, in its taxonomy.
In July this year, 56 nuclear reactors, with an installed generation capacity of 61,644MW, were under construction around the world. The construction of eight reactors (of which five are in Russia and Ukraine) have been suspended. Three reactors are being built in EU member states (France and Slovakia), with another five planned, according to WNA data. An additional 16 reactors have been proposed in EU member states.
Following the EU’s change of heart regarding the environmental sustainability of nuclear energy, member states may soon double down on nuclear building. Russia’s stranglehold on EU member states’ natural gas supply may yet be an impetus for the latter to opt for a “cheaper” source of energy in the form of nuclear energy.
Investors are taking note of developments in the uranium market. The number of nuclear reactors being built in the EU fades into comparison when considering China’s rollout of new power stations. The world’s second-largest economy is in the process of constructing 20 reactors (22,261MW capacity), with an additional 32 planned (35,660MW) and 168 proposed (196,860MW).
The US government said in April it would fund the refurbishment of nuclear power plants that would otherwise be closed soon, at a cost of $6bn. The UK government in the same month released its British Energy Security Strategy – to harsh criticism. The plan did, however, include £120m to establish a Future Nuclear Enabling Fund in May to invest in new planned nuclear power reactors.
Although many reactors are built to replace decommissioned ones, the WNA expects 289 to be built by 2040 to replace 154 closed ones. Clearly, demand for uranium doesn’t look too shabby over the next two decades.
The International Energy Association estimates that global electricity generation will increase from 26,762TWh in 2020 to 46,703TWh by 2050. The uranium industry bets that this is only achievable if nuclear energy receives a sizeable allocation of newly installed capacity. As seen from WNA data, China at least is forging ahead with nuclear power generation.
With an outlook for increased nuclear power plant builds, uranium miners’ purposeful reduction in supply for several years, geopolitical tension in Russia and Kazakhstan, and the launch of a tradeable physical uranium trust in Canada, the price of yellow cake (as uranium fuel is called) has adjusted upwards over the past two years.
Producer conservatism
After trading in a band between $20 and $30 for most of the period between 2016 and the first quarter of 2020, spot uranium reached $58.20/lb at the end of March.
Uranium miners are holding out on increasing supply. Speaking at the release on May 5 of first-quarter results by Cameco, the world’s second-largest miner of the metal, CEO Tim Gitzel was clear that it will take more than the current supply disruptions caused by the Russo-Ukraine war to increase supply.
“We will also take a balanced and disciplined approach to our supply decisions,” Gitzel said. “Even though we have seen considerable pricing pressure resulting from the geopolitical uncertainty, we will not change our production plans.”
These deliberate supply constraints have been implemented since 2017, when 63,207t of uranium (or 96% of world demand) were mined, according to WNA data. By 2020, production has declined to 47,731t (74% of world demand). Last year, production increased somewhat to 48,332t as Kazakhstan (the world’s largest producer) and Namibia (the second-largest miner of the metal) ramped up production. Russia was responsible for 2,635t, WNA data shows.
Following the outbreak of the Russo-Ukraine war, Russian exports of uranium and refined uranium have not been banned. Kazatomprom, the world’s largest miner of the metal and listed on the London Stock Exchange, however warned investors in May that “negative sentiment has increased and legislative initiatives have been proposed by EU and US lawmakers to ban nuclear fuel imports from Russia”.
Should the ban be realised, supply-driven price increases might be in the offing.
“The uncertain future availability of Russian fuel and processing services has brought concerns related to security of supply for Western utilities, driving an increase in both spot and term market activity, putting significant upward pressure on natural uranium, conversion and enrichment prices,” Kazatomprom said when it released its first-quarter results in May.
According to the company, Kazakhstan is responsible for “more than 45% of global primary supply” of uranium. With a belligerent neighbour, Russia, the company is scrambling to secure deliveries of uranium to customers. “Some of the company’s exported products are transported through the Russian Federation and, accordingly, there are risks associated with transit through the territory of Russia, insurance and the delivery of cargo by sea vessels,” it warned in May. “Kazatomprom constantly monitors the situation with sanctions against Russia and the potential impact on the transportation of finished products.”
In addition to envisaged supply shortages and a net increase in nuclear power plants across the planet, investors can now bet on these dynamics playing out in the long term.
The uncertain future availability of Russian fuel and processing services has brought concerns related to security of supply for Western utilities
The Sprott Physical Uranium Trust was launched in July last year. It buys and holds physical uranium in the same way as gold exchange-traded notes. The uptake of this trust, with its management expense ratio of 0.96%, has been astonishing to say the least.
In less than a year, the unit trust, which trades in either Canadian or US dollars on the Toronto Stock Exchange, has attracted $2.74bn in investments and holds 25,816t of uranium. The underlying holdings are equal to more than a half of annual global uranium output.
(The US Securities and Exchange Commission denied the trust’s application in April to list on American bourses, citing concerns about the physical delivery of radioactive material. The underlying holdings consist of triuranium octoxide, or U3O8.)
By the end of June, the Sprott fund had delivered a return of 18.6% in Canadian dollars over the past year, although it fared worse since the beginning of the year, declining 9%.
Interestingly, and probably beneficial to holders of physical uranium, Sprott doesn’t forecast supply-side growth for uranium over the next 13 years. The company does, however, estimate moderate demand growth.
This contrasts with Cameco’s announcement in May that it will return its McArthur River/Key Lake mining complex to production this year, aiming for 2,268t of uranium in 2022 and ramping it up to 6,805 tons by 2024.
With a new impetus on nuclear power generation and higher demand for uranium, and amid tight supply, the outlook for the yellow metal’s price might indeed be rosy.
