Rarely does an investment opportunity like nuclear power come along.
It's cheap, it's clean, and it's all the rage.
Not every country is blessed with massive reserves of natural gas and coal. And the ones that are, are rethinking that model in light of climate change and life-threatening pollution.
Carbon emissions are no longer en vogue. They pose a serious risk to our health and our environment.
Problem is, green energy sources — such as solar, wind, and hydropower — aren't capable of carrying the load on their own. They're too expensive, and they simply don't have enough juice to power the planet.
Nuclear power is necessary. It's cheaper than alternative fuel sources, and it emits no carbon.
In that capacity, nuclear energy is actually good for the environment. I know it sounds crazy, but it's true.
Nuclear power has avoided the release of an estimated 56 gigatonnes of CO2 since 1971. That's almost two years of total global emissions at current rates.
It's also one of the cheapest forms of energy out there.
It's not quite as cheap as natural gas, but it's far more efficient than solar, wind, and even coal in terms of levelized cost.
That is why so many countries, including the United States, continue to rely on nuclear power.
In all, more than a dozen countries get over 25% of their energy from nuclear power, with 437 nuclear reactors operating around the world. On top of that, there are another 71 reactors under construction, 165 planned, and 315 proposed.
China is the biggest driver by far.
It already has 36 reactors in operation, another 20 under construction, and more than 100 planned.
China will build 40 nuclear power plants in the next five years. It will have 58 gigawatts (GW) of capacity in full commercial operation by the end of 2020, up from 30.7 GW now.
When it's all said and done, Beijing will have spent a whopping $2.4 trillion to expand its nuclear power generation by 6,600%.
This incredible expansion is global news...
But China is hardly an isolated case.
India is in a similar situation. It's pledged to grow its nuclear power capacity from 5,000 megawatts to 63,000 megawatts by 2030.
Russia aims to boost the share of electricity it gets from nuclear power to 25% in that time, up from 16% now.
Even Japan is restarting reactors.
In all, 15 Japanese nuclear plants housing 25 reactors have applied for permission to resume operations. Five reactors have already been cleared.
As for the United States, nuclear energy provides 63% — nearly two-thirds! — of the country's carbon-free electricity. That's shocking when you consider nuclear power accounted for just 1% of the nation's electricity when Congress passed the Clean Air Act in 1970.
And guess what? That share is forecast to grow even further over the next decade.
In fact, Congress recently passed a $1.8 trillion Omnibus Appropriations Act. It included $1.1 trillion of spending and $700 billion in tax breaks and kept the government open through September of this year.
Tucked into that bill was $1 billion of funding for nuclear energy programs. That's a billion dollars earmarked for the development of new advanced reactors.
This is good news for the environment and nuclear power companies... But it's amazing news for uranium prices.
The Coming Uranium Rush
This nuclear renaissance, predictably, has led to a sharp rise in uranium demand.
Uranium needed to supply growing global nuclear generating capacity is seen at 80,383 tonnes in 2020, rising to 90,780 tonnes in 2025 and 106,301 tonnes in 2030. However, estimated total production of uranium is seen at 75,000 tonnes by 2020 and around 85,000 in 2025. That's obviously short of what's needed.
As a recent Morningstar report noted:
We expect global uranium demand to rise 40% by 2025. Annual growth of 2.8% might not sound like a lot, but is massive for a commodity that has seen precious little demand growth since the 1980s. Consider that average annual copper demand growth of less than 3% from 2002 to 2012 was enough to drive a 336% price increase.
Mined supply of uranium will struggle to keep pace amid rising demand and falling secondary supplies. Low uranium prices since Fukushima have left the project cupboard bare. We expect a cumulative supply deficit to emerge by 2021.
These shortfalls should begin to have an impact on price negotiations in 2017 because utilities tend to secure supplies three to four years prior to actual use. We estimate prices must rise from $50 a pound to $75 a pound to encourage enough new supply.
That note also touches another pressing problem — namely: “Low uranium prices since Fukushima have left the project cupboard bare.”
No doubt, the five-year bear market in uranium prices was devastating for producers.
Prices slid from $52 per pound to just $28.25 in June 2014. They posted a modest rebound over the next two years, but as 2016 drew to a close, they crashed back down below $25 per pound.
As a result, uranium mining has become unprofitable, leading to mine closures and even bankruptcies.
Several years ago, there were 500 companies mining uranium. Today, there are just 20.
That's right: The uranium crash has removed 96% of suppliers from the market.
Now, 80% of the world's primary uranium supply comes from just 10 mines. And future global supply is dependent on just five newly proposed projects.
That hasn't been a problem up until this point, because the world had adequate reserves to cover for declining production. But 2016 marked a huge inflection point for the industry. It was the first year that demand actually exceeded supplies. We're now poised to see a 60,000-tonne shortfall by 2018.
For that reason, uranium prices will rise over the next 10 years. They'll almost certainly double from their current level, rising above $50 per pound.
Some forecast models even suggest a price of $70 or $80 by 2018.
So how can you play it?
Well, two major uranium plays worthy of consideration are:
Cameco (NYSE: CCJ): Cameco is the world's largest uranium producer. The company explores, mines, mills, buys, and sells uranium concentrate. It has working properties at McArthur River and Key Lake, Cigar Lake, and Rabbit Lake, located in Saskatchewan, Canada. It also has the Crow Butte property located in Nebraska and the Smith Ranch-Highland located in Wyoming. Its Inkai uranium deposit is located in Kazakhstan. Cameco also operates four nuclear reactors.
Areva SA (OTC: ARVCF): Areva is a multinational conglomerate, headquartered in Courbevoie, Paris. The company offers technological solutions for nuclear power generation and electricity transmission and distribution. It also manufactures nuclear measurement equipment and transportation safety systems, along with recycling and reprocessing nuclear fuel.
Additionally, while many of the smaller miners have been wiped out, there are still some floating around. They would be considered high-risk, high-reward investments. Two of these are Paladin Energy and Berkeley Resources:
Paladin Energy (TSX: PDN): Paladin is an Australia-based producer. It operates mines in Canada, Namibia, and South Africa, as well as Australia.
Berkeley Energia (OTC: BKLRF): Berkeley is a microcap that's too small to be considered anything other than a possible buyout candidate.
Besides miners and service companies, investors can profit from the nuclear industry by buying simple exchange-traded funds or mutual funds. These can track baskets of uranium companies, nuclear energy companies, or both.
Global X Uranium ETF (NYSE: URA): URA is designed to track the price movements in shares of companies that are active in the uranium mining industry. The fund holds uranium stocks from all around the world, including Cameco, which accounts for a fifth of its assets.
Market Vectors Nuclear Energy ETF (NYSE: NLR): NLR seeks to replicate the price and yield performance of the DAXglobal Nuclear Energy Index. To be included, companies must have a market cap exceeding $150 million, daily average trading volume of at least $1 million, and monthly trading volume of 250,000 shares. It has $76 million in assets.
Holding a combination of these plays as new nuclear plants come online, the effects of reduced supply become apparent, and uranium prices start to rise is a sound way to deploy a uranium investment strategy.
— The Outsider Club Research Team