Investment Case
In 2023, enough of the investing world woke up to the uranium theme that spot uranium doubled in price from c. $50/lb to over $100/lb. This was an accelleration of the slow gride up from the bottom in 2016 at c. 30/lb.
As with a lot of investment themes, the greater the certainty on outcome the less the certainty on timing. Uranium, since 2016 was one of the most certain investment opportunities that had been available.
More recently, the new nuclear fuel contracting cycle (which can last 5 to 10-years) has begun, with most of the uranium transactions thus switching from the spot market to the opaque bilateral term market. This locks in 7 to 15-year offtake agreements from major suppliers at prices around of above $70/lb, giving high quality produces guaranteed margins of up to 100% on cost of production.
We consider the long-term cash flow available to the main produces from this new phase of the market not yet to be represented in company income statements, balance sheets, and cash flow statements, giving the potential for substantial re-ratings in equity prices.
In addition, with over 50 new nuclear power plants under construction, and up to another 150 in planning, the potential for small modular reactors, the political narrative change in favour of nuclear as the only low/non-carbon solution on the worlds growing energy needs, the future annual demand for uranium is expected to continue to exceed production supply in the short- to medium-term.
This is because current and future demand can reasonably well be predicted (from fuel cycle replacement in existing reactors and new reactor production), whereas new supply cannot quickly be brought online. It can take 3 to 5-years to substantially increase production from existing mines, and locating, permitting, financing, and constructing new mine supply can be a 10 to 20-year project.
In addition, uranium is highly price inelastic as it constitutes a very small component of a nuclear power plant’s total cost (considering the construction CapEx). Thus, there is a fairly week demand price-cap on future potential prices.
This bodes well for medium- to long-term price support for uranium, and so cash flows to the quality uranium mining companies.
Potential Beneficiaries
There are a few ETFs and funds (both for the commodity and for the related equities) available to access this theme.
These have the advantage of exposing the investor to the general price rise of the theme, at the cost of either losing the operational and financial leverage available to the equities compared to the underlying commodity, and/or holding a basket of stocks on a market-cap weighted basis most of which a discerning stock picker would not look at for more than an hour each.
With over c. 70 equity stocks in the uranium sector, of which only 12 to 15 are viable from a quality perspective, this is a stock-pickers theme.
Performance Tracking
Uranium Futures (‘Spot Price’)
Chart provided by TradingView.