Uranium Bull 3
Based on its core strategic fundamentals, investors ought to be wildly bullish on uranium’s future. But with a veil of uncertainty cast over it thanks to the tragic Fukushima disaster, should we be looking at the future differently? Of course only time will tell how things play out. But based on cold-hard rationality, my money is on a future where nuclear power is an indispensible part of the world’s energy infrastructure.
This rationality is based on the fact that electricity demand is expected to increase by about 75% over the next 20 or so years. With this soaring demand, only economically-scalable sources of energy will suffice. For a variety of reasons renewable energy does not have the right combination of economics and scalability in today’s environment. And while coal and natural gas will continue to be big players, the world’s push towards clean energy pits a lot of objections to these sources.
Nuclear energy on the other hand is scalable, economical, sustainable, reliable, and even with such black-swan events as Chernobyl and Fukushima, it is clean. It already accounts for about 14% of the world’s electricity, and most of the world’s utilities/governments realize that nuclear power is integral to meeting future energy needs.
For these reasons and more uranium, the commodity that fuels nuclear power, is in the midst of an incredibly-powerful bull market. And based on the economic imbalance of the uranium market, this bull ought to plow forward for many years to come.
Mine production is of course the main supplier of uranium for the world’s 440 operating nuclear reactors. And over the last decade or so the miners have done a fine job increasing production volume. In fact, according to the World Nuclear Association (WNA) mine production had increased by an impressive 51% from 2003 to 2010, to nearly 54k metric tons. But amazingly this current rate of production is a staggering 15k metric tons short of what is required to power the reactors in 2011.
Filling this giant gap is supply from military and commercial stockpiles. But while this stockpile supply has been reliable, its outlook is bleak. With programs like “Megatons to Megawatts”, in which Russia converts highly-enriched uranium from dismantled warheads into nuclear fuel, coming to an end in 2013, along with the dwindling of other stockpile sources, consumers are soon to find themselves in a pinch.
And this pinch will be even more painful as the competition for this resource grows. Per the WNA’s most recent assessment, there are 558 nuclear reactors currently under construction, planned, or proposed. And with these new reactors expected to come online at a much faster pace than those that are decommissioned, uranium’s supply crunch is looking quite ominous.
Needless to say growing demand, decreasing stockpiles, and mine-production shortfalls have not gone unnoticed. And for these reasons and more, uranium prices have skyrocketed over the course of its bull. But as you can see in this chart, uranium’s uptrend has been far from orderly.
After years of reliance on the liquidation of stockpiled inventories, uranium consumers had grown complacent. Competition for obtaining this mineral was a non-issue, and they didn’t see any reason to fret about supply disruptions and/or higher prices. But as you can see, beginning in the latter half of 2003 reality smacked this industry in the face.
From 2003 to mid-2007 uranium was the hottest commodity in all the markets. And when folks finally came to the realization that a supply deficit was imminent, prices went parabolic. Uranium’s breathtaking surge took prices from their lows just over $7 per pound in December 2000 to $136 in June 2007, a staggering 1815% gain.
Parabolas are of course unsustainable, regardless of how bullish fundamentals are. Uranium was way overbought at its 2007 apex, and the downside action to rebalance sentiment was bound to be messy. It needed to correct, and indeed the resulting correction was as fast and furious to the downside as uranium had been on the upside.
After a year or so of aggressive selling, uranium appeared to find its bottom. But as with nearly every asset, it got sucked into the universal selloff spawned by the infamous stock panic. Stock-panic splash damage dragged uranium prices even lower. And thanks to global economic worries that reverberated across the nuclear-power industry, uranium didn’t see its bottom until early 2010. By the time the dust settled, uranium was off 71% from its high.
Uranium had finally found support at the $40 level. And while this was a whopping $96 off its high, it was still 450%+ above its lows. The bull was still intact. After a rough few years folks realized that the need for nuclear energy had not diminished, nor did uranium’s fundamentals. Demand was still rising, stockpiles had three more years of drawdowns, and the miners were still way behind the eight ball.
In mid-2010 uranium caught a serious bid, one that transpired into a powerful upleg that gained 75%. And by February 2011 prices had climbed back to $70, a level that hadn’t been seen for nearly three years. But as is necessary, and healthy, a selloff was due in order to rebalance sentiment.
Uranium prices took a little breather into March, but this breather has turned into a big blow thanks to a catastrophic series of events on March 11th. Following one of the biggest earthquakes ever recorded, a giant tsunami pounded Japan’s Fukushima-1 nuclear power plant. Unfortunately this plant’s seawall was only designed to withstand a tsunami about a third the size of the one that hit it. And this 43-foot-high beast flooded the entire plant, incapacitating its cooling systems and ultimately leading to a full meltdown in three of its six reactors.
This disaster, which is still ongoing, has certainly given a reality check to the nuclear-power industry. While the operation of a nuclear power plant is about as clean as you can get from an environmental standpoint, the risk of a failure (core meltdown) and its resulting widespread damage is always a concern. And though a meltdown is an incredibly low-probability event, what transpired at Fukushima makes it all too real.
The result of such a disaster is heated deliberations on the future of nuclear power. And you may recall a similar situation in the mid-1980s following the aftermath of the Chernobyl disaster in Ukraine. Many were outspoken about completely shutting down commercial nuclear power.
The nuclear-power industry of course rebounded from Chernobyl, but this disaster had clearly damaged its growth prospects. As an example, right around the time of this meltdown Italy was rolling out a plan to build out nuclear power. But even though it was determined that Chernobyl’s reactor failure was a result of shoddy workmanship and insufficient safety procedures, Italy fearfully shelved its nuclear program. Provocatively just this year Italy was in the process of revisiting nuclear power. But thanks to Fukushima, it is again off the table.
And Italy isn’t the only country allowing Japan’s disaster to alter its policy on nuclear. Switzerland, a country that uses nuclear to power 40% of its electricity needs, recently announced it will be decommissioning all of its nuclear power plants by 2034. Germany is also planning on phasing out nuclear thanks to Fukushima. This major European powerhouse currently gets 23% of its electricity from nuclear, but will wipe this source by 2022.
News like this and more will no doubt impact and remold the future of nuclear power. Even the Ux Consulting Company (UxC), one of the nuclear industry’s premier market/consulting houses, acknowledges that Fukushima has notably impacted future nuclear-power growth. And for this reason uranium’s ongoing correction has likely overshot to the downside, bringing prices back down towards $50.
But though it may seem like the future of nuclear power is in jeopardy and that uranium prices are in a death spiral, this couldn’t be farther from the truth. Though tragic, Fukushima will serve to improve safety standards going forward. And despite the speed bump that this disaster’s aftereffects will have on the global nuclear buildout, nuclear power will still be a vital component of today’s and tomorrow’s electricity needs.
Even with the notable impact of Fukushima, UxC still foresees a steady construction of nuclear reactors in the coming decades. While there might be some delays directly linked to Fukushima, such as what we are seeing in a next-generation reactor under construction in France, most reactors will still be built. Even before Fukushima the majority of existing construction projects and those in the pipeline belonged to China, Russia, India, and South Korea. And these countries are expected to proceed as planned.
The world needs nuclear power, and regardless of what’s going on in Germany, Switzerland, Italy, and even the US, nuclear power will increase and so will uranium demand. In fact, UxC anticipates that even with the Fukushima effect we will still see a double in uranium demand by 2030.
With this Japan disaster still so fresh on people’s minds, uranium may indeed still have some downside in the interim. But on balance it still ought to trend upwards as fundamentals overtake the current negative sentiment. In which case there are still excellent opportunities for investors to cash in on this bull.
There are a couple of primary ways to play uranium. First is via futures, vehicles that are still relatively new to the uranium scene. Only in 2007 did the NYMEX introduce off-exchange-traded uranium futures. These contracts are in cooperation with UxC, in which UxC provides month-end spot U3O8 prices.
Futures trading is of course designed for more sophisticated traders with a higher appetite for risk, so most investors prefer stocks. But even uranium stocks are not for the risk-averse. Ask any investor who’s put capital into these stocks and you’ll get consensus that this realm comes with gut-wrenching volatility.
When uranium prices were going parabolic, so were uranium-mining stocks. In fact, before uranium gave up its ghost in 2007 there was a bit of a mania to grab any company that had a stake in a uranium deposit. Most of these companies weren’t even close to production and had yet to prove up their deposits to economic feasibility. But that didn’t matter. And most of these stocks delivered legendary gains, positively leveraging uranium’s own gains.
But once the bottom fell out of uranium, these stocks got crushed. Uranium’s sharp multi-year downtrend decimated the companies scouring the earth for this mineral. Many didn’t survive, and many of those that did shifted gears in their search for mineral wealth. With uranium in the depths of despair, they decided to look for something with more promise like gold, silver, copper, or even rare earths.
This uranium-stock bludgeoning was unfortunate considering the dire need to increase mine production going forward. With stockpiles dwindling, demand not letting up, and mature uranium mines depleting, miners have a lot of weight on their shoulders to get the next generation of mines into production.
Fortunately uranium prices are still plenty high enough to entice mining companies to discover and develop uranium deposits. And investors still have ample opportunity to capitalize on the fortunes of the elite companies that will be successful in doing so. But identifying high-potential uranium stocks is easier said than done.
Interestingly there is plenty of uranium in the ground, it is not a rare mineral. In fact, uranium is as common in the earth’s crust as tin and zinc. Higher prices also serve to make lower-grade deposits that may not have been economical in the past economical today. For these reasons and others, mining companies that own uranium deposits are not hard to come by.
The biggest challenge that miners are faced with is not discovery, but rather development. Since uranium is toxic by nature, proposed mining operations are subject to substantial regulatory oversight. These mines usually need specialty permitting from a country’s nuclear agency for such things as tailings disposal, processing, and transportation. And overall this makes the process of developing a uranium mine quite cumbersome from a time and cost perspective.
For these reasons and more, most uranium companies will fail. And I suspect the road will be even tougher in the interim considering all the negative sentiment currently surrounding nuclear. These mining companies are likely to encounter a much leaner capital-raising environment until some of the fear abates.
Provocatively these negative factors are quite bullish for uranium’s long-term fundamental picture. The major challenges miners are faced with will only allow them to ramp up supply so fast. And this is apparent when you look at the universe of uranium stocks. There aren’t many projects in the development pipeline.
As investors we need to be selective in the stocks we choose. There aren’t many producers to choose from, emerging producers are few and far between, and explorers with a combination of high-potential deposits and managerial know-how to drive development are even more rare. But if you do find these stocks, huge gains are likely to be had. And considering the carnage in this sector from the events earlier this year, it is currently a bargain-hunter’s paradise.
At Zeal we’re taking advantage of the rotten sentiment towards nuclear, and in our newsletters we’ve recently taken positions in some high-probability-for-success uranium stocks. We’ve also been deploying capital into other high-potential commodities stocks, and will continue to layer in trades for what we believe to be an upcoming autumn rally. To see our trades and get cutting-edge market analysis, subscribe today to our weekly and/or monthly newsletters.
The bottom line is uranium’s bull market has so far exhibited a series of extreme highs and lows, with the highs taking this mineral on an uptrend that has delivered spectacular gains. And while the recent tragic events at Fukushima have temporarily marred the nuclear industry, and thus uranium prices, nuclear power will still be a vital source of today’s and tomorrow’s energy needs.
As a result folks must not lose sight of uranium’s wildly-bullish fundamentals. Even with the Fukushima effect, demand is expected to grow at a rapid pace. And because supply from both the mining and stockpile fronts is expected to struggle to meet this demand, uranium prices should continue to rise. Investors can play this imbalance by buying quality stocks that are currently out of favor. Contrarian plays like this typically lead to huge gains.
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December 6th, 2023
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