Uranium - antidote for global energy crisis

The world is facing the challenge of meeting growing global demand for electricity. With a growing population and more electricity-powered technologies in use, as well as the ongoing transition toward electric motor-powered devices, global energy demand is likely to grow exponentially. With a shortage of supply, rising energy commodity prices and continued strong demand, energy price hikes could push humanity toward only the most efficient sources of energy. Europe is facing the prospect of an energy crisis, led by its lack of diversification of energy sources and its dependence on Russian gas supplies. The war in Ukraine has brought global attention to the energy issue, and rising commodity prices are prompting the world to debate global energy security, as energy is now the lungs of the global economy.

The two most efficient energy sources on Earth, i.e. uranium and hydro, only account for less than 10% of the global energy produced. Both of these sources leave no carbon footprint and are part of green trends based on concern for the health of the planet. In today's analysis, however, we will focus exclusively on uranium, which is the most calorific natural energy source on Earth. One gram of enriched uranium is equivalent to 3 tons of lignite coal. So is there a chance that the world will turn to uranium again?

The spot price of enriched uranium U308 has risen nearly 115% over the past 2 years, giving a return higher than investments in the S&P500, the US dollar, gold, US bonds and the Bloomberg Commodity Index. Source: Sprott

Why nuclear power?

We are in interesting times at the moment, as we are on the verge of a serious energy crisis, despite a surge in economic growth in recent years. Electricity is expensive, and its production is subject to factors that further fuel the inflationary spiral. This is where uranium, which remains the most efficient energy source despite bad PR in the media, can help. Energy prices in Europe have skyrocketed to levels not seen in decades. This begs the question: what can we do about it? 

Nuclear power plants are the most efficient source of energy on Earth, but for many years, including the Chernobyl and Fukushima disasters, they did not enjoy positive sentiment from societies and politicians, which reduced global demand for uranium. Today, state-of-the-art facilities are subject to strict safety regulations. The number of accidents at power plants is incomparable to the number of disasters at coal mines or wind farms. As a result of the unfolding energy crisis, politicians are forced to look at dry facts, not just sentiment and the interdependent economic ties built up over the years as was the case between Germany and Russia, among others. Physical facts confirm the advantages of nuclear fusion over conventional energy sources.

The market price of uranium, which is the basic ingredient of fuel in nuclear power plants, although it has risen by more than 100% over the past two years is still below the threshold of profitable production for many suppliers. It was this fact that prompted a fund owned by Canadian billionaire Eric Sprott to make record purchases of physical uranium in the summer of 2021, sparking price spikes for the 'dormant resource'. Sprott received information that nuclear power plants regularly received offers from suppliers of up to several times the market price of the raw material, which drew the institution's attention to the 'undervalued' price of physical uranium. From the summer of 2021 to the end of the first quarter of this year, the Sprott Fund purchased nearly 25,000 tons of U308, nearly half of the world's annual uranium needs.

The raw material still has no substitutes, and nuclear power plants are forced to use enriched uranium.  Considering that a pound of uranium is nearly 450 grams, the price of $70 for such an amount of raw ore (1 pound of pure, enriched uranium equals 450 MW of energy) still seems low compared to natural gas or coal, which have no chance of matching uranium's energy output. Of course, one pound of commercially available uranium ore does not apply to U308 uranium, which must be extracted from it, enriched and turned into nuclear fuel. The percentage of raw material in one pound of uranium ore depends on the purity of the deposit. 

The energy return on energy invested (EROI eng. Energy returned on investment) ratio compares by far most favorably to nuclear power. The most uncertain remains renewable sources, whose energy performance depends on many external factors and thus is difficult to predict. In addition, the prices of the materials necessary (rare earth metals, steel, concrete, etc.) to build a wind or solar farm reduce the EROI. Coal and gas are still not bad, but taking into account the carbon footprint and the total result, the most favorable source turns out to be water and nuclear, with the supply of energy from nuclear being completely predictable, similar to coal and gas. Buffering capacity, i.e., a value that takes into account energy storage (bars with dashed lines), also compares most favorably to nuclear, least favorably to RES. The efficiency of nuclear power is also indicated by studies by researchers at leading universities like Harvard and the Massachusetts Institute of Technology. Source: Forbes, Weißbach, UEC

A global shift in the nuclear narrative?

Japan, which turned against nuclear power plants in the wake of the Fukushima disaster, plans to reopen 17 of them, nearly half of the total shut down after 2011, as announced by the country's president, Fumio Kishida. Some of the expert studies following the Fukushima disaster point to relatively minor damage caused by the power plant accident. Significantly, the cause of the accident was a tsunami, which, unlike Chernobyl, was not directly related to the safety of the reactors. Analysts at Bank of Scotland indicate that 21 more power plants will open in Japan by 2030. According to Reuters, Germany may also keep three nuclear plants open next year as well, which would result in up to a 4% reduction in energy prices. The world has turned negatively toward nuclear power in the wake of the aftermath of the Fukushima earthquake and tsunami in Japan. Interestingly, Germany began a massive shutdown of power plants and removing them from the energy map after the Fukushima accident. However, looking at Japan's own pro-nuclear moves, will they send a signal to crisis-stricken Germany? Equally important, the European Union has endorsed nuclear power as an ESG investment, as of July 6, 2022, the European Parliament favorably voted to include nuclear power in the EU's energy nomenclature in favor of so-called sustainable finance.

Nuclear energy has also been a topic repeatedly addressed by Elon Musk, who has stated that 'closing non-carbon footprint nuclear power plants would be a detriment to the planet.' The U.S. Inflation Reduction Act, signed into law by President Joe Biden prioritizes nuclear power in the energy sector which could improve demand conditions in the global as well as domestic (U.S.) uranium producer market. The United States is also considering extending the operation of power plants, including one of California's largest, Diablo Canyon, which has so far accounted for nearly 10% of the state's electricity supply. 

We can see that the uranium price has so far moved in erratic cycles, each time halted by disasters like the Three Mile Island mine flood (1979), the Chernobyl accident (1986) and the Fukushima tsunami disaster (2011), as well as the financial crisis in (2008). Today, sentiment around uranium is clearly beginning to improve, and a return to nuclear energy has been announced by, among others, Japan, which shut down its reactors after the Fukushima accident, thereby contributing to worsening demand conditions and ultimately ending the bull market in uranium mining companies' stocks. Nuclear energy, as a CO2-free source, fits in with green trends while maintaining an efficiency unmatched by any other energy source on Earth today. In the face of the energy crisis, European countries may look to nuclear as a lifesaver; Germany and France have already announced the extension of nuclear power plants. Sprott, TradeTech

Outlook for growth 

Bank of America, among others, has been positive on uranium recently, pointing to the increasing activity of financial entities buying uranium in recent times, which in the past has translated into higher prices. The immediate catalysts for the bull market could be the loss of supply from Russia, which would project a rise in the price of uranium ore and possibly mean an unconditional extension of the life of the massive Diablo Canyon nuclear power plant, in California, which accounts for much of the U.S. energy production. The plant's closure seems highly unlikely, as indicated by California Mayor Gavin Newsom, among others. Analysts at BofA forecast an increase in uranium prices to $70 per pound in 2023, compared to the current $52. They cited supply problems and growing global support for nuclear power as the main reason for the increase. 

In 2021, uranium imports from Russia and Kazakhstan accounted for 49% of total supplies (22.9 million pounds of uranium), but analysts point out that amid the Washington-Moscow crisis, there is a growing likelihood of diversification of supply sources from allied countries like Australia, Canada and the United States, which continue to identify indigenous sources. An extension of the Diablo Canyon power plant could raise global uranium demand by as much as 1.2 million pounds in 2025. At the same time, a scenario of frenzied uranium price increases similar to the 2003-2007 period when the price rose from $10 to $140 does not seem likely in the face of still substantial reserves at power plants and improving supply chains of infrastructure to enable mining.

Which stocks can gain from rising uranium demand?

In the following analysis, we have considered two listed companies that, in our view, are well positioned against their competitors to profit from rising uranium demand and a global shift in sentiment toward nuclear energy. Both have market advantages that may indicate a so-called "wide moat. In the case of Kazatomprom, it is the world's largest access to ISR mines, the establishment of which was conditioned by the occurrence of uranium in Kazakhstan.  Thanks to ISR mining, the company can supply uranium at unbeatable prices and incur lower mining costs compared to the market. Kazatomprom is also the world's largest producer of uranium ore. 

In contrast, Uranium Energy Corp. is the only major U.S. company that currently mines uranium and has mining licenses that enable it to launch a domestic supply market in the United States. In the absence of significant competition in the U.S., the company can benefit from the transition and be the first contractual choice for supplying the raw material to U.S. power plants. UEC's research has proven massive uranium ore reserves within the US in the states of Wyoming and Texas, among others. Until now, the United States has imported massive amounts of uranium from Canada and Russia. Significantly, the United States is still exploring the potential of smaller SMR (Small Modular Reactor) reactors, advocated by Bill Gates and Warren Buffett, among others.

Kazatomprom (KAP.UK) - The company is the world's largest uranium producer and in 2021 accounted for 25% of the global supply of the raw material, supplying 12,000 tons of U308. The company currently has about 351 thousand tons of reserves of the raw material in its in-situ mines, these reserves could last for up to 6 more years of global uranium demand, which positions it well in case prices rise. At the end of 2021, the Kazakh giant reported $256 million in debt and cash reserves of $373 million. The company regularly pays dividends. 

Kazatomprom enjoys a significant competitive advantage from its natural access to low-cost mining thanks to its in-situ mines (ISR In Situ Recovery Mining), made possible by Kazakhstan's easily accessible and abundant uranium ore deposits. Increasing production at conventional mines like Cigar Lake (and throughout the Saskatchewan uranium basin region in Canada) is more costly and slower than mines operating with ISR technology. Kazatomprom's relatively modest mining costs of about $9 per pound of uranium in the face of a raw material sporting prices above $50 per pound and an average selling price of about $30 per pound in 2021 may account for the company's future operating profit potential. 

Kazatomprom is weighed down by geopolitical risks that could potentially impact the supply chain of the raw material and the company's other products (beryllium, tantalum, niobium), as well as lowered sentiment around Kazakhstan exposed to Russia's imperial influence. The company is not listed on any Russian stock exchange, there are no Russians on its board of directors, and Kazakhstan itself has distanced itself from aggression in Ukraine, refusing military aid to the Kremlin. Kazakhstan's geographic location still seems to be the main reason why its share price has not seen a significant increase, although the price of uranium has risen by nearly 50%. Kazatomprom also has some internal risk, as only 15% of the company's shares are admitted to free trading. 85% of the shares are held by Samruk Kazyna JSC, a Kazakhstan state-owned company.

Kazakhstan has 12% of the world's uranium reserves and the largest number of in-situ mines (including Inkai where 40% of the shares are held by Cameco CCJ.US ), which make it possible for Kazatomprom to extract the raw material at competitive prices without incurring 'inflationary mining costs' that can weigh on Western producers. Source: Kazatomprom

The company's presentation shows that the trade route can bypass Russian territory. The route goes through the Caspian Sea (Aktau), the port of Alat, Porti Poti and the navigable Turkish straits from where it exits to the Mediterranean Sea and the global market. A separate supply chain from Kazakhstan leads to East Asia. China and India, which plan to generate 22,480 MW of nuclear power by 2031, may become Kazatomprom's main markets in the future. Over the past three years, Kazatomprom's uranium imports to India have totaled more than 4,500 tons against less than 3,000 tons imported from the second largest producer, Cameco. India plans to commission 4 new nuclear reactors later this year and 36 new reactors by 2028, some of which have already received construction permits. Source: KazatompromKazatomprom (KAP.UK) chart, D1 interval. The company's shares have managed to defend the support set by the 50% Fibo elimination of the upward wave started after the Covidian bottom and are trying to permanently exit the medium-term downtrend. Source: xStation5

Uranium Energy Corp (UEC.US)

The company is the largest uranium producer in the United States. It has no debt and declares a cash position of $180 million accumulated in cash and physical uranium ore, which the company has successively accumulated at lower prices, allowing it to boast a substantial unrealized profit today. In addition to media CEO Amir Adnani, the company's key positions include Scott Melbye, president of Uranium Producers of America and former chairman of the Board of Governors of the World Nuclear Fuel Market, and Spencer Abraham, former US Secretary of Energy (term 2001 - 2005). 

Uranium Energy Corp currently operates two production-ready in situ recovery mining (ISR) sites in the states of Texas and Wyoming, with fully licensed, operating Hobson and Irigaray sites. The company also has seven U.S. uranium ISR projects on which all major licenses have already been obtained. Significantly, the licensing process is time-consuming, and Uranium Energy is clearly ahead of its domestic competitors in this regard. Adnani pointed in a recent interview to the growing need among Western companies to diversify uranium supplies from safe jurisdictions, and emphasized the contribution UEC intends to have in the energy green transition in the US.

While the uranium stockpile at U.S. nuclear power plants is likely to be sufficient for several months of undisturbed reactor operation, some senators pointed out that the U.S. has so far made insufficient efforts to identify and exploit indigenous uranium deposits which exposes the country to supply chain energy risks. Until now, Russia has been the main exporter of uranium to the US, receiving ore from suppliers, with the Rosatom corporation enriching the raw material and exporting the fuel. 

Positive statements on uranium have been made by, among others, Senators Kevin Cramer and John Barrasso, who have filed a bill, the 'National Opportunity to Restore Uranium Supply Services In America (NO RUSSIA) Act of 2022', which includes uranium as a strategic resource, which, if approved, will entail increasing its production and supply:

• "Uranium is critical to our energy security, national security and the reliability of the power grid. Establishing a national strategic uranium reserve, consisting of uranium produced and processed in America, would reduce our dependence on Russia and other adversaries and support domestic energy production."  Senator Cramer conveyed in turn.  
• "Access to U.S.-produced uranium is critical to both our energy and national security," Barrasso said. "We cannot depend on our adversaries for fuel that is with us. The bill will kick-start the U.S. nuclear fuel supply chain. It will increase demand for Wyoming uranium and provide America with the fuel needed to power our nuclear reactors." 

In the first half of the year, Uranium Energy Corp reported on a document filed with the SEC that it had identified a record uranium deposit in the state of Wyoming. The reserves identified by UEC turned out to be larger than all previously reported crude deposits in the US. The company also has 3 active projects in Paraguay where ISR mining is possible.  Reserves of physical crude amount to 5 million. pounds, which were purchased by the company at an average price of $38 per pound, resulting in a current unrealized gain of $14 per pound, (about $60 million).

This year, the company also completed the largest acquisition in the history of the U.S. uranium market with the purchase of Uranium One Americas for $112 million. USD in cash. The acquisition doubled the company's production capacity, total number of permitted ISR mining projects in the US, resources and available processing infrastructure. To date, UEC has extracted 6 million pounds through ISR projects. The company has also purchased more than 400 square kilometers of uranium-bearing land deposits in the state of Wyoming. By 2021, nuclear power will account for 20% of total energy production in the US.Current uranium prices at $52 levels are still well below historical peaks. The 12-year price bottom was anchored at $17 levels, in 2016. Source: UECUranium Energy Corp (UEC.US) stock chart, D1 interval. The technical situation of the company's stock price is very similar to Kazataprom. Nevertheless, in this case, the supply side managed to stop the upward wave 3 times around $4.5 per share. In both cases, the RSI indicator oscillates near the upper band of 70. Source: xStation5

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