The forgotten energy play: uranium

The reasons behind the boom in energy minerals and metals in recent years were not overly complex: more manufacturers were making cars that ran on batteries, and the ingredients in those batteries went up in price. Now, cobalt, lithium and graphite remain in demand, despite coming off the price highs of 2016-18, and copper and nickel markets are likely to keep getting tighter as well. 

The move to electric vehicles is part of a global effort to cut emissions, with the common goal being to keep global temperatures lower than two degrees above pre-industrial levels as per the Paris Agreement. As coal-fired power plants were responsible for 30 per cent of worldwide CO2 emissions in 2018, according to the International Energy Agency (IEA), investors might well think that buying into anything connected to cutting that output would be a smart decision. 

Readers who have seen the new TV dramatisation of the Chernobyl disaster could be forgiven for turning the page now, but it’s true nuclear power provides low-emission and stable energy.  While catastrophe still looms when talking about the uranium market, with Fukushima the most recent disaster, nuclear power has lost some of its past toxicity as the world looks to low-carbon energy options.

US congresswoman Alexandria Ocasio-Cortez, who has has refocused Democratic Party environmental policy, has said she has an open mind on the technology, and that view has been echoed by the authors of the Green New Deal (GND) policies. China and India are big backers as well. 

But uranium faces a few hurdles that might prevent it from recovering from its years-long rut and handing investors massive returns, à la cobalt between 2016 and mid-2018. 

 

Me and U 

As an investment, uranium is still perceived as closer to coal than cobalt, lithium and vanadium, but is well off the price strength of coking or thermal coal. Between 2011 – when the tsunami caused three meltdowns at the Fukushima Daiichi plant – and the end of 2016, the spot price went from over $70 (£55) per pound (lb) to $20/lb. The price fall took some time because the market is heavily weighted towards long-term contracts, which are usually priced higher than spot. Looking at demand, the current trajectory for nuclear power would see a quarter of current capacity in developed nations disappear by 2025.

But China and India are providing growth, with 11 and seven reactors under construction, respectively. The IEA said in a report in May that more low-emissions power was needed as electricity demand continues to expand. “The failure to expand low-carbon electricity generation is the single most important reason the world is falling short on key sustainable energy goals, including international climate targets,” says executive director Fatih Birol. 

In the short term, the industry is looking towards a ruling from the Trump administration on the Section 232 report into the US’s reliance on uranium imports from Russia and its allies. Trump has another month before the deadline for a response, which could send spot and contract prices way up. 

Rob Crayfourd at New City Investment Managers (NCIM), who runs the Geiger Counter fund with Keith Watson, says uranium’s fall is more complicated than a reaction to Fukushima. “The main issue was increasing production out of Kazakhstan,” he says. “The Kazakhs went from being 10 per cent of global production to 40 per cent over that period [2007 to now]. That was the real headwind for the overall sector, rather than any kind of decline in demand.”  Kazatomprom (KAP) makes up 7.6 per cent of the £19.2m Geiger Counter fund.

 

Long-term languish

The uranium mining sector is now very familiar with poor prices, with U3O8sitting under $40/lb for much of the past six years. Supply has only just been turned off, however, with miners forced to stick to long-term agreements with utilities and keep producing. Cameco (CAN:CCO) suspended its 18 million-pounds (Mlbs) per-annum McArthur River operation in Canada in January 2018, Kazatomprom cut planned supply increases, while development projects have slowed, leaving uranium in the ground. 

On top of the supply cuts, Trump’s reaction to the 232 report could boost demand for US-friendly uranium supply. Numis analyst Justin Chan has said in several notes this year the that Section 232 investigation is hanging over the industry by delaying new long-term supply contracts. “In our view, and backed by other market participants including Kazatomprom, the 232 process has slowed a correction for uranium prices as utilities would be unwise to contract before there is policy clarity,” he says. “As we believe that long-term contracts are likely to see prices of $45 per pound or higher... contracting is the major catalyst for a contract and spot price recovery.”

The Bank of Montreal’s Alexander Pearce is less bullish, writing at the opening of the investigation that the introduction of tariffs or quotas would be likely to split the market in two, and would need more than a 25 per cent tariff to encourage US mines to reopen.  “Applying any kind of import tariffs or quotas to US utilities to buy domestic production (the section 232 petition envisaged 25 per cent, or around 12Mlb) would likely result in a two-tier uranium market,” he says. “Stimulating a meaningful supply response would be likely to require a significantly higher price than [July 2018] levels of $24/lb U3O8, perhaps requiring tariffs of 75-100 per cent of the current uranium price.” While this research is almost a year old, the uranium price is still around $25/lb.

Mr Watson from NCIM agrees on the price split: “[Tariffs] would probably set up a bifurcated price, where there might be some premium for US origin over elsewhere,” he says. “There might be some kind of broader differentiation, where there would be US and US friendly premiums.” According to the US Energy Information Administration (EIA), last year’s domestic production was the lowest in almost 70 years, at 1.47Mlbs. For comparison, Kazatomprom, produced 48Mlbs of U3O8 in 2018.

Low energy

The rush on energy minerals since 2015 has made speculators lots of cash – if they knew when to get out. But despite recent falls in cobalt and copper to a lesser extent, there are medium- and long-term bull cases for those metals as well as lithium, graphite and nickel, and the mining industry has continued to try and keep up with electric vehicle forecasts and related infrastructure needs. 

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