Categories: Energy / General Market Commentary
Topics: General Energy / General Market Commentary

Uranium Is About To Go Nuclear

March 28, 2017

 

Summary

155 net more nuclear reactors in operation by 2035, a 35% increase.

Significant supply deficit to occur in 2025, at least through 2035.

Uranium is trading under its cost of production and is going to take off as supply fails to meet demand.

Uncovered demand by utility companies is at a record low level, giving pricing power to producers.

I mention risks specific to uranium and investing options.

Nuclear power is once again becoming popular as the world moves on from the Fukushima incident and tries to produce energy from non-carbon sources. Japan, showing it is moving past Fukushima, has already brought several reactors back into operation and plans on reactivating many more over the next few years. With 60 nuclear reactors currently under construction and 164 planned, nuclear power is catching the eyes of the investing community.

This bodes well for uranium, the main input for the common fission nuclear reactors. There will be a uranium supply deficit around 2025 that will fail to meet the demands of the massive increase in reactors. Uranium will see significant price appreciation over the next decade and a half due to a mix of bullish fundamentals. Healthy, low-cost producers will see their shares appreciate in price to a greater extent due to leverage. Get in before the herd, but be aware of the risks.

Supply and Demand

There is a surplus of uranium at the moment, but lower prices have led to production cuts and have also discouraged new mines from starting. Kazakhstan, the world's largest producer of uranium, is reducing production by 10% in 2017 due to market oversupply. Cameco (NYSE:CCJ), the world's largest publicly traded uranium producer, recently cut production and has hinted at further cuts.

These production cuts are understandable with uranium trading around US$25.50/lb. For many producers, their marginal cost of production is in the US$40-50/lb range. So it goes with mining companies: it's a cycle of reducing production in surpluses when the commodity's price is low, which creates a deficit which raises the commodity's price and causes producers to increase production.

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