22 JUN, 2022
By Rohan Reddy
With aggressive timelines to reach net-zero carbon emissions and global energy consumption expected to increase by 50% through 2050, governments are exploring all options in the next generation of power production. While much of the focus has been on renewables, like solar and wind, there may still be a critical role for nuclear energy in the global energy mix, given that it’s clean, reliable, and yes, safe.
Importantly, nuclear power is gradually shedding the stigma attached to it, helped by significant improvements in technology and safety measures. And as it gains broader acceptance, we believe nuclear energy is raising the investment profile of uranium, its key fuel input.
Meeting the world’s growing power needs while simultaneously reducing carbon emissions presents difficult challenges for policymakers. Compounding the issue is finding ways to power the 55% percent of the world’s population living in dense urban areas. While proven renewables, like solar and wind, are becoming increasingly economical, their larger footprint, intermittent power production, and difficulty in rapidly scaling requires other clean solutions to diversify the world’s energy mix. Nuclear energy may be the solution, as a clean, high output, and reliable power source.
Similar to solar and wind, nuclear fission reactors produce no greenhouse gas emissions during operation. But even when accounting for total carbon emissions (such as in the building of a nuclear power plant or solar panels) they have lower carbon emissions than many other renewables.
Source: World Nuclear. “How can Nuclear Combat Climate Change”.
Nuclear is also more dependable than many other power sources. Renewables like solar and wind depend on variable climate conditions to power their panels and turbines, and at many points through the day and year may not produce much energy at all. The intermittent outages make it difficult for them to function as the sole provider of a nation’s power needs. Conversely, the U.S. Energy Information Administration (EIA) reports that nuclear operates at full capacity 93.5% of the time, making it the most reliable energy source by far.
Capacity factor by energy source, 2019
Uranium provides the fuel to nuclear power plants. But many of the world’s largest uranium miners, including Cameco and Kazatomprom, tapered production or shuttered mines completely as the global economy came to a standstill at the start of the pandemic. These decisions flipped a deeply oversupplied market into one that quickly became undersupplied. Now with demand increasing, the supply deficit is unlikely to dissipate soon due to the uranium production cycle.
Unlike other commodities, uranium requires a longer and more extensive production timeline. Utilities must source uranium 12–24 months before its expected use. Producers like Cameco and Kazatomprom, which together represented 28% of global uranium production in 2020, are not expected to increase production for the next 1–2 years.3 That timeline suggests the earliest we can expect materially higher production output is between 2024 and 2026, which could provide support for higher prices.
The ETF market and institutional investors, like hedge funds, are also signalling bullish uranium price dynamics. Uranium is different from other energy commodities like oil and natural gas in that its futures market is relatively underdeveloped. Therefore, most investors do not seek exposure to uranium through the futures market, but rather through ETFs, individual equities, or spot market purchases. As this graph shows, ETF flows for uranium accelerated rapidly in 2021 as investors sought exposure to the space amid the supply/demand imbalance.
Source: Bloomberg. Data from 12/31/18 to 1/31/22. Represented by URA, URNM, NLR & HURA ETFs. URNM inception date: 12/3/2019. NLR inception dat: 8/13/2007 and HURA inception date: 5/15/2019.
We believe that sustained political buy-in and financial support from governments means nuclear is here to stay, particularly as demand for clean and reliable energy grows. In 2021, a wider pool of investors brought significant attention to nuclear energy and the role it can play in helping the world achieve its climate change goals. They also shed light on uranium’s unique production timelines and price dynamics. Uranium prices jumping from $25 to $42 led to a 60% rise in uranium equities last year.4 If the current price rally persists, it could open the door for wider uranium inclusion in broader indexes like those that are market cap weighted indexes, potentially driving equity price expansion relative to current earnings.