The uranium sector is traditionally twisted and unknown to the vast majority of investors, barely reaching 10 billion in capitalization. Nevertheless, it represents an incredible source of opportunities and unimaginable earnings, as history teaches us. Everything revolves around the supply process of the main consumers of uranium, nuclear reactors, which triggers a series of peculiar mechanisms between the price of the raw material and the mines where the metal is extracted.
When the consumers have to buy uranium, they do so with long term contracts which last 5-10 years, filling inventories and hoarding large quantities of raw material. When this happens, however, it causes an imbalance in demand, which grows sharply and exceeds the offer, pushing the utilities to buy on the spot market. The uranium supply consists in a limited number of mines that can only produce a certain amount of material, and it takes decades of exploration, testing and field work in order to open new ones. The immediate consequence is a sudden increase in uranium prices, which generates immense cash flows for miners and a consequent rise in their stock prices. In addition, the cost of raw material for reactors is basically irrelevant, amounting to about 3-5% of the total, and therefore they continue to buy U3O8 regardless of excessive prices.
Potential Super-Cycle Could Trigger Major Speculative Gains
This process generates the famous uranium “super-cycle”, that creates a huge inflation in the U3O8 prices and a fast increase in the miner’s stock prices, that could grow even by 1000%-10000% as history shows us (find below the performances of the raw material price and of a miner). In the period 2002-2007, the uranium prices went from 10$/lb to an all-time high of 160$/lb (adjusted to inflation). Considering that the extraction price for an average miner is around 40-50$/lb, they were flooded by cash flows and they went from being penny stocks to extremely profitable companies, creating the ideal territory for speculation and for incredible gains.
Figure 1 and 2 – Uranium Prices (USD/Lbs) versus Uranium Miner Performance (TSE:EFR)
When the supply cycle is ended, the price of the uranium collapses, dragging behind the stocks of the mines, and it starts a phase of stall. Being the prices under the levels of profitability for the mines, they must stop the production and enter in maintenance, knocking down completely the revenues, and it is reflected in their stocks, that drastically go down.
A New Uranium Bull Market Might Be On The Horizon
Today we can observe the signals for an imminent and even bigger uranium super-cycle, both in terms of duration and height, and following you’ll find the main reasons.
We are in a particular situation, where uranium prices are too low to justify its extraction, and therefore most mines are currently inactive. However, we are close to the next procurement cycles, and there is a structural supply deficit on the market: the only producer that would be profitable at the current price of the raw material (30$/lb) is Kazatomprom, one of the largest uranium producers. Nonetheless, it has been strongly impacted by Covid-19 and had to drastically reduce the extraction (-20% flex down in 2021 & 2022, >20M lbs), and for the first time ever in the history it had to buy uranium on the spot market, basically contending the metal with its own clients. Knowing that U3O8 demand is ~200Mlbs/yr for the next decade, at a spot price under $33/lb only 40% of world nuclear demand will be met (ignoring COVID19). Therefore, prices have to rise to at least 50-60 $/lb, or nations like the US, with more than 20% of energy generated by nuclear reactors will leave their population without energy.
Moreover, nuclear energy is emission-free and has an impact on the environment that could be compared to renewable energies, so the vast majority of countries are planning an increasing number of projects concerning the nuclear power implementation: 53 new reactors are currently under construction, China announced that it is likely to triple nuclear power capacity by 2030, India plans for 21 new nuclear reactors before 2031, UK is upgrading nuclear fleet to new advanced reactors, Russia is building 36 reactors, US is completing two new AP-1000 reactors in Georgia with an ecofriendly neo-elected president.
The chart above shows the World Nuclear Association expected supply and demand for the next decades, without considering the COVID-19 impact. While we don’t know how the supply will respond to the deeply uncovered demand, it is extremely clear that no new mines will be opened for the next 10-15 years, and we all know what will be the inflationary effects on the existing ones.
Disclaimer: These comments on uranium price dynamics are of Luca Davoli personally. The comments made are his personal opinion and thus should not be interpreted as investment advice, or anything like that.