One of the most frequently asked questions among commodity investors is about uranium. This controversial commodity seems to finally have entered a new bull market after a decade and a half of pure disappointments. What followed the euphoria of 2007/2008 was a long stretch torture. What are the prospects now and will the uranium price shoot up again sustainably? Or is it just hyped and ready to fall into dust?

Summary and key takeaways from today’s Weekly
– Uranium and uranium investments are hotly discussed as well as controversial topics.
– The world seems to shift towards more, not less, nuclear energy generation.
– At the same time, due to too low uranium prices even now, the supply situation is fragile. The supply and demand mix is getting out of balance.

Due to some readers asking me for a short summary at the beginning of a Weekly, I decided to implement this info box. Feedback is appreciated the same as other suggestions.

In a quick sum-up, one could say that after coal and oil, uranium was the next used commodity to produce energy for civilian use in a predictable and controllable way. As a big plus, it didn’t pollute the air with big clouds of dust. Over many decades, it seemed that this was a “clean” and durable method compared to the other two.

Most people will remember what happened on 11 March 2011 and the following days.

I even remember exactly that I started my half-year internship semester at one of the big German car makers then. More important, however, was the turn in energy politics in many countries. Especially here in Germany, but also self-explanatory especially in Japan, but also other places.

Nuclear energy was declared a phased-out model and should be turned away from to be replaced by what is sold today as unreliable renewable energy.

After a strong bounce that followed the collapse in the price of uranium during the financial crisis, the yellow commodity tanked again after the Fukushima disaster, because it was a foregone conclusion that uranium was to be phased-out with time.

Discussions about building new reactors were also barely found.

But the wind seems to blow from a totally different direction now – except looking at Europe where there is barely any wind to propel the windmills at the moment. What we are going to look at today, is the worldwide big picture.

It is important to understand the supply and demand situation.

Plus, on Saturday 17 December 2022, I will publish a special bonus report about a company that offers you a defensive way to invest into uranium, even at a discount, without all the risks that miners are facing. I will also explain why I prefer the more defensive investment compared to miners which (at least theoretically) have the higher upside, but also way higher risks.

The report will be free for every subscriber to my free newsletter as a (premature) Christmas gift and sent out next Saturday.

Thank you, my readers, for your support!

And now, back to today’s article.

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A short historical overview of nuclear energy

Sources for more in-depth information: see here, here, here, here, here and here.

Do you know what happened almost exactly 80 years ago?

In December 1942 the first controlled atomic chain reaction was created by scientists in the USA. It happened under the University of Chicago. The “Windy City” was the place where many scientists, chemists and physicist were working on different projects.

One such project was to understand uranium atoms and their behavior.

The Chicago Pile-1 (or CP-1 in short) was the worlds’ first nuclear reactor that was built after some smaller successful experiments. The crew had been working two weeks on building and arranging the tower. It was about 20 ft. tall and was used to experiment on the controlled splitting of uranium atoms.

Here is how it works in simple words: Uranium naturally already throws off neutrons (neutrally charged atoms). If arranged in a certain position / angle so that jumping-around neutrons hit other uranium pieces, a self-reinforcing chain reaction releases gigantic amounts of energy. In this process heat / steam is created.

A nuclear power plant produces electricity from this released heat. It is a thermal power plant, just as coal-fired or gas-fired power plants are. The steam drives a steam turbine, which is connected to a generator. The generator finally produces electricity.

Many split atoms cause other atoms to split faster and thus leading to the chain-reaction.

Not every split atom causes a reaction, however, because some get absorbed or miss their targets.

The chain-reaction can be controlled or even stopped by the operators by either setting a specific angle of the uranium blocks or by inserting special rods that absorb the flying around neutrons.

A nuclear reactor is designed and used to split uranium atoms purposefully and as effectively as possible.

The successful experiments kicked off the “Atomic Age” with both civilian as well as (unfortunately) military use of atomic chain reactions. Although the experiments were rather short-lived, the following use cases were quite the opposite.

After taking the results and testing atomic bombs in New Mexico, the civilian use was developed, likewise. Nearly exactly nine years later, shortly before the end of 1951, the first successful test led to the world’s first usable amount of electricity generated with this technology that powered four light bulbs.

Today, this technology is responsible for around 10% of world’s electricity production.

There are four generations of nuclear reactors.

The first, also called “early prototypic reactors”, was the above described evolution that led to the first civilian use. Learning from mistakes, making the reaction process more efficient and increasing the safety as well as the reliability profile, led to the second generation that became available on a commercial basis during the mid- to late-1960s.

This is the technology that most active reactors are still using today. It is characterized by a so-called “active safety system”, where human intervention is possible. In case of an electric shut-down, these reactors stop operating.

In the following third generation of atomic reactors, also called “advanced light-water reactors”, this active safety system was changed into a passive one. The first such reactors were available by the 1990s. In the case of an emergency or stop of electricity, in one certain model rods are sunk into the reactor to absorb neutrons and interrupt the chain-reaction.

The fourth generation (also called next generation nuclear plant) is currently in development. Here is an interesting chart that flew over my screen just in time for this article:

As you see and probably have heard already, most active nuclear reactors are from the 1960–1980, i.e. they are necessarily second gen. Many also have reached their end of life span, however, in some cases the usage was extend by governments or at least discussed.

Here is one extreme example:

What you also need to know, in short (see here for more information):

• it takes about a decade or more to build a nuclear power plant (besides building time, you need to factor in location search, permitting and licensing as well as testing time, before such a reactor can go into operations)
• costs are difficult to name, but from what I heard and read, one should assume mid- to high-single digit billions for building such a big reactor like the old ones. However, it can also be more, if coupled with the next point
• more often than not, such projects were plagued with cost- and time-overruns
• the sourcing of uranium is nearly a neglectable problem from a price perspective, once you’ve gone through the points above, i.e. these sourcing costs are of minor importance in the aftermath. Having an operable nuclear plant not running would be the bigger issue
• usually, utilities and producers have long-term supply agreements. During the last decade of low uranium prices, however, less such commitments were agreed upon. This will necessarily lead to buying pressure in the not too distant future, if the utilities want to keep operations running

That’s the basics we need to know.

Current worldwide developments

It is hard to believe, especially from an inside-Germany perspective.

But worldwide, many countries are not thinking about phasing-out nuclear energy. They either want to extend the lifetime of operating older reactors, build additional reactors or even enter the game for the first time at all and are either planning or already constructing new nuclear power plants.

Here is an overview of some more prominent developments:

• France which is still the number two when it comes to having the most nuclear reactors after the USA, is planning to construct 14 additional ones (see here)
• China is catching up; over the last ten years, they grew from a fleet of 13 nuclear reactors to 55 – additional 21 reactors are under construction and more than 30 said to be in planning mode (see here)
• the UAE have two operating nuclear reactors – the first in the Arab world – and additional two under construction (see here and here)
• Poland and Egypt for the first time have a reactor in serious planning or construction (see here and here)
• Japan und the UK are having discussions as to how to go on with (not without!) nuclear energy generation to decrease the own dependencies on energy imports (see here and here)
• Finland recently started a newly build, but much delayed nuclear reactor (see here)

If you want to, you can find more examples. The core message should be clear.

In total, currently there are 437 nuclear reactors in operations, 59 under construction and further 89 planned. Also some reactors are under longer than expected maintenance. The exact numbers are not that important. It is about the overall trend.

Overall, the trend is clear: MORE not less nuclear rectors will be in operations over the next decades.

Here is an overview of the biggest fleets worldwide, country-wise:

It is also surprising that Germany that actually needs nuclear plants to have sufficient base-load power generation and simultaneously achieve its self-declared goals, but is nonetheless fighting it like evil (because it would tear out the biggest pillar of existence from the shaky house of the greens), is surrounded by several nations that are using and even constructing new nuclear power plants.

It is not difficult to see that the argumentation is weak and not based on common sense.

The latest example I heard from the news, was the Netherlands:

(The Netherlands are build two new reactors)

The trends clearly goes into third-gen so-called Small Modular Reactors (SMR).

Here is a short explanation of their advantages (bold passages from me):

Small modular reactors (SMRs) are those reactors with an output power of no more than 300 MWe, and they are part of the Generation III reactors. This reactor initiative was born as an alternative to satisfy different power generation needs as a single or a multiple units plant to reduce the risk of delays in construction observed in large reactors and also to decrease the upfront capital needed for this type of projects. SMRs will be built in a modular way in factories and assembled on-site, reducing time construction, among other things. 

source: Sciencedirect.com (see here)

The last point I want to make under this section, is the efficiency comparing different fuels with one another. One could also say comparing the energy density per fuel.

A piece (or pellet) of uranium is only a fraction in size compared to coal, oil or natural gas when having the goal to power an average household for a whole year.

I am consciously leaving out the pseudo-religious climate-discussion, as everyone can make up their own mind. The results don’t alter the outcome of today’s article, anyhow. Another topic is the storage of used and still radioactive material. But this does not alter the trend, either.

Energy security will rise in significance in most places. This is the reason why coal-fired plants are running hot in the short term and why nuclear reactors will be in many places a viable mid- (existing plants) and long-term (new plants) solution.

With that, let’s jump to the supply and demand situation.

The supply / demand mismatch in uranium

Many of my readers will already know in what direction this section will lead.

There is a current mismatch in the uranium market that is only about to grow, at the very least in the short- to medium-term. Longer term can be another story.

But, it is a fact that over the last decade overall uranium production collapsed together with the price of uranium, due to oversupply and too low prices that made production unprofitable or barely profitable.

What often happens when the price of a commodity becomes absurdly expensive is that at one point many new exploration and production projects get started that would be out of existence under normal price conditions. This increases supply over time.

You probably have heard the saying “the best cure against high prices are high prices”…

… and certainly not price limits or controls, often imposed by populistic politicians. What they actually achieve is an artificially higher price, i.e. the opposite of what they thought they would enforce. Limitations by decree only keep prices up due to reduced supply, because no one sane wants to offer products or services below market or even production prices.

I don’t know what is so difficult to understand at this point.

High prices incentivize new production and lead to more supply, if the regulatory environment allows for. This pushes prices down for so long as the uneconomical projects pause or go out of business altogether, taking supply down with them.

Both price swings usually tend to overshoot during a whole cycle, before the respective other direction starts their next big move.

Here you see the development of the price of a pound uranium:

After having gone 10x in just a few years prior to the Financial Crisis, uranium subsequently collapsed, especially after 2011. It found its low under 20 USD per pound around 2016 / 2017.

Since then, the price already slightly more than doubled which should not be underestimated. As the price has recovered somewhat, idled projects are about to come back into production.

However, this doesn’t happen overnight.

Two big projects that are coming back into production are Cameco‘s (ISIN: CA13321L1085, Ticker: CCJ) McArthur River Mine in Canada and Paladin Energy‘s (ISIN: AU000000PDN8, Ticker: PDN) Langer Heinrich mine in Namibia.

However, the McArthur river mine will only produce 40% of its capacity by 2024 (last month it restarted with low volumes, see here), while the Langer Heinrich mine is said to restart in 2024, too.

You see, such re-openings cannot happened in the short-term.

This is why the respective management teams must have sufficient confidence in the medium- to long-term sustainability and expect certain minimum price levels in order not to be forced to close again.

Both big mines (number 1 and 9 by size, see here) were closed for several years due to unfavorable economics. Many projects – even the biggest – were just not profitable to stay online and therefore had to close, at least temporarily.

Other mines became depleted and had to close operations for good, like in uranium-rich Niger:

Next, you see an overview of the total production per country over the last decade. Note, that many listed countries lowered their total output, even the big producers.

Total world output slipped by around 20%.

You will also have noticed that in the last row the percent of total world demand is covered to a lesser extent by these countries. This is a first hint for an undersupplied situation becoming even worse.

There are also several demand projections. You know that I prefer to look at the supply situation, because it is way more slow-moving and better to base a firm thesis on. In the case of uranium, I see very slow and long-term cycles in both, supply and demand.

Taken all the above into one graphic, could produce such a prognosis for the next decades, as from Visual Capitalist. The source is the World Nuclear Association, hence it is not an amateur or semi-professional guesstimate:

The wider one looks in time, the bigger the supply gap becomes – as of now.

According to this graphic, starting from 2023 on the imbalance will start to become greater. This takes into assumption that the price of uranium will stay as it is and that no new supply will enter the market.

From this front, it looks promising.

As the price of uranium stayed at or around 20 USD per pound for a big part of the last decade, there was no incentive for the miners to invest into exploration and growth. It is hard so say where an appropriate price target lies.

Some say “at least 50 USD”, others even say 60 USD or more.

Currently, the price of uranium is slightly under 50 USD. This is not enough to incentivize many producers, except the lower cost ones. Only the first projects are slowly starting to come back. But supply likely won’t increase much before 2024.

What is also very interesting is that the USA as the biggest uranium power producer has barely any own production. It has certain resources, yes, but not even close to enough own production volumes:

Why is this the case? High-quality and low-cost resources are only available in other countries. The domestic production is, even at current prices that went up 2x from the lows, still not profitable.

Comment on the “nuclear fusion breakthrough”

Certainly, many of you have heard the news from last Tuesday, 13 December 2022:

This could be a threat to nuclear power generation and thwart my thesis.

However, from what I have heard and read, it is more noise than a concrete regime-change. It is not the time to get over-enthusiastic.

In short, nuclear fusion is the opposite of nuclear splitting, as the names already suggest. There are some differences and technical / physical hurdles, though. That is why what seems logical at first sight, has not brought any real everyday applications to the surface.

While nuclear splitting is a quasi-automatic reaction due to uranium already splitting naturally, in merging hydrogen atoms you have to bring something together that is naturally repelling. Hydrogen and Hydrogen (positively charged) push each other off.

Try to bring the same sides of two magnets to each other by force and you understand why nuclear fusion is so difficult to achieve.

Hence, you are forcing the atoms to merge by using an external energy source. However, the goal and also unresolved challenge is to extract more energy than you put in. This is in a nutshell the principle behind it.

The research and trying has been ongoing for 60–70 years already, without results leaving the laboratory.

Here is a Twitter thread from an Austrian physicist. I extracted the most important pieces of information, shortened the original text somewhat and translated it from German (see original threat here):

In the USA, energy has been generated by nuclear fusion – is that the big breakthrough? Well, half of it […] In short: nuclear fusion is complicated, it’s great, we should do research on it, but it won’t solve the energy crisis.

Unfortunately, fusion is much more difficult than nuclear fission: radioactive nuclei decay all by themselves. But if you want to fuse nuclei, you have to bring them extremely close together. But atomic nuclei are positively charged and repel each other.

So you need technical tricks to overcome this repulsion. It succeeds with extremely high temperature and pressure (like in the sun). […]

What has now been done in the USA is something completely different: it’s laser fusion. A laser is used to generate radiation, which then hits a small hydrogen pellet as evenly as possible from all sides and turns it into plasma at lightning speed.

If you do that with enough energy, nuclear fusion ignites – the hydrogen nuclei in the pellet combine to form helium and release energy. The question is: How much energy? More or less than I had to put in in the form of laser light?

And supposedly, for the first time, more energy has now been gained in this way than has been expended. But only if you compare the laser energy with the output. This ignores the fact that energy was already lost before: No laser system has 100% efficiency.

In addition, if you wanted to use the released energy (for example, in a steam turbine to generate electricity), then a large part of the energy would be lost again. To build such a real power plant, one would therefore need a much higher efficiency.

[…]

If you turn 1 hydrogen pellet into plasma for fractions of a second, you still don’t have a power plant. Allegedly, 1.8 megajoules were obtained, with which you can boil a few liters of tea. That’s nice, but it doesn’t solve any energy problem.

You would have to drop pellet after pellet into the system and hit each one with a laser shot. Will that work without breaking everything? I don’t know. Then you’d have to efficiently dissipate and use the heat. Can you do that? We don’t know.

So the technical details of how laser fusion could be used for a power plant seem completely open to me. What has now been achieved is a nice milestone. But I see it more as a gradual improvement and not as a major breakthrough.

[…]

Twitter thread by Austrian physicist, Florian Aigner (see here)

To sum it up, nice to hear, but no immediate threat to the uranium thesis.

Also, I don’t think that already constructed nuclear reactors or such being in construction will suddenly be written off.

In another interview on TV from a researcher in Germany, the core message was that it will take decades (not one!) before any meaningful amount of energy could be generated by nuclear fusion.

Let’s leave it with that.

How to invest in uranium – if convinced

There are several ways to get exposure to uranium, in case one believes in this controversial story.

• stocks of uranium producers
• ETFs or ETCs that either have a basket of uranium producers or hold derivatives on the price of uranium
• derivatives that follow the price of uranium

None of these convinces me due to too high risk profiles.

I found a better way to get exposure to a possibly and not unlikely rising price of uranium over the next years, should the thesis play out.

In my research report, due next Saturday, 17 December 2022, I will not only introduce my readers (that receive my free weekly newsletter) to this particular opportunity. I will also lay out further, why I prefer another approach than investing directly in miners or ETFs that hold miners. There are several points.

One of them is that you even can buy into uranium at a discount, currently. There is a listed stock.

After Saturday, this report will be exclusive to my Premium Members.

If you sign up until Saturday morning German time, you will qualify for this special dividend from me.

Conclusion

Uranium and uranium investments are hotly discussed as well as controversial topics.

The world seems to shift towards more, not less, nuclear energy generation. With the big exception of Germany, which is a basket case in itself, many countries have new reactors already in construction or are close to it.

At the same time, due to too low uranium prices even now, the supply situation is fragile. The supply and demand mix is getting out of balance. New supply cannot come to the market quickly. Not only will it take time, it will also require higher uranium prices.

If you put all pieces together, the trend is clear.

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