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 U3O8 sitting 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.
The IEA says nuclear could help support greater solar and wind uptake by providing back-up power when the sun is gone and turbines are becalmed. “To a certain extent, [nuclear plants] can adjust their operations to follow demand and supply shifts,” the report says. “As the share of variable renewables like wind and solar photovoltaics (PV) rises, the need for such services will increase. Nuclear plants can help to limit the impacts from seasonal fluctuations in output from renewables and bolster energy security by reducing dependence on imported fuels.”
Elsewhere, the report covers the rise in cheaper energy storage that is coming alongside increased renewable generation, but the IEA’s main argument is that existing reactors should have their lives extended rather than governments rush to build many more new plants. “A sharp decline in nuclear in advanced economies would mean a substantial increase in investment needs for other forms of power generation and the electricity network. Around $1.6 trillion in additional investment would be required in the electricity sector in advanced economies from 2018 to 2040,” the report says. “Despite recent declines in wind and solar costs, adding new renewable capacity requires considerably more capital investment than extending the lifetimes of existing nuclear reactors.”
UK investors have seen the worst of the industry’s development abilities at home, Mr Crayfourd says. “The costs that have been incurred at the likes of Hinkley Point, are not reflective of costs that we're seeing globally,” he says. “When we look to China, where they're building six to eight reactors a year, they effectively use the same design on each of those plants and use it as a cookie-cutter-type process. That makes a huge difference to the costs.” EDF Energy forecasts that Hinkley Point C will cost around £20bn.
The downsides
Groups such as Greenpeace and Friends of the Earth still campaign heartily against nuclear power, because the connected risks have not disappeared. Even France, which has produced much of its power through nuclear plants since the 1980s, still struggles with where to put the waste. The technology is still banned in Australia, home to several uranium mines, and the conservative prime minister said in April he had no plans to change the law despite pressure from inside his governing coalition. Gas-fired plants have also emerged as a less carbon-intensive coal alternative that are politically easier than nuclear.
On the mining side, major projects can suddenly turn into burdens and see hundreds of workers lose their jobs (see McArthur River in Canada and Langer Heinrich in Namibia), while environmental risks include spills and exposure to radon gas, released into the air as uranium decays. However, uranium demand looks strong overall. The Chinese and Indian investment in new plants ensures demand for uranium will continue, and any response from Trump on 232 will set the new contracts rolling.
Mr Chan from Numis says the prices are likely to reflect the established miners’ costs, which means development projects from the likes of NexGen Energy (CAN:NXE) and Fission Uranium (CAN:FCU) in Canada come into play. At a uranium price of $50/lb, NexGen’s Arrow project has a post-tax internal rate of return (IRR) of 56.8 per cent, with a capital cost of C$1.25bn (£740m), and Fission’s C$1.49bn Patterson Lake South project has a post-tax IRR of 21 per cent at the same price.
