Uranium: Electrifying the Low-Carbon Future (Part II – Demand)

Nuclear power hit a hard reset with the Fukushima Daiichi disaster in March 2011. The downturn in nuclear has been deeper and longer than that of oil and gas, allowing for more supply destruction to play out (See Part I of this series ). The uranium mining sector has suffered a wholesale desertion of investors. The aggregate market capitalization of all publicly-listed primary uranium producers is a mere $8 bn ($15 bn Enterprise Value). Only 8 companies are valued above $100 mn. Excluding the top 2 companies, the whole sector can be purchased for $3 bn. In February 2011, the top 100 mining companies’ market capitalization was $43 bn ($46 bn EV), with 33 companies larger than $100 mn. Excluding the top 2 companies, the sector sported a $25 bn valuation. However, more nuclear reactors are presently in the development pipeline than ever before (Exhibits 1, 2). Nuclear power is the fastest growing traditional energy source. Investments to address the greenhouse gas effects of the world’s growing energy needs are accelerating. Steady and zero-emission nuclear power will be a key part of the solution.

Exhibit 1: Source: World Nuclear Association (WNA), Radiant Value Management

Exhibit 2: Source: Raymond James Ltd (WNA, IEA, UxC, NIW, Bloomberg, Company reports)

At such extreme market dislocations, company-specific value drivers are ignored. Market participants sell on all bad news but ignore all good news. At Radiant Value, we focus exactly on these developments to identify great businesses outside the limelight. Qualitative factors like interviews with executive management, technical analysis of projects and insider buying activity guide our decision-making process. The numbers on the annual reports are the result of management decisions, possibly from 5 years ago. Presently, we are pursuing uranium producers with strong management teams using the downturn to their advantage. While excited about leverage to an inevitable recovery, we like companies with bearable equity dilution in the meantime.

Can you be an environmentalist and be pro-nuclear? In light of climate change, can you be an environmentalist and not be pro-nuclear?

Nuclear power makes sense. Unlike solar or wind, it provides stable and reliable electricity. Unlike coal or natural gas, it does not emit greenhouse gases. It is scalable and is one of the safest sources of energy by a large margin. Even Fukushima, the biggest modern nuclear power accident, has had practically negligible radiobiological consequences. While ~16,000 people perished from the Tohoku/Great East Japan Earthquake and subsequent tsunami, five years later no deaths have been recorded from the associated nuclear accident. Furthermore, UN expert panel reported that deaths will be extraordinarily unlikely in future. For more, read Five Surprising Public Health Facts About Fukushima .

Persistent fears of nuclear power start with the erroneous conflation with nuclear weapons. While civilian nuclear power does offer a costly and inefficient path to weapons development, curtailing civilian nuclear power development does little to diminish proliferation threats. The energy release from nuclear fission per ton of fuel is about a million times greater than the energy release from burning fossil fuels. Consequently, the waste volume generated is about a million times less. Of that amount, only 3% is high-level waste that needs to be contained for 1000 years. Generating enough electricity for one person produces 30 grams of such radioactive waste per year. Despite its challenges, waste management is not insurmountable. Compare this to the orders-of-magnitude larger waste problems from burning coal, including heavy metals and naturally radioactive fly ash . The documentary Pandora’s Promise makes the environmentalist case for nuclear power.

Nuclear reactors provide 11.5% of global electric output. In the U.S. nuclear contributes 20% of grid power, but accounts for ~60% of ‘zero’-carbon electricity. At the UN Climate Conference COP21, 195 countries adopted the Paris Agreement to reduce greenhouse gas emissions. Renewable energy sources will continue to grow at a fast clip, but their intermittency destabilizes electricity grids. Steady ‘baseload’ power will be necessary to maintain system inertia, a problem that cannot be solved by scaling renewables. Coal remains the predominant baseload source, but has fallen out of favor. For example, in 2013, the World Bank and the U.S. stopped funding coal power . Coal-fired power plants electrify 41% of the world, presenting a long runway for alternatives. In the fight with natural gas for incremental baseload share, nuclear’s advantages are lower emissions and lesser volatility.

Base-case scenarios expect uranium demand to grow between 3% and 4% annually to 2030. Emerging nuclear power consumers benefit from the vastly improved safety and efficiency of modern plants. Compare this to the first movers, U.S. and France, where reactors are, on average, 35 and 30 years old respectively. The 444 operable reactors world-wide require ~170 million pounds of uranium per year at full operation.

The rapid nuclear reactor expansion has a multiplying effect on uranium demand. At steady-state about one-third of the spent fuel is replaced every 1 to 1½ years. On the other hand, 3-4x the normal fuel load is needed to initiate a reactor core. Exhibit 3 below tabulates the countries with the most nuclear power under construction.

Exhibit 3: Source: World Nuclear Association, 21 June 2016

In the long term, nearly one half of U.S. nuclear fleet could close prematurely by 2030 if natural gas prices remain low and nuclear power is not rewarded for being a baseload, low-carbon resource. Even in such a low-growth scenario, net nuclear generation will remain steady as capacity retirements in U.S., Japan, Germany, Sweden, etc. match additions in China and India. Even if alternative forms of electricity generation like wind, solar and natural gas accelerate, power from nuclear will not be replaceable over the next 10 years. Since uranium accounts for only 2% to 4% of the cost of nuclear power, demand is extremely inelastic to price. In the developed world, either the uranium price goes up, or the lights go out.