Will Your Portfolio Explode Or Implode? A Look At Uranium

January 24, 2017

Will Your Portfolio Explode Or Implode? A Look At Uranium

  • The short and medium term don’t look that great for uranium as military inventories, idled reactors, and negative sentiment push prices down.
  • In the long term, increased demand from new nuclear reactors should eventually push prices higher and may create tremendous returns given the current low investment environment – think 3 to 10 years.
  • In the long-long term, there is plenty of uranium for the next thousand years.

Introduction

Uranium has been in a five-year long price slump with several factors having impacted the decline.

The 2011 Fukushima disaster forced Japan to idle its reactors. According to the Nuclear Energy Institute, only three reactors of the 42 commercially operable are currently in use in Japan. As Japan represents one third of global nuclear capacity, this blow was tremendous for uranium.

Further, Germany also announced a plan to phase out its nuclear reactors. In 2011, Germany had 17 reactors in operation. That number is down to 8 today and new closures are planned.

Additionally, the Nuclear Nonproliferation Treaty lowered demand for uranium as military demand sharply fell.


Figure 1: U.S. nuclear weapon stockpile, 1967-2017. Source: Arms Control.

The decline in nuclear weapon stockpiles not only lowered demand for uranium, but also increased supply as countries sold their surplus uranium on the open market. The Department of Energy continues to sell more than 5 million pounds of uranium per year.

With such news, it isn’t a surprise that the price of uranium has fallen 65% since March 2011 and almost 85% since its peak in June 2007.


Figure 2: Historical uranium price. Source: Cameo.

However, since President Trump got elected, the sentiment surrounding uranium has changed a bit, especially surrounding uranium stocks.

Trump recently tweeted that the U.S. needs to expand its nuclear capability.


Figure 3: Trump’s tweet. Source: Twitter.

The tweet had additional positive effect on the Global X Uranium ETF (NYSEARCA: URA). Since Trump’s election, the index is up 34%.


Figure 4: Global X Uranium ETF in the last 6 months. Source: Yahoo Finance.

From a long-term perspective, the index has lost almost 90% since the Fukushima disaster.


Figure 5: Global X Uranium ETF in the last 5 years. Source: Yahoo Finance.

Uranium lows are a very interesting place to be bargain hunting. Temporary tweet booms aside, a look at fundamentals will tell us what the risks and rewards could be for a uranium related investment.

Uranium Fundamentals

At the moment, there is an oversupply in the uranium market. It’s taking longer than expected for Japanese plants to come online again, uranium mining is at historical highs as capital investments as a result of the 2007 and 2011 price peaks are commissioned, and there is still plenty of secondary supply coming from military and commercial inventory.

Currently, 20% of global demand is still covered by secondary supply. However, due to the high secondary supply, there has been a gap between the mined uranium and total demand for almost 30 years.


Figure 6: Demand for uranium and supply from mines. Source: World Nuclear.

According to Cameco Corporation (NYSE: CCJ)—the operator of the world largest uranium mine, McArthur River in Canada—the short term outlook isn’t positive as the Japanese reactors aren’t coming online quickly and utilities needs have been well covered in the near term. Further, CCJ plans to cut 10% of its workforce as it sees more oversupply in the short term.

To put the current oversupply into perspective, even if Japan restarts all of its idled reactors, it won’t need uranium for about 10 years as it accumulated 120 million pounds of it by honoring existing supply contracts.

Uranium miners see positive catalysts in the long-term coming from emerging markets as their need for electricity is expected to increase significantly. The World Energy Outlook sees nuclear energy production almost doubling by 2040.


Figure 7: Global electricity generation by source. Source: World Energy Outlook.

Reactors being currently built should increase uranium demand by a fifth.


Figure 8: National uranium demand increases coming from new reactors. Source: Mining.com.

Conclusion

In a low-price uranium environment, miners aren’t investing but cutting production. As current mining production isn’t enough to meet demand and inventories are eventually going to be depleted somewhere in the future, we could see a supply gap forming that will shoot uranium prices up like it did in 2007.

The issue with uranium is that boom will probably happen in the next decade or so. Extremely long term investors might want to take a position as part of a well-diversified portfolio. Medium and short term investors should follow uranium and perhaps trade around sentiment.

Another issue with uranium is that there is plenty of it in the world’s crust for thousands of years of nuclear production. Therefore, the most important factor for uranium prices is cost. Buying miners that have the lowest mining costs can significantly de-risk your uranium investment while leaving you open to supply gap upsides.

Investors who want to invest in a metal that will become scarcer in time and where demand will grow due to the above described increase in energy consumption should look at copper. You can read more about copper here, or if you’d like to read my copper analysis, click here.