After years of neglect, uranium supplies enjoy time in the sun. What’s interesting is that today’s spot price of $ 30 per pound, while significantly higher than its multi-year low of $ 18 per pound in 2016, is still below what most manufacturers need to make a profit and to create incentives for new mines well below the required level. There’s no question that positive sentiment has driven stocks. The question is why is it happening now?
Let’s start with a quick look back at how uranium fell out of favor. After the shutdown of the extensive Japanese reactor fleet, led by Fukushima, the industry found itself in a considerable oversupply. Because sales were tied to more expensive long-term contracts, manufacturers were protected for several years and aggressively pumped uranium well past the point where it was economically viable. The spot price fell, dropping to $ 18 per pound in 2016.
Incredibly, it wasn’t until 2018 that the price environment forced producers to act. Kazatomprom, the world’s largest producer, reduced production by 20% in January 2018. Cameco, the second largest producer, put its McArthur River Mine in care and maintenance in July 2018. Rio Tinto, one of the world’s largest mining companies, decided to virtually end its uranium business, starting with the sale of its large stake in the Rossing uranium mine to China in November 2018. More recently, there have also been some Covid-19-related disruptions that forced Cameco to suspend its cigar operations at sea – the world’s largest high-grade uranium mine – in March 2020 and then again in December 2020.
Millions of U3O8 pounds have gone off the market in recent years, and investment in new projects has largely dried up, with the exception of a few with the potential for spectacular economies such as NexGen Energy and Fission Uranium. Cameco still won’t commit to a date to restart McArthur River, and Kazatomprom has announced the extension of its production cut until 2022.
According to UxC, a leading uranium research and analysis group, 70% of uranium is produced at a price below $ 30 per pound (the current approximate spot price), 30% above it. As soon as we are past 2025, UxC has indicated that a drop in inventory and a depletion of reserves will require the use of more expensive production – something manufacturers have made clear is off the table until prices go up.
This is all very encouraging, but does not fully explain the magnitude of the current surge in sentiment.
To get a more complete picture, let’s look at uranium in the broader context of decarbonization and the greening of the world economy.
The World Nuclear Association (WNA) states that just over 440 reactors are currently in operation worldwide. According to the International Energy Association (IEA), nuclear power currently provides over 10% of global electricity needs, is the largest low-carbon power source in advanced economies, and it says it prevents 2.1 billion tons of carbon dioxide (CO2) equivalent from being emitted every year.
The world’s largest economies, including the United States and China, use nuclear energy alongside Russia, the United Kingdom, France, Canada, South Korea, India, and Belgium. There is even a nuclear power plant in operation in the United Arab Emirates.
Nuclear power is one of the cleanest forms of energy available. When it comes to CO2 emissions, this equates to and in some cases exceeds renewable energy sources. It’s also much more reliable. As several US states discovered last year – in the form of massive, widespread power outages affecting hundreds of thousands of people – adverse weather can prevent renewable energy plants from operating properly. The fact is, the vast majority of power grids are designed to use constant base load energy from fossil fuels and nuclear power plants – not those with power that can change at any given point in time, like wind and sun. The nuclear industry has been promoting the importance of base load power for years, but I think it’s only now, when the evidence is in their face, that more people will realize that renewable energy generation and modern power grids are not doing well with big ones mix use of renewable energies.
According to the Intergovernmental Panel on Climate Change, the United Nations’ body to evaluate science related to climate change, at least 80% of global electricity must be low carbon by 2050 to prevent global temperature rises above 2 ° C.
The IEA is even more aggressive. It is said that by 2040 the world will need 85% of its electricity to come from clean sources. They call for “massive investments in efficiency and renewable energies … and an 80% increase in global nuclear power generation by 2040”.
The numbers have not gone unnoticed by governments. The WNA states that 53 new reactors are under construction, more than 100 reactors in the planning phase and over 320 more in the proposal phase. With this in mind, it is not surprising that the latest fuel report from the World Nuclear Association shows uranium needs will increase by 26% over the next decade.
Even so, many of these numbers have been around for a while. They acknowledge that the fundamentals are more than robust, and I think the final piece of the mood puzzle might be what we hear from nation states. Governments speak openly about the need to include nuclear power in their climate plans, and they are taking action too. The US, UK, and Canada have invested billions of dollars in small modular reactor designs and initial deployments over the past eighteen months. In January of this year, the US announced that it was considering extending the power plant licenses to 100 years.
The change in government attitudes and a willingness to speak openly about nuclear plans is a big deal. Politicians hate negative public opposition to their policies and, after Fukushima, very few were willing to take a step forward and promote nuclear power. Japan’s later decision to dump 1.25 million tons of treated wastewater contaminated in Fukushima into the Pacific certainly did not help public opinion move forward. The situation has now changed significantly, however, and as countries try to figure out how to effectively decarbonise and how to deal with electricity grids, it is becoming very clear that nuclear power plants are playing an obvious and growing role.
The uranium spot market is thin and can change dramatically in a comparatively short period of time. As a result, you cannot rely on recent price increases to predict the future of the commodity. However, with compelling supply and demand numbers coupled with increased government support and funding, it becomes easier to understand the shift in sentiment for this long-neglected energy metal and to consider that it may stay here.
– Anthony Milewski is Director of International Consolidated Uranium (TSXV: CUR). The Company has option agreements to acquire five uranium projects in Australia, Canada and Argentina, each with significant past expenditures and attractive development features.
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