After more than a decade in the shadows, uranium, or more accurately nuclear power, is now finding itself back in the spotlight as the global energy crisis highlights fundamental imbalances in power generating capacity.
Against a backdrop of China’s stance to limit emissions from coal-fired power, which generates more than 60% of the nation’s electricity and depleted global fuel stockpiles, the post-covid scramble for power has been exacerbated by supply curtailments and logistics bottlenecks.
International competition for all forms of energy has driven a sharp rise in traditional fuels such as coal and gas, where prices are up more than 200% and 300% respectively over the past six months.
Ahead of the COP26 climate conference, these cost pressures have provided a warning to global governments that an energy transition policy is not as simple as just adding more intermittent renewable capacity, as there is no solution yet to ensure sufficient energy to balance grid demands.
Battery technologies, such as lithium ion, have been proposed but they can only provide a small proportion of this requirement at best. Hydrogen has latterly arisen as a form of energy storage but remains in its infancy on a commercial scale.
This is leading to a material political shift in favour of previously orphaned nuclear power. This is important firstly, for extending the lives of the existing fleet of nuclear facilities in the West, but also in supporting continued reactor build out in Asia.
As the only source of zero carbon, nuclear power fulfils a core aspect of governments’ environmental policies while also contributing to more stable and secure energy supply.
Though China continues to plough on with its ambitious nuclear power goals, to more than triple capacity by 2035, political acceptance elsewhere is also on the up.
US moves to establish a strategic reserve and issue zero carbon credits to certain reactors and the continuing pro-nuclear stance of Japan’s Prime Minister in-waiting provide illustration.
Allowing nuclear output to wither on the vine over the next two decades may prove costly and the current energy crisis may serve to harden such views.
Aside from the more favourable political shifts, investment sentiment has also improved. February’s power shortages in Texas, as a cold snap froze its dominant wind turbine generating capacity, raised investor awareness of the overlooked sector with considerable funds flowing into related equities.
Another key driver followed soon after with the Sprott takeover of Uranium Participation Corp. Rebadged as the Sprott Physical Uranium Trust, nicknamed SPUT, the new entity also amended its financing structure.
Instead of raising funds through institutional investors, SPUT instated an “at the market” financing facility, a mechanism allowing easier equity issuance to retail investors. This small technical difference has proved key, allowing more immediate funding and purchase of U3O8 when the trust trades at a premium.
The SPUT management also indicated they are happy for the trust to trade at a discount, so this structure will not simply sell its uranium back onto the market, unlike other ETF vehicles. This means the SPUT holding will prove stickier, effectively removing product from the market.
Since its inception SPUT has acquired approximately 11Mlbsof U3O8, equivalent to around 6% of annual utility consumption.
Following significant mine closures due to the low commodity price, the recent SPUT purchases have materially tightened the market and injected further impetus to the U3O8 price which has risen around 35% to $43/lb since summer.
Related uranium mining equities have consequently seen significant gains, as evidenced by the rise in the Geiger Counter investment trust NAV which is up around 86% year-to-date.
Importantly, having only deployed a small portion of its authorised $1.3bn funding capacity, the fund has considerably firepower to further tighten the market.
Indeed, the strong move in the spot price has now spurred an increase in the longer-term contract price, which is more widely used by utility operators and therefore more representative of underlying needs.
This may need to rise further to incentivise the restart of mothballed capacity and further still to incentivise many greenfield development projects.
With improving support and tightening market conditions, the nuclear power sector continues to represent an attractive investment opportunity and, just as with government energy policy, investors may benefit from having some exposure.
Rob Crayfourd & Keith Watson are portfolio managers for the Geiger Counter trust at New City Investment Managers. The views expressed above are their own and should not be taken as investment advice.