Commodities, including uranium, are enjoying a bull run at present – spurred on by the EV revolution, among other factors. Where does uranium fit into this vison of a cleaner future?
As specialist resources investors, we have seen the sector come under intense scrutiny as both ESG awareness and the global decarbonization themes have become such important drivers of investment flows. As a result, we have invested a huge effort in understanding these drivers and how they will shape the future demand for those natural resources essential to achieve these goals.
The world has declared war on carbon and almost three quarters of global greenhouse gas emissions come from the provision of energy. Roughly one third of these emissions are directly attributable to electricity generation.
Numerous studies highlight that approximately 70% of the world’s electricity generation is created by the burning of hydrocarbons (coal, gas, and oil).
Despite calls for carbon reduction targets, many global energy bodies still model coal, gas, and oil power as a majority component of the electricity mix in their forward projections out to 2040, albeit with the gas replacing some of the share of coal. Those modelling a more aggressive reduction in hydrocarbon electricity generation are making ambitious assumptions around technology advances with respect to either carbon capture or grid scale energy storage.
Based on current technologies, nuclear power is the only low carbon base load electricity source that can reduce grid dependence on coal, oil, and gas. Base load means the ability to produce electricity 24/7 unlike weather-dependant sources like wind and solar, which have obvious constraints.
When we include the electrification of vehicles, where road transport is responsible for roughly 15% of global greenhouse gas emissions, we must bring the debate back to electricity. After all, battery electric vehicles (BEVs) are only as green as the source of electricity used to charge them. For example, Ontario, Canada, is one of the “greenest” places in the world to own a BEV because 96% of electricity in Ontario is produced from low or zero carbon emitting sources (approximately 60% nuclear, 26% hydroelectricity, 7% wind, and 2% solar, based on 2018 figures).
We are currently witnessing the beginning of the largest reactor build programme in decades, led by China, and many developed-world governments are seriously considering maintaining their existing nuclear fleets and investing in new nuclear capacity, as well as developing new nuclear technologies.
These new and existing reactors require consistent long-term supply of uranium. After a 10-year uranium bear market, which has resulted in chronic underinvestment and mine shut-downs, the price to incentivise supply back to market is well above current levels.
The world has declared war on carbon and almost three quarters of global greenhouse gas emissions come from the provision of energy.
What are some of the other factors that have boosted uranium prices recently?
Simple. The market has woken up to the fact that at the current price of approximately US$30 per pound, there is a supply deficit that will not be filled. The two largest, lowest cost producers have Tier 1 assets idling and are actively purchasing uranium in the physical market. We have also recently experienced unprecedented actions from a handful of uranium developers raising equity to step into the physical market and purchase physical pounds. This was alongside the two listed physical vehicles Uranium Participation Corporation (TSX: U) and Yellow Cake Plc (LSE: YCA) soaking up more excess inventory from the physical market. The uranium sector has raised approximately US$1 billion this calendar year, an amount not likely raised in the whole 10 years previous. When we look back on the previous bull market, the catalyst for higher prices was financial players soaking up physical pounds. Now, we see different actors, but likely a similar response. All this time, power utilities, being the large scale buyers of uranium, have largely been absent for the last three years – all the while their inventory levels have continued to fall.
What do you see as some of the challenges to greater uranium adoption in the near-term?
The main challenges are more to do with investor perception rather than the fundamentals of the sector. However, the negative perception and fear-mongering campaigns are gradually being replaced by a greater awareness of the role nuclear power can play in decarbonization.
One advantage of the large-scale commitment to build reactors is that we can easily model demand over the next five years. Importantly, China informs us of their nuclear reactor building plans via their five-year plans so we have a line of sight over the next 10 to 15 years. We also know that China sees nuclear power as an important tool in their extremely aggressive decarbonization plans, so if anything, Chinese uranium demand will exceed our modelled expectations over the next 10 years.
But none of that matters, because with current supply deficits out to at least 2026, we model a shortage of uranium merely based on the requirement of the current global reactor fleet and those reactors currently being built. Even when Tier 1 idled supply comes back to market, there is still not enough. And the price is too low to encourage any further mines to be financed and constructed to meet that shortfall.
Do you see moves like Biden’s green fiscal stimulus as being positive for greater uranium adoption in the U.S., as well as further afield in Europe, for example?
The Biden Administration has done some simple mathematics and concluded that maintaining the nuclear fleet is the bare minimum required to help the U.S. reach its decarbonization plans. The U.S. nuclear fleet produces 20% of the country’s total annual electricity and is responsible for 55% of its low carbon electricity. The U.S. nuclear fleet has a capacity factor of 92%. In other words, it produced electricity for 335 days of the year. In 2017, nuclear power avoided 547 million metric tonnes of CO2 emissions, according to the U.S. Department of Energy.
To put things further into perspective, The U.S. Administration recently approved the completion of two nuclear reactors in the state of Georgia, where construction had previously stalled. Those two reactors will produce more carbon-free electricity than is currently generated by the more than 7,000 wind turbines in the state of California, and will, over a 60-year lifetime, avoid the release of about 600 million metric tons of carbon dioxide.
One advantage of the large-scale commitment to build reactors is that we can easily model demand over the next five years.
Please give an overview of the Nuclear Energy Opportunities Fund that you manage.
We launched the Nuclear Energy Opportunities Fund three years ago after a deep-dive exercise into the sector. We primarily invest via listed securities. However, we do have the ability to hold physical derivatives, debt products, and invest in pre-IPO opportunities. In 2020, the Fund posted a net return of 194% and is up an estimated 88% year-to-date. Despite the returns we’ve been able to generate so far, we still believe that the potential returns on offer from current levels remain highly asymmetric, especially given that the uranium price has yet to move substantially.
The uranium investment thesis seemed asymmetrical, especially when we studied the returns from the previous bull markets. The fundamentals from the perspective of uranium supply and demand flagged as extremely compelling. We have the advantage of being early movers in the space, so while others scramble to bring themselves up the information curve, we are largely set in a portfolio of uranium projects we know extremely well. We also have the advantage of being able to leverage market relationships from our flagship Tribeca Global Natural Resources Fund, and having built a reputation as specialist uranium investors, have been shown almost all the investment opportunities in the sector. The Global Natural Resources Fund has wholesale investment funds as well as an ASX-listed entity Tribeca Global Natural Resources Ltd (ASX: TGF). These funds maintain approximately 20% exposure to uranium.
What do you look for when investing in uranium explorers and producers? Are there certain jurisdictions that you prefer?
Jurisdiction and permitting are crucial when evaluating investment opportunities. We have a strong preference to favour jurisdictions with either current or historical uranium mining. However, this does not guarantee a project will progress. Obviously, community support is extremely important given the strong emotional response that the idea of mining uranium can elicit. Of course, it’s also crucial to have a management team with the skills to be able to progress their project depending on its stage of development. Astute investors will also need a healthy dose of scepticism as the sector heats up, in order to deal with the inevitable mad rush of promotors shifting back to a uranium focus. Three years ago, this listed universe was less than 50 names, but peaked at over 500 listed securities in the last bull market – testimony as to why studying history is so important in this sector.
