Atomic energy: waiting for renaissance

Atomic energy: waiting for renaissance

In early 2022, uranium prices were up more than 8%. Such dynamics aroused great interest among investors because the sphere of application of this metal is narrow. The market is limited because it is used only for the nuclear power industry. Let’s look into the reasons for the growth and see if there are any prospects for investing in this economic sector.

Uranium is needed as nuclear fuel, generating electricity in nuclear power plants. To compare, 450 grams of uranium can produce as much energy as 1,300 tons of coal.

The demand for this metal has little dependence on economic cycles. The primary consumers of uranium are nuclear power plants, of which there are currently just over 440 in the world. The uranium market is expected to be worth approximately $10.2 billion in 2022.

The uranium market is a market for long-term contracts. Most of them here are concluded between utility companies. Transactions often bypass the market. Financial investors can also trade in the spot market. An insignificant portion of raw materials with delivery within one year is traded here as well. Investors can purchase futures on NYMEX, the commodities exchange and part of the CME Group.

It is quite a rare metal, and it is mined only in a small number of countries. Australia has high reserves with 28% of the total, followed by Kazakhstan with 15%, Canada with 9%, and Russia with 8%.

As for global supply, Kazakhstan is the undisputed leader with a share of 42%, followed by Canada with 13%, Australia with 12%, and Namibia with 10%.

Incidentally, at the beginning of January 2022, Kazakhstan caused the rapid growth of uranium futures. The prices of this metal catapulted upward against the backdrop of mass unrest in the country.

Previously, price hikes in the market occurred in the fall of 2021 against the background of aggressive purchases of metal by Physical Uranium Trust. In addition, in September 2021, private investors from the Reddit forum also began fueling the excitement around uranium mining companies, resulting in some of those companies’ stocks rising by a quarter or more.

It should be noted that uranium production has been limited in recent years, primarily due to the transition to safer energy industry. On the one hand, nuclear power plants do not pollute the environment during their operation, but any accidents at these facilities become environmental disasters. Just remember Fukushima in Japan and Chernobyl.

In 2020, demand was also affected by the coronavirus pandemic. Due to the spread of covid-19, global uranium production decreased by 9.5% in 2020. Many mines have been mothballed, and production has also been reduced. However, now there is a resurgence of interest in this metal.

First, demand is returning amid the introduction of new reactors. According to the World Nuclear Association, we should expect twice as many nuclear reactors by 2050. At the moment, uranium stocks are shrinking because the current demand is largely covered by them. Also, carbon neutrality should not be discounted. It won’t be long before the market is taken over by renewables. Right now, the amount of energy they produce is tiny.

As a result of a conference held in Glasgow, countries decided to reduce the use of coal. Uranium was proposed as a “green alternative.” But some countries, including Germany, oppose nuclear power plants.

The fate of the industry depends on the impact of the peaceful atom on the energy sector. If most states take an interest in it, the Bloomberg New Energy Outlook predicts a 19-fold increase in the capacity of nuclear power plants by 2050.

Companies involved in uranium mining

Kazatomprom

Kazatomprom is among the world’s largest producers. The volume of metal produced in 2020 was 21.6% of the global total. This figure reached 10,736 tons.

During the first half of 2021, production increased to 5,864 tons. There was also an increase in revenue and adjusted net income of 54% and 32%, respectively. The net margin in 2020 was 37.68%, and the gross margin was 45.52%.

The company pays a dividend. The latest yield data was 4.8%, with a payout per share of $1.33. According to Refinitiv, the P/E multiple is well above the sector average of 13.59x and stands at 23.59x.

Cameco

We see two reasons why investors interested in uranium mining companies might look at Cameco (CCJ) stock. First, it is one of the world’s largest miners of radioactive metal, and the company’s actions have a wild impact on the global uranium industry, particularly on supply. For example, the issuer was the first to drastically cut production over the past couple of years to ease fears of oversupply in the market and support metal prices.

Second, a company’s operational flexibility is a huge competitive advantage, especially now that the entire industry is at a crossroads.

Prices for this substance reached ten-year highs back in September 2021, when the Sprott Physical Uranium Trust Fund began actively pushing the metal out of the spot market. CCJ is not a spot market player, interested only in long-term contracts with utilities. But because of the shrinking supply in the spot market, utilities have returned to negotiating uranium contracts, which has been the main reason for the rise in long-term prices for the asset.

According to the company, the long-term price of the metal jumped 25 percent between August and October 2021. In its third-quarter report, the issuer’s management called the current market for radioactive metal more constructive than it has been in recent years. But will the company benefit from this price?

So far, it has been doing poorly, and its financial statements have been negative in recent quarters. For example, in Q3, the issuer reported a net loss of $72 million. It should be noted that uranium production increased by 43% year on year, but sales during the reporting period decreased by 19%. It led to a 25% year-over-year drop in revenue. We should add that the company still has $1 billion in debt.

The steadily rising price of uranium is a good indicator of growing demand. Demand is also affected by the commissioning of new reactors, which means that Cameco could potentially win additional contracts.

Due to increased demand, the company may return to mining at its closed mines. For example, the MacArthur River mine, one of the richest uranium deposits on the planet, could start working again. Any opening of a mine would indeed entail an increase in costs, which would spoil the issuer’s statistics for a while.

Before buying this paper, potential investors should keep in mind the losses Cameco has continued to report in recent quarters. The company will have to work hard to get out of the negative territory. Nevertheless, CCJ deserves a chance. Growing demand for uranium and high prices for this metal could help the company quickly leave the negative territory. However, as long as there are sellers in the market, we would not risk buying this paper.

Uranium Energy

Next, we will talk about Uranium Energy (UEC), which, unlike Cameco, has not brought any income to its shareholders since 2015. So why do we recommend paying attention to UEC?

In 2020, the company was not mining uranium; instead, it was buying yellowcake in the spot market to sell it later, at a higher price. In other words, the company engaged in open speculation on spot prices.

But that’s not what deserves our attention. In November 2021, Uranium Energy surprised the market by announcing its intention to buy Uranium One, the fourth-largest uranium producer in the world. Uranium One was controlled by Rosatom, the Russian State Atomic Energy Corporation.

This acquisition should make UEC a leader in the field because it is not just buying a company – it is buying both uranium deposits and finished production facilities.

The deal is worth $112 million and includes the Powder River Basin in Wyoming and one of the largest uranium processing plants in the United States, which can produce 25 million pounds of uranium annually. That is, the company acquired a ready-made business, which can immediately bring profit. Moreover, by purchasing ready-made production, the issuer no longer has to think about building its plants, thereby saving initial capital, which can be channeled in another direction.

Of course, UEC may not start mining shortly and will wait for a more profitable increase in uranium prices. But already now, it can safely be considered one of the largest uranium mining companies in the U.S. in terms of capacity. In our opinion, it is quite an interesting investment, although it is even riskier than investing in Cameco.