For the past three months, we have been especially constructive on the uranium sector (and its handful of beaten down stocks), which we believe are set to benefit tremendously as the sector gets swept up in the upcoming flurry of Biden's various multi-trillion infrastructure deals and the concurrent ESG euphoria. Some of our recent observations can be found at the following links:
Then, as uranium stocks did move significantly higher in recent months as investors rekindled their love affair with a sector that had been left for dead for much of the past decade, at the start of February an TD Securities analyst said that the reddit short squeeze crowd had started to buy into the sector as well, shortly after a BofA analyst laid out an even more bullish fundamental case, on the assumption that the US could delay the closure of its aging nuclear fleet, boosting demand over the next few decades.
Next, the bullish uranium case was further bolstered by a lengthy tweetstorm by former hedge fund manager Hugh Hendry who said "A lot of you are invested in uranium. I commend you. I wish I was. Uranium is the rockstar of commodities. It doesn't mess around - bull and bear markets are of epic proportions."
Hendry was followed by yet another iconic hedge fund manager, who also jumped on the uranium bandwagon. In a tweet from Michael "the Big Short" Burry (who communicates with the outside world almost exclusively by twitter with tweets that are spontaneously deleted after a few days), the hedge fund manager said that "If the government is going to spend $2 trillion, there is no better use than converting the US to nuclear. Dems can do it! Jobs +"potentially limitless electricity...no greenhouse gas emissions" #greenfuture NOW!"
Then, after a few weeks of rangebound price moves for equities in the sector, it appears that we are now set to see the next surge for uranium stocks, for two main reasons.
The first reason is a mix of regulatory and market developments.
As we reported earlier today, the spot price for U3O8 moved above $30 per pound for the first time this year as uranium producers and mine developers hoovered up above-ground inventories and reactor construction continues apace. Two new research notes from BMO Capital Markets and Morgan Stanley say today’s price marks a floor and predict a rally in prices over the next few years to the ~$50 level by 2024, which - all else equal - would translate into soaring stock prices for names such as CCJ, UEC, URA and URNM.
Indeed, as Mining.com said, the stars seem to be aligning for a new phase of nuclear energy investment with the US, China and Europe bolstering the bull case for the fuel this month.
And while nuclear energy was not (yet) mentioned explicitly in the $2 trillion Biden infrastructure proposal released today, its federally mandated “energy efficiency and clean electricity standard” is hardly achievable without it.
Curiously, the big regulatory move may be coming out of Europe, where - as we expected - Uranium is now officially part of the cool ESG crowd as over the weekend leaked documents showed a panel of experts advising the EU is set to designate nuclear as a sustainable source of electricity which opens the door for new investment under the continent’s ambitious green energy program.
Then there is China - as Mining.com notes, China’s 14th five-year plan released a fortnight ago also buoyed the uranium market with Beijing planning to up the country’s nuclear energy capacity by 46% – from 48GW in 2020 to 70GW by 2025. There are several factors working in uranium’s favor, not least the fact that annual uranium demand is now above the level that existed before the 2011 Fukushima disaster when Japan shut off all its reactors:
Uranium miners, developers and investment funds like Yellow Cake (13m lbs inventory build up so far) are buying material on the spot market bringing to more normal levels government and utility inventories built up over the last decade
Major mines are idled including Cameco’s Cigar Lake (due to covid-19) which accounts for 18m lbs or 13% of annual mine supply. The world’s largest uranium operation McArthur River was suspended in July 2018 taking 25m lbs off the market
Permanent closures so far this year include Rio Tinto’s Ranger operation in Australia (3m lbs) and Niger’s Cominak mine (2.6m lbs) which had been in operation since 1978. Rio is exiting the market entirely following the sale of Rössing Uranium in Namibia
Like Cameco, top producer Kazatomprom, which mined 15% less material last year due to covid restrictions has committed to below capacity production (–20% for the state-owned Kazakh miner) for the foreseeable future
Price reporting agency and research company UxC estimates that utilities’ uncovered requirements would balloon to some 500m lbs by 2026 and 1.4 billion lbs by 2035
Roughly 390m lbs are already locked up in the long term market while 815m lbs have been consumed in reactors over the last five years, according to UxC
There are 444 nuclear reactors in operation worldwide and another 50 under construction – 2 new connections to the grid and one construction start so far in 2021
Much cheaper and safer, small modular nuclear power reactors which can readily slot into brownfield sites like decommissioned coal-fired plants (or even underground or underwater) are expected to become a significant source of additional demand.
The last bullet brings us to reason number 2: the coming "small modular reactor" frenzy:
As Nikkei Asia reports today, one of Japan's top industrial engineering companies will join a US-led project to build a new type of nuclear power plant designed with added precautions against meltdowns. These plants will be built in the US, where they will propel the uranium sector to level it hasn't seen in decades (indicatively CCJ traded roughly double where it is today as just before the 2008 financial crisis).
According to the Nikkei, Japan's JGC Holdings will help build a plant in the state of Idaho designed by NuScale Power, an American company whose proposal for a small modular reactor (SMR) involves immersing the containment units in a pool of water.
Small nuclear reactors have been hailed as an option for replacing fossil fuel power plants as nations commit to cutting carbon dioxide emissions in the coming decade
And here, we get one step closer to Uranium becoming part of ESG: when Joe Biden meets Japanese Prime Minister Yoshihide Suga for a summit in the U.S. later this month, fighting climate change will be on the agenda and "small nuclear" - and uranium - will be high on the agenda.
JGC has invested $40 million for a roughly 3% stake in NuScale, one player in the emerging field of SMRs. The Japanese group will work with NuScale's parent, U.S.-based engineering company Fluor, on construction management and other aspects of the Idaho project.
One thing is clear: as the SMR strategy takes off, much more uranium will be needed, as the partners eventually could set their sights on similar projects in the Middle East - where JGC boasts a long track record in oil and petrochemical infrastructure - and Southeast Asia. In fact, the entire world could soon be covered in small, safe nukes which will lead to an unprecedented renaissance for the uranium sector.
Why the scramble for SMR?
The first reason is simple: price. Nuclear plants on the scale of 1,000 megawatts cost around $10 billion to build using established reactor designs. NuScale's SMR design - which completed a technical review by the U.S. Nuclear Regulatory Commission in August 2020, ahead of rival proposals - reportedly costs around $3 billion for more than 900 MW. The Idaho plant will have a capacity between 600 MW and more than 700 MW, according to announced plans. NuScale also has a strategic partnership with South Korea's Doosan Heavy Industries and Construction, which will supply components for the plant.
The second, and far more important reason, is safety. Japan's Fukushima nuclear disaster a decade ago shows what happens when reactor cooling systems break down. The loss of emergency power after a devastating 2011 tsunami led to reactor meltdowns at the Fukushima Daiichi plant operated by Tokyo Electric Power Co. Holdings. Well, NuScale's SMR design seeks to remove this risk, as the water in the pool takes a month to evaporate and helps keep the reactor's temperature down.
The U.S. government supports research and development in small-scale reactors. A Green Growth Strategy announced by Japan last year calls for "providing active support" to Japanese companies participating in experimental overseas projects in this field. Many existing nuclear plants in Japan, the U.S. and other advanced economies have been in operation for decades and require upgrades or decommissioning.
In short, between recent bullish market dynamics, and a sector that is on the cusp of becoming the next ESG craze, the promise of new SMR technologies could ensure uranium demand is stable for decades, leading to a new golden age for uranium stocks.
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Finally, if that's not enough, courtesy of Larry McDonald, author of the Bear Traps report, here is a March 25 report published by ACG Analytics, titled "Energy: Uranium Gateway to Net Zero Emissions?"
The Biden Administration is at a potential pivot point regarding future U.S. nuclear energy policy. How the Administration grapples with long-standing issues, deploys investment, and who Biden selects to head the Nuclear Regulatory Commission (NRC) will indicate the future of the sector.
In the most recent Democratic Party Platform (which the Biden campaign helped shape), the Democratic Party committed to advancing nuclear power as part of a “technology-neutral” means of decreasing fossil fuel emissions. In the Biden campaign’s “Plan for A Clean Energy Revolution and Environmental Justice” (“Climate Plan”), the campaign also committed itself to identifying the future of nuclear energy, identifying nuclear waste disposal as a “challenge with nuclear power today” while promising to focus on “small modular nuclear reactors at half the construction cost of today’s reactors.” The question now for the Biden Administration is how to proceed.
By rejoining the Paris Agreement and committing to more ambitious emissions targets, the Biden Administration may utilize nuclear energy as a bridge until other renewable energy sources are more viable and battery storage technology improves. The Administration faces several immediate political challenges regarding the greater adoption of nuclear power including the planned closure of several existing plants, the aversion many Democrats have towards new mining projects which stem from environmental concerns, the related but distinct concerns of many Native American tribes located where U.S. uranium mining might occur, and the aforementioned long-standing question of longer-term spent nuclear material storage. On the other hand, if nuclear plants continue to close early, decreasing the U.S. zero emissions base-load capacity, demand for dependable carbon emitting sources will increase.
President Biden is likely to address some of these challenges in upcoming infrastructure legislation, which will incorporate much of the Administration’s environmental agenda and potentially include incentives for maintaining the existing U.S. nuclear fleet. President Biden is expected to outline his infrastructure plan publicly on March 31st. Another key decision will be who President Biden nominates to the Nuclear Regulatory Commission (NRC) which comprises 2 Democrats and 2 Republicans, stymying the decision-making process at an agency integral to the future of U.S. nuclear energy policy.
Uranium itself will benefit from increased demand in the United States, but U.S. and Canadian miners also stand to benefit from efforts to secure safe and reliable uranium supply chains, ending U.S. reliance on adversarial countries for imports. Republicans have emphasized that U.S. foreign reliance represents a national security threat and believe the Administration should loosen mining requirements while also committing itself to completing the U.S. uranium reserve established by law late last year. House Minority Leader Kevin McCarthy (R-CA) is also attempting to get House Republicans to coalesce around an environmental agenda that includes investments in nuclear energy and regulatory changes to speed up permitting and environmental reviews. Many Progressives, however, do not support these moves. Senator Bernie Sanders (I-VT), who challenged Biden to be the 2020 Democratic nominee, would ban nuclear energy.
Biden’s Cabinet appointments come from both sides of the spectrum on nuclear energy. Interior Secretary Deb Haaland has opposed uranium mining on public lands and fought for compensation for communities exposed to radiation. She won the Nuclear-Free Future Award last year from the German Nuclear Free Future Foundation while a Representative from New Mexico. Former Michigan Governor and current Energy Secretary Jennifer Granholm has less experience with nuclear policy, arguing during her Senate confirmation hearing that the disposal of used nuclear fuel is a “sticky situation” and that “We have to maybe look at what the Blue Ribbon Commission [An Obama Administration panel tasked with developing policy options for nuclear waste] did on this, which was to engage in some consensus-based strategies that allow us to determine where that waste should go.”
The Biden Administration, however, is expected to devote additional resources to research and development (R&D) in the nuclear space, particularly R&D regarding the development and adoption of small modular nuclear reactors, among other promising technologies. The Department of Energy (DOE) Loan Programs Office, with $40 billion in loan authority, will prioritize renewable and net-zero emission technologies.
While the Obama-era Blue Ribbon Commission on America’s Nuclear Future was tasked with developing policy options for current and future nuclear waste, it was not tasked with identifying alternative waste disposal sites after work on completing Nevada’s Yucca Mountain Nuclear Waste Repository ceased in 2011, arguably for political reasons. After the completion of its work in January 2012, the Blue Ribbon Commission’s recommendations went largely ignored during the remainder of the Obama Administration and during the Trump Administration.
Waste storage continues to be the largest risk to greater adoption of nuclear power in the United States. The Federal government has tried for decades to create a central repository for spent nuclear waste and since work began in 1987 on Yucca Mountain (which is unlikely to re-commence under President Biden), no other long-term waste disposal site has been identified in what would likely be a several decades-long process if the selection of another site or sites were to occur.
Currently, existing nuclear plants typically store most of their waste on site. Proponents believe such storage is relatively safe and disaggregates the risks associated with the long- term care of radioactive waste in centralized locations. Transporting large quantities of waste along thousands of miles of highways to a central repository increases the risk of an accident and contamination. However, at least 7 states (California, Connecticut, Illinois, Kentucky, Maine, Oregon and West Virginia) have laws prohibiting additional nuclear reactors in the state until longer-term waste disposal issues have been solved by the Federal government. Massachusetts, Montana, and Oregon require voter approval, while other states have varying degrees of prohibitions.
This week, Rep. Doris Matsui (D-CA) introduced “The Storage and Transportation of Residual and Excess Nuclear Fuel (STORE) Act,” which aims to create interim waste storage facilities. It remains unclear if this legislation could be folded into President Biden’s infrastructure package (it would not meet rules if passed in its current form under Reconciliation). Currently, the legislation has no-cosponsors and appears tied to a specific issue affecting her district Matsui does, however, sit on the House Energy & Commerce Committee and her legislation comports with the recommendation of the Blue Ribbon Commission and the Administration’s goals that nuclear waste disposal citing be consent-based in the future.