Uranium gets a boost from Japan’s nuclear sea change

A decade has passed since the nuclear reactor disaster at Fukushima in Japan. But something, well, seismic seems to be unfolding in Japanese politics (reports The Australian Financial Review).
14th October 2021

The country has a new Prime Minister, Fumio Kishida, who seems ready to turn the page on the country’s post-Fukushima shutdown of its nuclear power industry.

Last week, Industry Minister Koichi Hagiuda said nuclear power was “indispensable, when we think about how we can ensure a stable and affordable electricity supply while addressing climate change”.

He had a simple pledge. The government probably will not build anything new, but “we will work to restart Japan’s nuclear reactors”.

It is a big volte-face, but perhaps not surprising.

That’s because the spike in gas prices this past month, plus a freak lapse in the output of Europe’s wind turbines, has caused many countries to rapidly reappraise their sense of what the journey to a net-zero energy mix will look like.

Nuclear power, which offers the most carbon-friendly kind of supply stability, is back in the frame as a baseload option.

So, Japan is not alone. China and Britain are among the countries looking to push ahead with small modular reactors (SMRs). These are mini-nukes that can be assembled more quickly than the saga of building a big reactor – a process that has pretty much ground to a halt in many Western countries.

Proponents say a single SMR, with up to 300 megawatts of output, could power a medium-sized city – albeit much more expensively than renewables.

Even before the Japanese revealed they were changing course, the International Atomic Energy Agency in mid-September revised up its upper-end expectation for nuclear generation capacity by 10 per cent, forecasting that it could double to 792 gigawatts by 2050.

This has given yet more impetus to the remarkable run-up in uranium prices over the past six months, and over the past six weeks or so in particular.

Unusual activity by market participants has fuelled some of this recent price gain. But the Japanese and British revival of nuclear power – with the gas-spike as backdrop – seem to offer fresh legs to the longer-term, structural dynamics underpinning uranium’s rise.

Some industry projections suggest there will be a 60 per cent increase in uranium demand over the next two decades.

Even as things stand, existing uranium demand is about 180 million pounds and primary supply is just 120 million.

Nuclear power producers are living off their stockpiles. Within two years, the shortfall between what they need and what is locked in via their long-term supply contracts could reach 25 per cent of their total demand.

It takes two to three years to turn raw uranium oxide into reactor-ready fuel rods, so the crunch has to be addressed now. And the way to coax uranium producers to ramp up their output is, of course, for prices to rise.

“We believe that the gap between demand and primary production is set to increase, as current prices do not incentivise investment in new production capacity,” says Kumar Pandit, London-based co-portfolio manager at Somerset Capital’s emerging market dividend growth fund.

“In the next 24 months, utilities will have to go to producers and secure long-term supply contracts at a price that incentivises meaningful production increases.”

The uranium spot price had been trundling along at about $US30 a pound until mid-August, when it suddenly tore upwards, hitting a peak above $US50 in late September – taking most of the world’s listed uranium stocks along for the ride. It has since eased off to just under $US40.

The sudden surge was attributed to Canada-based Sprott Asset Management’s Physical Uranium Trust snapping up uranium on the spot market, building a stockpile of more than 28 million pounds.

Chief executive John Ciampaglia, though, told Bloomberg that Sprott was competing with end users, speculators and financial intermediaries – not to mention the Reddit crowd.

He later told the Financial Times that Sprott’s actions would drive prices to a level that stimulated the necessary production.

“It’s in the best interests of utilities … for this to happen. If the price doesn’t reset to a level that incentivises miners to pull uranium out of the ground, how are they going to have security of supply in five or 10 years from now?”

This is also how Somerset Capital sees it. Even if there’s a highly unusual set of immediate market dynamics at play right now, the eye-catching activity nonetheless highlights the bigger picture: that the uranium sector might offer a decent longer-term bet.

Its sector pick is Kazakhstan’s Kazatomprom, the world’s largest uranium producer, which accounts for almost a quarter of global primary production.

Pandit says its low cash costs mean it can mine profitably even when the uranium price is in the doldrums – “which is remarkable in an industry where 40 per cent of global production is loss making at current prices”.

Handily, it also offers generous dividends – “which means that we are paid while we wait for the inflection to occur”.

Unsurprisingly, Kazatomprom features heavily in the bigger uranium exchange-traded funds such as Global X Uranium and North Shore Global Uranium Mining. Both have experienced vast capital inflows since the start of the year.

Global X has more than tripled in size to $US955 million ($1.3 billion) in assets, and has offered a 115 per cent one-year return. North Shore has increased more than tenfold to $US609 million and has returned 170 per cent in 12 months.

Each has Cameco and Kazatomprom as their first and second-largest holdings, with NexGen and Australia’s Paladin also featuring strongly. North Shore has also put 9 per cent of its funds into Sprott’s trust, while Global X has given it a miss. Both, though, have exposure to London-listed trust Yellow Cake.

Since Fukushima, uranium’s price gyrations mean it hasn’t been an investment for the faint-hearted. And even with the structural headwinds, the risks are still there.

But this time, the decarbonisation disruption has the uranium bulls hoping they will be able to have their yellow cake and eat it.

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