Uranium - Puzzle pieces falling in place
3rd of February, 2022 - torck capital management AG
Back in September 2021, we argued that uranium represents the awakening giant within the commodity sector. While uranium prices haven’t yet moved since then, we at torck capital management are still convinced of our original thesis regarding uranium. In light of some important recent happenings, we want to revisit our theory on why it is a good time to enter the uranium trade.
As a matter of fact, we see two major catalysts that have the potential to move the uranium price in a positive direction. For one thing, nuclear energy production will be included in the European Union’s green finance taxonomy. For another thing, the unexpected eruption of protests and unrest in Kazakhstan will most likely have an impact on uranium’s supply dynamics, potentially adding to the supply shortage in the commodity markets.
Let’s first look at where we stand with uranium: After a long drought, the uranium price finally experienced some positivity in 2021. Last year, uranium mining companies also reversed their 10-year decline in exploration budgets. Year over year, uranium exploration budgets increased 10.7%. If the price was indeed to rally to new highs over the course of this year, exploration budgets could rise further. If prices were to enter the 60$-70$ range, significant production at new sites could be triggered.
One thing is clear: once uranium starts moving, it can move quickly. It has happened before: Driven by rising demand and supply disruptions, the uranium price went on a tear in 2007, increasing from US$72 per pound at the start of the year to an all-time high of US$136.22 by early June 2008. Such a run-up can certainly happen again.
Nuclear: Thumps up from the European Union
Demand forces will likely get stronger. Right at the end of 2021, the European Commission (EC) announced in a draft document that nuclear will be included in their green finance taxonomy. Such an inclusion would make nuclear more attractive and direct public and private funding into new nuclear projects and reactor extensions in the pursuit to meet the European Union’s transition goals towards a green energy future.
As a consequence, this new wave of funding – resulting in a reduced cost of capital – should make nuclear energy production more competitive in comparison to renewable energy projects in the EU. It is therefore highly likely that demand for nuclear coming from Europe would increase.
Also, there might be second-order consequences from nuclear’s inclusion in the taxonomy: This would certainly signal that nuclear energy is a valid option alongside other renewable energy sources when it comes to moving the world closer to a green energy standard. Following this, there is also the potential for increased ESG fund-flows into uranium stocks. In fact, certain European investors will have the possibility to more easily invest in the uranium topic, which is why flows towards uranium-related investments should increase.
To date, this new taxonomy including nuclear energy has not passed yet. It is expected that it will come into law for 2023, subject to review and voting by the co-legislators (the European Council and EU Parliament) within 4-6 months. So, although the taxonomy has not been carved into stone yet, the proposal is widely expected to pass.
Supply-side disruptions in the making?
The supply side could also be getting an unexpected boost this year. Only two weeks into 2022, we have become witnesses of protests and unrest in the country of Kazakhstan. As turmoil has raged on, Kazakhstan's government has asked for help – mainly from Russia and other former Soviet nations – to tame the nationwide protests.
Having reached critical dimensions, the situation in Kazakhstan could disrupt supply chains at least temporarily. This would have repercussions for the wider world as it could see parts of its demand for uranium go unmet. The state of affairs could be particularly precarious as Kazakhstan is by far the largest producer of uranium in the world, being responsible for north of 40% of all of the world’s uranium production.
So, the question really is: Will uranium be freely movable in the coming months? A factor that could be exacerbating the situation for the rest of the world is China. The Asian giant has been a big commodity buyer, also buying large quantities of uranium from Kazakhstan while paying in hard cash.
This they do because China needs the uranium badly. Currently, the land of the middle has 50 operable reactors, while another 18 are under construction. Also, the country has pledged net-zero emissions by 2060. In order to achieve this goal, in the next 15 years, China will have to actively develop nuclear capacity the size of about 10 reactors any given year.
This gives China a high interest in making sure, it gets what it wants when it comes to uranium supply. As a matter of fact, the Chinese have been pushing for a partnership with Kazakhstan for quite a while. Back in 2016, Kazakh-Chinese nuclear fuel assemblies were started in Ust-Kamenogorsk, which is in the East Kazakhstan Region, close to the Chinese border. This factory went live in late 2021 and is 51 percent owned by Kazakhstan’s state uranium giant Kazatomprom and 49 percent by China's largest state-owned nuclear company. Through this partnership, the Chinese have established a long-term purchase agreement for Kazakh uranium.
Being directly adjacent to the Kazakhstan border and having a good relationship with the country, China will make sure that their uranium supply coming out of Kazakhstan will not be stymied. The same might not be true for the rest of the world. What if the West currently overestimates the quantities of uranium that it will be able to buy from Kazakhstan going forward?
Where else to look?
As the situation in Kazakhstan once again shows: Supply diversification is of utmost importance. For Western nations, this is yet another lesson that it cannot/must not rely too firmly on the uranium supply from Kazakhstan. With things playing out in Kazakhstan, it’s likely that many countries will be looking to producers in other regions, mainly in Africa (Niger and Nambia), Canada, or Australia.
Nonetheless, higher uranium prices could be around the corner as demand as well as supply forces seem to be lining up. This is why we at torck capital management believe that uranium should be part of every serious investor’s portfolio. We have created the new “Energy Revolution Fund” that helps you invest in commodities like uranium and profit from the clean energy revolution that will kick-start another “super cycle” of rising commodity prices.
About torck capital management
torck capital management is an asset management boutique based in Zurich. Well-established in the Swiss financial industry, our goal is for torck to become the leading boutique of choice for exponential opportunity investments. We aspire to both drive meaningful change with our investments and seize exponential return opportunities in times of market disruption. Our new “Energy Revolution Fund” – launched at the end of September 2021 – builds on the thesis that a worldwide clean energy transition will kick-start another “super cycle” of rising commodity prices, which was last seen in the early 2000s when China’s economic growth took off. With investments in hand-picked junior mining companies that ensure an adequate supply of minerals for the clean energy transition, we see the potential for our next exponential opportunity.
Follow our upcoming blog articles to learn more about how the clean energy transition will impact the demand for critical minerals and create a strong investment case for junior mining companies.