Uranium - The awakening Giant
21st of September, 2021 - torck capital management AG
Sometimes mother nature is truly relentless. Back in 2011, one of the most powerful earthquakes ever recorded caused a tsunami. As it was rolling over Japan’s north-eastern coast, three out of six reactors at Fukushima’s Daiichi Nuclear Power Plant got damaged causing one of the worst nuclear meltdowns since Chernobyl.
Following this world-shattering incident, several countries – particularly in the Western hemisphere – decided to phase out of atomic power. Around the globe, nuclear power plants were put to a halt or gradually powered down. Taking the lead in this were countries like Germany, Switzerland, South Korea or Japan itself.
The structural supply deficit is real
With major economies turning away from nuclear energy because of governmental decree, focus shifted away from the uranium industry underpinning it. While demand for the radioactive element stalled, uranium supply that was not needed anymore was thrown onto the market. Japan alone was sitting on about 100 million pounds of unprocessed uranium, about 60% of annual global demand. After Fukushima’s watershed moment, the country started selling down its uranium stocks. This obviously put pressure on uranium’s price that continuously trended lower over the next few years.
As the price was pushed down to now lows in 2016, more and more uranium mining facilities went into care and maintenance, shut down their mining operations and did not sign any new contracts. Production halted because, for most mining companies, it was just not profitable anymore to mine uranium. According to estimates, for uranium mining to be profitable, the price needs to be around $50 per pound. So due to the low price, profitability was low that again translated into low investments that were being made in the field of uranium mining.
Graph 1: Annual uranium production is found to be the lowest since 2008, meeting just 74% of the world’s nuclear demand.
This resulted in a current structural supply deficit. Since production has been throttled, uranium stocks have been run down. In addition to these substantial structural issues, the recent world-wide pandemic has not helped. COVID-19 has further curtailed supply from the two largest producers in the world as the virus affected global supply chains. Demand for electricity slowed down during the pandemic. In 2020 there was a decline in nuclear power generation of 4%, which might have also dampened demand for uranium as a source of nuclear electricity production.
Future demand increase seems programmed
What goes down, must come up. The uranium price cannot indefinitely stay below the cost of production. For one thing, as the pandemic is overcome, electricity demand is bound to recover. The demand for electricity will not only recover though, it will possibly grow much larger in the near future.
Driven by the electric vehicle revolution, the entire world will need more electricity. As political consensus increasingly demands, this electricity will have to come from renewable energy sources. These can either come from hydro, solar, wind or nuclear power. While hydro is a favored way of producing energy but no readily and broadly available, wind and solar have their known issues.
In the last few years, more and more countries have recognized that if they truly want to move into a more sustainable future built around the premise of renewables, there seems to be no way around nuclear energy. Nuclear power is vastly more efficient than other green energy alternatives. Also, it is the most reliable energy source and baseload power as their steady output helps stabilizing grids. What is increasingly being recognized: Turning away from nuclear power comes at the cost of higher electricity costs. After all, energy price increases have been seen in countries like Japan or Germany as they have been moving away from nuclear power plants.
Achieving the prescribed climate targets and with it the reduction of CO2 is unlikely to be possible without the reliance on nuclear energy. That this seems to be the case is gaining more and more traction. In fact, Japan has indicated that they might be willing to ramp up certain nuclear power facilities once again. Three long-idled, Japanese nuclear reactors received local approval to resume operation, and a country like France, which had actually already renounced nuclear power and wanted to take 50 percent of its reactors off the grid, does not seem to want to do so after all. The country’s nuclear safety authority agreed to extend the operational lifetime of 32 of its oldest nuclear reactors by a decade to as much as 50 years.
In the USA, the government has established a $150 million uranium reserve program. New reactors are under construction in the state of Georgia, for example. In another state, Illinois, the senate has just saved two nuclear power plants from closing down with a promise of financial subsidies. Due to its zero-carbon emission policy, the U.S. government saw it fit to approve four license renewals that will extend the lifetime of several nuclear reactors. And in other parts of the world, nuclear power capacity is being built out further. According to the World Nuclear Associations, about 50 reactors are currently under construction, most of them either in Asia or in Russia. An additional 100 power reactors are planned, while over 300 more are being proposed. This all sounds a whole lot of new demand.
It’s time to turn to uranium
With this monumental shift in thinking, narrative and reality, increasing demand for uranium will come. As the last few weeks have shown, the price is already reacting to this favorable setup. In only a about a month, the radioactive chemical element’s price has shot up almost 60%.
Graph 2: Uranium’s price performance from August 16 to September 15: an increase of 59.44%.
This significant price increase is mainly because of one single player: The Sprott Physical Uranium Trust, whose former name was Uranium Participation Corp. It’s an investment vehicle by Sprott Asset Management that allows for a direct way to invest in uranium. Via an “At-The-Market (ATM)” facility, the trust conducted a financing on demand. The capital that was raised through this facility was then used to by physical uranium in the spot market.
While the trust was permissioned to rake in $300 million, in only 16 trading days, it had raised about $246 million and acquired more than 6.6 million pounds of physical uranium, pushing its holding to more than 24 million pounds of uranium in total. But that is not the end of it. Now the physical uranium trust managed to get rapid approval to increase its ATM maximum from $300 million to a total of $1.3 billion. With that much more money that is being raised, it’s highly likely that the uranium’s price will push higher going forward.
The bull run has started
Although uranium’s price has already seen a substantial increase, it is most likely the case that the commodity is only just entering its bull market. Historically, the uranium price is still only one-third of its previous all-time high – so there is still a lot of room to grow. And if history is any indication, the bull run could get quite wild, since uranium has always gone through major booms and busts.
With stock piles having been depleting over the last years and a thinly populated operational mining industry, as most miners are still barely profitable even at today's price, the supply-side signals scarcity. At the same time, the fundamentals in terms of increasing future demand pressure because of the unfolding green energy revolution that is dependent to a large part on nuclear energy production look great. The combination of these facts is setting uranium up for a proper supply squeeze that will most likely develop over the last months or even years. After all, putting uranium mining companies back into work is a pretty involved process. Interestingly enough, the kings of supply squeeze detectors, the retail investors from WallStreetBets have also been starting to discover the peculiar fundamentals surrounding uranium.
Gaining exposure through the Energy Revolution fund
So, while one way of profiting from this looming bull run is through buying physical uranium, another option is to purchase uranium equities. They have recently experiencing several of the precursors of a momentum phase: a significant increase in money flows, broad media coverage, and resultant growth in stock prices and liquidity.
As a matter of fact, there are not a lot of stocks in the uranium game. This can be seen as an advantage since the manageable amount equities does not make it all too complex for investors. On the other hand, if there are only a handful of good stocks, valuation can quickly get out of hand and the fear of missing out can kick in. It is all the more important than to entrust one’s capital to professionals. With our knowledge, expertise and network, we at torck capital management have set up our energy revolution fund for this very purpose.
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” – set to launch at the end of September – 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.