The Ins and Outs of Nuclear Energy

If you are new to nuclear energy investing, I am sure you will learn a great deal from what is about to come. Even if you have made investments in this field before, I am pretty sure you’ll learn a thing or two you didn’t know already. Even experienced commodity investors have admitted to me that uranium behaves so differently from other commodities that experience from commodities in general doesn’t count for much.

“Why uranium?”, you may ask. Isn’t this about nuclear energy and not about uranium? Yes, it is but uranium makes up the fuel in virtually all nuclear reactors and is therefore the starting point for almost all investors; however, as you will see later, there are indeed other ways to invest in nuclear energy.

Why now?

In the summer of 2019, uranium caught my attention for the first time. Back then, the uranium spot price lingered in the mid-$20s, and few investors paid it any attention. Not much happened the next two years – when I came back after the 2021 summer break, uranium spot traded around $30/lb. Then, the bull story took off. Between September 2021 and April 2022, the spot price doubled. After consolidating the next nine months, it went on a tear again, and 2023 turned into a monster year, where uranium spot almost tripled in value.

By the time spot peaked around $105/lb in late January 2024, the vast majority of investors had turned bullish. The talk amongst investors was, first and foremost, about when we could expect spot to pass $148, the all-time high reached in May 2007. However, precisely the opposite happened. Spot began to go south again and is now trading around $65/lb, a price we last saw in September 2023.

You cannot open a newspaper these days without reading about the ‘second coming’ of nuclear energy, and Wall Street firms have, with only one or two exemptions, turned bullish; however, uranium spot continues to trade lower. What is going on? Everybody is puzzled. With this article, I will argue that quite a rare investment opportunity is presenting itself in front of our eyes. Having said that, you need to understand how this investment opportunity should be approached.

How to invest in nuclear energy

In the following, I will only talk about listed investment opportunities. FYI, in addition to those, there is an array of opportunities in the private equity space. They are no less interesting but typically not available to private investors.

Before investing, you must establish which part of the value chain you wish to focus on. We have identified no less than seven distinct investment opportunities in the nuclear value chain:

• mining companies;
• conversion companies;
• enrichment companies;
• uranium brokers;
• companies that construct nuclear reactors;
• electric utilities specialising in operating nuclear power stations; and
• radioactive waste management companies.

The first one above, mining companies, or uranium mining companies to be precise, account for the vast majority of all nuclear energy investments so far; however, as I hope to make clear with the list above, the opportunity set is wider than that. I shall not, in this article, go into any level of detail on any of the other investment opportunities listed above other than encouraging you to contact us, should you wish to learn more (contact details later).

What have we learnt so far?

By far the biggest lesson learnt so far is not to assume that uranium spot and term prices trade similarly. Allow me to explain. Uranium is unlike any other commodity. There is indeed both a spot and a forward (term) market, but the term market is not standardised as in other commodities. The price and other terms are agreed bilaterally and reported monthly by Cameco, and the term price is often detached from the spot price (see Exhibit 1 below), reason being that financial investors operate exclusively in the spot market, whereas industry buyers (nuclear power stations and nuclear research laboratories) buy predominantly in the term market.

A nuclear power station cannot afford to run out of fuel, which is why they typically have sufficient inventory for at least a year or two. Running out of fuel is akin to a financial catastrophe, as the cost of re-starting a reactor which ran out of fuel can run into $100 million plus.

This aspect has created almost absurd spreads between spot and term prices from time to time; however, the usual mechanisms to arbitrage out any abnormalities are not in place in uranium. And because the spot price has been so weak more recently, ‘fatigue’ amongst financial investors has caused them to sell their uranium mining stocks, even if the spot price is largely irrelevant to most of those companies. Admittedly, one or two uranium mining companies sell most of their output in the spot market, i.e., you need to bypass them if you wish not to be overly exposed to the spot price.

My expectations

Most of those investors who have already invested in this industry have based their decision to invest on a belief that demand for uranium will significantly outstrip supply over the next decade. While I don’t disagree with that (you cannot disagree – it is a fact), the fact that it takes up to ten years from decision to build a nuclear power station to actually going live is an important detail which should not be underestimated. It is therefore not impossible that the next big bull market in uranium spot is still a few years away and that, in the near term, investors should look elsewhere in the nuclear energy value chain for attractive returns.

The recent media frenzy surrounding Big Tech’s data centre expansion plans has also contained a nuclear energy angle. Alphabet (Google), Amazon, Meta Platforms and Microsoft have all made significant, nuclear energy investments in recent months in response to growing demand for electricity, as new data centres populated with power-hungry AI servers shoot up everywhere. SMRs (Small Modular Reactors) look to be in pole position in the race to benefit from the rapid growth in electricity demand from data centres, as they bring several advantages that don’t exist today:

• Conventional nuclear reactors require operating pressures of over 2,000 psi to prevent the water from boiling at core temperatures of about 600°C. Molten-salt SMRs deal with this problem. As molten salt boils at 1,400°C, SMRs can operate at atmospheric pressure. The much lower pressure eliminates the risk of meltdowns.
• SMRs are assembled mostly by advanced robotics in a factory and are subsequently shipped to the installation site, i.e., the risk of human error in the construction process has been pretty much eliminated.
• The modular design makes it possible to reduce the electricity output at times where the need for power is lower. With today’s technology, that option doesn’t exist.
• SMRs can be positioned under-water to further enhance safety.
• An SMR power station takes up much less space than a conventional nuclear power station, allowing de-commissioned coal-fired power stations in the suburbs to be converted to SMR power stations. This will have a major (positive) impact on the electricity price.

For all those reasons, I believe the future belongs to the SMR design.

Conclusion & contact details

Whether I like it or not, almost all stocks linked to nuclear energy trade more or less in line with the uranium spot price, i.e., you cannot completely isolate yourself from being exposed to spot, even if its impact on corporate earnings in the industry is minimal. That said, you can do one or two things to reduce the impact. Take for example those (few) companies that value their inventory based on the spot price. Or take those (even fewer) mining companies that sell a substantial proportion of their output in the spot market. In both instances, those names should not be included in your portfolio, unless you are happy with the volatility spot brings.

Liquidity is another issue to consider, in particular if you have sizeable assets under management. There are, in fact, not that many listed nuclear energy stocks which offer ample liquidity. In that context, I should bring up Kazatomprom in Kazakhstan, which is the biggest uranium mining company worldwide. Given the geopolitical uncertainties surrounding anything to do with Russia, I don’t feel comfortable investing in this company, even if it is a sound company and there is an ADR listed on NYSE. You may take a different view but, to me, this stock is a no-go (for geo-political reasons only).

You also need to get your head around the fact that only a small minority of companies in this industry actually make a profit. For many years, the uranium price has been too low to incentivise investments of any significance. According to industry insiders, the incentive price is hovering around $90/lb at present cost levels, i.e., with a term price around $80/lb, the appetite to make major investments is still relatively limited. Only because industry insiders can spot the same gap between future demand and supply that the rest of us can, do they make any investments at all. However, none of the new entrants, the so-called junior mining companies, are profitable yet and won’t turn profitable for another few years. The number of companies that actually make a profit in this industry can (easily) be counted on one hand. A balance sheet analysis therefore needs to be part of the work you do.

I think I will stop now. I wholeheartedly believe returns on nuclear energy investments will be outstanding over the next 5-10 years, and I hope I have made that clear with this article. Having said that, I am not (as I pointed out earlier) convinced that the best place to be over the next year or two is in uranium mining stocks. Feel free to call or email us, should you want to take this discussion any further. We can be reached on +44 20 8939 2900 or on [email protected].

Niels

24 February 2025