The ‘uranium renaissance’ is not a term widely deployed in the UK. As some industrial policy types such as Rian Whitton observe, we in the UK are way behind the curve and unlikely to meet our self-imposed deadlines to roll out new capacity.

My suspicion is that that general reluctance to commit aggressively to nuclear power – as I believe we should – produces a kind of myopia amongst investors. For ages anything nuclear found itself on the ESG naughty step – a trend that is now, thankfully, reversing as the EU embraces nuclear in its own regulatory requirements – and thus underowned by institutions and private investors.

Sentiment has improved but I sense we in the UK still collectively map our ambiguous feelings about nuclear into investment decisions. You all know the drill. ‘I get nuclear is efficient and relatively clean, but it’s expensive, takes decades to get stations up and running and renewables are shooting ahead.’

Developing story

In reality, the nuclear renaissance story has very little to do with the developed world where permitting and zealous regulation has slowed development down to a tortoise-like crawl. It’s a developing world story with countries such as China and India powering ahead although the Middle East isn’t that far behind as is much of Asia.

But there’s a catch. As their capacity grows it’s starting to run into a classic resource supply problem. Like many other commodities uranium and its derivative uranium oxide is produced, at scale, by a handful of major producers via established low-cost mines that take decades to get up and running. Uranium and its derivatives including yellow cake (impure uranium oxide) need to be processed and enriched – again by a handful of countries, notably Russia.

For most power producers’ running nuclear power stations, uranium and its products are an essential, though small, part of the total cost equation. Thus, they tend to lock in contracts for supply over many years, buying off market via long-term supply contracts. But at some point, the increased demand hits that less-than-flexible supply curve and the long-term contracts market isn’t enough at which point the spot markets become more relevant.

Those spotty spot markets produce a price which has gone up by 20% in the last year, but this market is a pale shadow of other commodity spot markets such as oil. Volumes are small and less than transparent. But many uranium bulls, notably research-led alternative investment house Ocean Wall, reckons this is about to flip over as demand begins to encounter that inelastic supply curve – helped along by a spot of geopolitical bother.

Crunch point

That bother I alluded to is of course Russia. It dominates the enrichment market and is also the main conduit through which supplies from Kazakhstan – the biggest producer of uranium – transit. Russia has cannily not, to date, threatened those supply routes but, given the volatile nature of its leadership, who knows what it might do next?

If I were a power-producing buyer I’d want to bypass all those concerns and get my hands on the important stuff via a rock-solid contract. Kazatomprom, the world’s largest uranium producer, seems confident it can activate a southern supply route via the Caspian Sea but frankly who knows if that is a practical solution.

For bulls such as Nick Lawson at Ocean Wall, we may be fast approaching a crunch point where spot prices could flip rapidly and produce a price spurt – as we have seen in many other spot commodity markets connected to the energy transition. 

There’s also the simple fact that more and more institutional investors are taking notice of this market financialising what has been until recently a marginal market for financial types. ESG funds are putting uranium back in the Goodie Two Shoes box and hedge funds are starting to take notice. That financialisation will, inevitably, accentuate any price swing.

Volatile niche

In this scenario, we could be closer to the real nuclear renaissance where a surge in pricing prompts more miners to develop resources which in turn might force prices down many years hence. But the obvious point here is that many – though not all – of the best development sites look a bit like the huge mine in Niger ie, in volatile countries with difficult political backdrops.

That puts North American majors such as Cameco in prime position, with its huge, reliable reserves of uranium, ready to ship to worried power utility customers.  And increased supply – wherever it comes from – will also put more and more pressure to develop new enrichment facilities that aren’t reliant on Russia. Cue a major but under-reported initiative by the Biden administration to develop new enrichment facilities, which is in turn helping to produce volatile share prices for wannabe outfits in this highly specialised space such as US-listed firm ASP Isotopes.

Despite all the enthusiasm, the whole nuclear space is a niche within the broader energy complex of resource stocks – the market value of all the listed companies totals less than $50bn and a good chunk of that belongs to state-dominated Kazakh entities. Ocean Wall tracks the sector via its own proprietary index which has quadrupled in value since a low point in the mid to late 2010s. We show the Solactive Uranium Pure Play index since 2014 below.

U-shaped uranium index

The Solactive Uranium Pure play index is a basket of uranium mining equities weighted to the larger and more liquid companies across global markets.

Handful of players

If we exclude investment companies that own stocks of uranium, such as the Sprott Physical Uranium Trust and Yellow Cake (YCA), this index is dominated by just a handful of companies such as Cameco, Kazatomprom (majority state owned), NextGen and Paladin Energy as well as Uranium Energy Corporation. These five miners comprise nearly 70% of the value of the Ocean Wall index.

Nexgen, Paladin, Cameco and Uranium Energy feature in the top holdings of the New City managed Geiger Counter (GCL ) and account for over half of the investment company’s assets. GCL has seen its net asset value increase by 163% over the last three years, although NAV is down 4.9% over the last 12 months but up 7.4% this year.

Over in ETF land the biggest and most established fund is from HANetf and is called the Sprott Uranium Miners Ucits ETF (URNM). The largest holding is, you guessed it, Cameco at just under 18%, closely followed by Kazatomprom at 13% and then the Sprott physical holding vehicle, their Uranium Trust, at 12.65%. The fund, with 37 holdings, boasts a see-through index price-earnings (P/E) ratio of 37 times and the fund charges an 0.85% annual fee. Geiger Counter’s fee is 1.38%.

AIM-listed YellowCake is another, arguably more straightforward, option – it’s an investment company that holds huge physical stocks of uranium oxide (U3O8 ). To be precise that equates to 18.81m lb of value (spot price of US$56.00/lb) plus and cash and other current assets and liabilities of US$81m. It’s a pure play way of buying into the uranium bulls vision of a nuclear renaissance.

Like traditional investment trusts, this investment company trades at a discount to NAV which can widen out to as much as 20%. It’s currently running at a 6.6% discount based on a spot price of $58.27 per lb, valuing the company at over $1.1bn.

Expensive Cameco

Last but by no means least investors could always just buy stock in Cameco, by far the largest and most strategic Western miner. It boasts licensed capacity to produce more than 30m pounds of uranium concentrates annually, backed by more than 469m pounds of proven and probable mineral reserves. It also happens to be a leading supplier of uranium refining, conversion and fuel manufacturing services.

Over the last year its share price is up 36% and 249% over the last five years putting the miner on a forecast P/E multiple of 67 times earnings, yielding a paltry 0.2% in dividends.

That eye-watering valuation on Cameco should also alert investors to the obvious risks. Like any other commodity sector, uranium is volatile in terms of pricing (and supply) and although the sector is currently enjoying a purple patch, the sector has had to endure very long stretches of negative sentiment, in some cases, lasting decades.

This has usually been prompted by a nuclear accident or mishap, and so it’s easy to see how the nuclear renaissance could fail to arrive. But I would maintain, rather unfashionably if you talk to diehard Greens, that if we want the energy transition to work much of the rest of the world has no other choice than to embrace nuclear power as one of the cornerstones of base load power.

And if you agree with that argument – many don’t of course – then the opportunity set is potentially huge.

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