Let’s start with nuclear energy. It’s back!
After being unloved, forgotten and punished for a decade, it’s rising again. Some call it a nuclear renaissance, but I like to think of it as a resurgence given the growing momentum.
Who would have thought that in only two years, public sentiment and government support would have shifted this strongly? Nuclear energy peeked out of the backstage shadows at COP26 in 2021. While the nuclear energy sector’s attendance that year was full of controversy, it marked the first public admission by governments that they had no chance of reaching net-zero targets without it. While there were outlier countries chasing energy unicorns, it was a watershed moment for nuclear.
By COP28, which recently concluded, nuclear energy took center stage with 22 countries pledging to triple their nuclear energy capacity by 2050.
The global pivot back to nuclear energy creates opportunities and challenges. We need to rebuild supply chains that have long since disappeared. Everything from mining uranium, building nuclear power stations to reshoring the nuclear fuel supply chain will be of paramount importance. The good news is the pivot is already under way as the energy crisis in 2022 galvanized political will and unleashed market forces to break a lost decade of inertia.
The uranium price is responding, with spot rising from $48 per pound to $91 in 2023, and the term contracting price approaching $100 caps. While there is lots of chatter about the impact of financial players in the market, the price gains in 2023 have clearly been driven by utilities, which purchased the most uranium in 2023 since 2012. UxC estimates that utilities have contracted more than 160 million pounds in 2023, which the industry considers replacement rate contracting. Also of note, nearly 42 million kgU (kilograms of elemental uranium) of conversion term contracting (the second-highest annual volume in the past decade) and nearly 50 million SWU (separative work unit) of enrichment term contracting (the most volume booked since 2009) reflects a renewed focus on the security of supply.
I often refer to the period from 2011 to 2020 as the lost decade for uranium and nuclear energy. A prolonged bear market spawns legacy issues that take years to form, and solving them often takes an equal amount of time. This lost decade affected the whole sector from the building of nuclear power stations to the mining and processing of uranium, and the nuclear fuel supply chain. It is a big challenge, yet an even bigger opportunity. If we want to expand our nuclear capacity over the coming decades, we are going to need to produce a tremendous amount of uranium.
We are often asked whether the price of uranium achieving/nearing incentive pricing levels will unleash a powerful supply response that will inevitably end the bull market. We don’t think so for the foreseeable future because of two realities. A lack of investment in the sector during the lost decade coupled with long development lead times for capital-intensive and complex projects will translate into a slower-than-expected supply response. Cameco, at its Investor Day on Dec. 19, 2023, estimated there is a very significant level of uncovered utility requirements, adding up to 2.3 billion pounds of uranium through 2040.
It’s “show me” time for the uranium mining sector. With the upward trajectory of the price of uranium generating renewed investor interest and government support, mining companies need to demonstrate that they can create real shareholder value by producing drums of uranium. The industry is responding by bringing a growing number of previously producing mines back online. This has been very encouraging, and the natural first steps are to bring the easier pounds back into production.
While the cost structures and challenges vary from region to region, the real test for mining companies will be building new mines. This will not be easy as the lost decade has atrophied the industry’s collective workforce, knowledge and experience. The burden cannot solely fall on them. Governments need to step in and assist by streamlining the permitting process and providing the right financial incentives to help “crowd in” private capital. There’s little value if a world-class deposit stays stuck in the ground.
The easy pounds are coming out of the ground first. Restarts of existing uranium mines that have been on care and maintenance for as long as 2013 are slowly coming back to life after a one- to two-year ramp-up period.
We won’t fix the looming supply deficit without building new uranium mines, something we haven’t done in 20 years. Again, this is a big challenge, but a bigger opportunity as capital is finally flowing back into the sector. There are several promising uranium deposits that were discovered up to 10 years ago that we are hopeful will be built in this cycle. As corporate budgets for exploration return, new discoveries will be found. The industry doesn’t have a choice if it is to ensure diversified sources of supply. Mining is difficult and investors will need to be compensated for their risk capital. We don’t anticipate any major new mines to come online before 2030.
In the previous uranium cycle, we saw a massive supply response from Kazakhstan. It emerged from a small producer in the early 2000s to becoming, what I believe to be, the equivalent of OPEC in uranium today. Naturally, as the current cycle progresses, one would ask whether Kazakhstan can bring on meaningful new supply as a low-cost provider. Time will tell. State-owned Kazatomprom has announced it will expand production to licensed nameplate capacity in 2025. This could go a long way to fill the looming supply gap, but the market remains skeptical. Ongoing supply chain issues have prevented Kazatomprom from hitting its currently reduced production goals since 2021. What if the supply-chain bottlenecks are solved? It’s possible, but most of its future production has already been contracted forward to China. Russia has also secured part of future production from jointly owned deposits in Kazakstan to ensure their own security of supply.
The nuclear fuel supply chain remains susceptible to further disruption. U.S. legislative efforts to finally sanction Russian nuclear fuel services appear to be imminent and could prompt retaliation by Russia. While uranium is the building block, conversion and enriched uranium are important steps in the fuel cycle. With Russia controlling meaningful percentages of global capacity in both conversion and enrichment, risk mitigation strategies by the West are under way with the reshoring of the supply chain. Western enricher Urenco announced it will expand its facilities in the United States, Netherlands and Germany, while Orano will expand its plant capacity in France. On the conversion front, the long-awaited restart of the Converdyn facility in the United States is helping to alleviate the bottleneck that has helped support rising uranium prices since 2022. Cameco will also ramp up production to capitalize on record conversion prices.
With the spot price of uranium recently reaching $90 per pound, we believe we have hit another inflection point in this bull market. Uranium contracting by utilities is accelerating, ending an extended era of inventory destocking. Security of supply is now the focus and priority. Some utilities appear to be well covered, while others that questioned the wave of market signals since 2021 are less so. Geopolitical risks remain a wild card that could create a market calamity.
The industry will require significant capital investments to meet its ambitious expansion plans. Thankfully, investor interest in the sector is growing globally as the opportunity becomes better understood and the legacy stigma fades. As the sector grows and recapitalizes, it will attract ever-larger institutions, drawn by a compelling investment thesis and improving liquidity. While 2023 was a momentous and rewarding year for nuclear energy, uranium and the miners, we remain bullish on the long-term prospects for the sector.
John Ciampaglia is CEO of Sprott Asset Management. Read the original and complete version of his article on the Sprott website here.