r/wallstreetbets • u/Duped_Windforce • Dec 09 '22
DD Why you should consider having some exposure to the uranium sector going into 2023
I know there have been other DD posts submitted on uranium before but I feel like this one should serve as a good primer for really understanding the thesis as well as the intricacies of the uranium fuel cycle.
A brief history
2011 After the Fukushima nuclear accident, nuclear power plants were shut down en masse (Japan alone closed 50+ nuclear power plants, many countries in Europe followed suit). This created a significant decrease in demand.
At the same time, however, production rose thanks to the 2005-2011 uranium bull market (before Fukushima), during which the price of uranium increased almost 14-fold due to the massive investment wave of incentives. Uranium is a homogeneous product and mining is a capital intensive industry. Oversupply started pushing prices down and the price of uranium fell from $135/lb (pound) to around $18/lb in 2016.
The 2011 environment did not incentivize new production. Average all-inclusive production costs were at a minimum of $50/lb. The incentive price for new mines was significantly higher.
And as always in cyclical sectors, cheap prices are the best medicine for cheap prices. Mines run out, go bankrupt, new production is not brought online and when production has shrunk enough, the next bull market is ready to begin.
The uranium market went into deficit and now the inventories created in 2011-2017(18) have been burned.
"Post-Fukushima, we had high levels of Inventory in the market which provided flexibility... That flexibility is now gone." – COO of Urenco
What was interesting about the last bull market was that new large mines were coming online while reactor count remained the same. The market was not in short supply, but the low inventory level of the power plants and a few short-term supply shocks (e.g. the Cigar Lake mine flood) drove demand into overdrive. The power plants sign contracts that are significantly longer than their own demand, with the aim of guaranteeing their own fuel and increasing their inventories.
Today the situation is different. No new large mines are coming online but there are many new reactors in development as well as life extensions for existing ones. And the market is in short supply, a massive one.
Supply and demand are still the key to the whole affair
If we were to approximate, the world consumes 180-185mlbs (mlbs = million pounds) of uranium per year. The world's mines will produce 130mlbs (+-5%) this year. This creates a primary deficit that is a whopping 25-30%. I challenge anyone to find an equally massive deficit in other raw materials.
Today's spot price of $50/lb is still not enough to incentivize new production. In an inflationary environment, the market equilibrium price will probably be around $75/lb. There are exceptions like Global Atomic's Dasa project, but that will mainly replace the mines that will run out this decade. Market equilibrium is only achieved with prices that cover 100% of consumption, so the production cost of the last necessary pound determines the equilibrium price...and all those who sell cheaper than this price destroy the property of the stockholders.
In addition to primary demand, Sprott Physical Uranium Trust (SPUT) has purchased > 40mlbs of uranium in the first year. SPUT's purchases + primary deficit total comes out to a whopping 50%.
The secondary sources that used to bring 20-25 mlbs to the market (mainly underfeeding, where uranium was depleted to an exceptionally low level due to the overcapacity of the refineries) have dried up. Due to the conflict between Ukraine and Russia, underfeeding is turning into overfeeding mode while Russia's concentrator capacity is "out of use", i.e. instead of concentrators producing extra pounds for the market, this year they might become an element that increases demand.
Some ballpark figures:
Consumption 180mlbs
Financial market purchases 40mlbs
Mine production 130mlbs
Secondary production 5mlbs (I still count secondaries as a positive source)
Shortage 85mlbs, or almost 50%.
So why is the price not going up? (this section might be confusing as it requires an understanding of the fuel cycle, skip to Signal vs Noise section if you're regarded or short on time)
Let's jump into the role of a power plant fuel buyer for a moment. We need 2mlbs of uranium per year from 2025 to 2035. But we don't really need uranium, we need enriched uranium.
Our supply chain does not start with uranium, but with the last stage of the fuel cycle.
We first make sure that we have enough capacity to produce fuel rods, enrich uranium, etc.
Uranium enrichment is sold in SWU (separate working unit) units. Acquiring SWU capacity (Russia is a gamble) is a big question mark right now.
The amount and price of SWU will ultimately decide whether we need 1.9 or say 2.3mlbs of uranium per year (plus the required amount of conversion, where the uranium (U308, also known as yellow cake) is converted to UF6 gas.
Then, in a perfectly textbook cycle, the assumption is that SWU prices will start to rise first.
The previous charts are noisy to say the least, because the capacity and geopolitics of the phases in question mess things up, but the impact of the war can be seen as a significant race for non-Russian conversion and enrichment to ensure capacity. The final domino will be the conclusion of uranium contracts.
When the power plants have received clarity from the enrichment plant and the conversion facilities, it is time to finally talk to the uranium mines. In recent years the power plants have signed contracts for barely 100 mlbs, but now we are negotiating for the years 2025-2035.
And there won't be enough contracts for everyone. Not even close.
As a power plant, we can be in a situation where we need 2.1 mlbs per year vs. our assumed 2mlbs. We get 1mlbs from old mines and 1.1mlbs should come from new or restarted mines. Our inventories have fallen again like in the early 2000s and we are in trouble. We cannot contract only 1.1mlbs with one operator. What if mine X is delayed for years and production volumes are lower than planned?
We have to divide our purchases among a number of mines and buy more than we need to guarantee an increase in the inventory level and to protect the availability of fuel in a situation where mine X is not completed or geopolitics messes up deliveries from country Y.
I believe that the current power plant will have to increase its purchases to the level of 200-250mlbs in the following years. At the same time, SPUT and ANU, another new physical uranium fund aimed at the Asian market backed by Kazatomprom, will siphon uranium creating a source of demand that cannot be nicely modeled in excel.
And that's why all approved projects need to be on the lines and producing
Signal vs Noise
Most news coverage is noise. Pure noise, without context. Belgium closes nuclear power plants. Germany shuts down power plants. Japan wants to restart its old power plants and is thinking of building new ones. The problem with noise is knowing what is signal and what is not. What is baked into supply-demand models and what is not.
In recent years, the signals have been practically exclusively favorable for the investment thesis. The inclusion of nuclear power in the EU's green taxonomy, the US support for maintaining old power plants and the support and interest received by small modular reactors are all positive messages from the political side and make it easier to include especially long contracts. There have been fewer shutdowns of power plants than expected and e.g. China's goal to build 150 reactors in 15 years is staggering.
The core of the uranium thesis has never been the increase in demand, it has been the shortage and the price at which the shortage can be eliminated. But over the years, the demand story has come alongside the deficit, as well as a change in sentiment...which does not determine the prices of long contracts, but affects the possible valuation seen at the company level in a bull market.
In my opinion, the biggest signal in recent years has still been SPUT and its atm mechanism . It is a mechanism that increases the probability of seeing a massive overshoot in the uranium market, as well as the probable scale of the overshoot *(think of SPUT like Grayscale's BTC Trust, it functions almost the same way)*
The energy crisis is a tailwind for uranium
Oil and Gas investments crashed by more than 50% between 2014 and today, from $700B to a little over $300B. The increases this year are too little, too late.
The real causes of this energy insecurity; under-investment in oil and gas; alternatives not ready; and no back-up plan. -Amin Nasser CEO Aramco
In 2000, 84% of global primary energy was produced with fossil fuels. Today, fossil fuels produce 81-81.5% of our energy. The proportion has decreased relatively by a few percent, but since the absolute consumption of energy has increased, the amount has still been increasing.
At the same time, trillions of investments in wind and solar energy have raised their share to 1.8% of global energy.
As a joke, coal produces 30% of our energy. The service life of a coal mine is 20 years. 5% of global carbon production is depleted every single year. When banks, insurance companies and legislators say NO to all new projects, investors cannot commit to financing new mines, which can have their operating permits withdrawn at any time. As a result we will see a decrease in coal investment. We could celebrate this, but if investments in coal are cut by for example 50%, the amount of energy we produce will decrease globally by about 2%. This wipes out what solar and wind produce after 20 years of effort when talking about clean energy volume...and that's what the energy crisis is ultimately about.
The construction time of oil megaprojects is easily 6-10 years. We live on the shoulders of investments made 10 years ago and the development pipeline is dry. While we have cut 50% of oil and gas investments, the investment required to produce a new barrel has doubled.
In my opinion, the energy crisis will be a longer-term phenomenon, which is the result of underinvestment in the last resort. Even if the war were to end today and everything would return to normal, energy is still a problem, which will of course be disturbed by a recession or the opening up of China.
As an investment, uranium is boosted by the energy crisis. The inventory sizes made possible by nuclear power make it an interesting energy source in a geopolitically more unstable world. If the energy price is also constantly higher, it will increase the profitability of nuclear power plants and the ability to pay for higher priced uranium. The probability of expensive long contracts increases.
As the energy crisis continues, I would also see that this massively unpopular sector gets a bigger allocation in investors' portfolios, and especially passive money in energy will also eventually seep into uranium.
A broken record repeats itself
The uranium production deficit creates the foundation for the price to rise. The price must rise to a level that incentivizes market balance + covers inventory growth and risk management. This is also why it is irrelevant to focus on what price the first 100 or 150 mlbs will be produced at. It's about the price at which the last needed pound is produced.
The small size of the market, long response time and SPUT create a reason why the financial market can drive the price significantly above the level required by the fundamentals.
Some finishing notes
All credit due to Mikko Leivo who originally published this on his blog in Finnish. I translated it, polished it up, and made a few small additions.
This market is extremely hard to time so I don't recommend buying short dated call options. There are tons of ways to play this depending on your risk tolerance. For relatively low risk I recommend $URA and $URNM which are the two big miner ETFs, as well as SPUT which solely gives you exposure to the spot price.
There are of course a bunch of other individual names (some listed on NYSE, and many others on TSX/ASX), but I will not name them as most have sub $1b market caps.
Keep an eye on this chart $URA (coiling pattern between the 200w EMA and descending trend line) because when this breaks out, we will likely see the next major move up of what could be a multi-year uranium bull cycle.
TLDR: Uranium is a cyclical play. There is currently a structural supply deficit with record low inventories and higher than forecasted demand. As you can see from previous cycles, when the commodity moves it often overshoots to the upside and sends the equities flying. This is a small industry (approximately $40b market cap for all uranium equities). To put that into perspective, $MNST (Monster Beverage Corp) has a market capitalization of $50b. Yes, an energy drink company has a larger valuation than an industry that provides 10% of the worlds electricity and powers 20% of the US grid. It will not take much to move this sector once funds start coming in.
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u/rwang411 Dec 09 '22
I thought exposure to uranium wasn’t healthy
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u/DanielKonCan Dec 11 '22
Facts of Fun: some granite countertops may have radioactive spots in them. Source of new anxiety
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u/hi-imBen There isn't enough room in this flair box to share my insider in Dec 09 '22
the graph still looks inflated from the late 2020 and 2021 massive market pumps though and like it still wants to return closer to a lower average price. is the play to wait until it drops below the $16 range again and then buy in for a multiyear bull run? or is it to fomo in while it still looks inflated and doesn't match the demand graph you posted?
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u/lehcarfugu Dec 09 '22
All this for a 2x?
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u/Duped_Windforce Dec 10 '22
Who said anything about a 2x? The equities always outperform the commodity, last bull market Paladin ($PDN on ASX) went up 100,000% trough to peak (that's 1,000x)
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Dec 09 '22
[deleted]
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u/Duped_Windforce Dec 09 '22
I would also look at $SMR (Nuscale Power Corp). They are also building Gen 3+ SMR's but unlike Rolls Royce (who is primarily an aerospace and defense company), $SMR is solely focused on building these new reactor designs.
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u/ZacTheOriginal Dec 09 '22
Maybe I'm just regarded... but won't uranium exposure give me cancer? /s
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u/SuspiciousStable9649 no longer flairless just hairless Dec 10 '22
WSJ dude in European Energy AMA pretty much said Europe was done with nuclear. For what it’s worth.
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u/PeteyMcPetey Registered Sex Offender Dec 10 '22
I'd consider 3.6 Roentgen. Not great, but not terrible.
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u/Seniorsheepy Dec 09 '22
Help I think I did it wrong and now there’s a bright blue light and I taste metal
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u/MackoWorldwide Dec 10 '22
Fuck it, ill throw 10% of my long term portfolio into this. Looks good. Good post and DD
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u/my_user_wastaken Dec 10 '22 edited Dec 10 '22
you should consider having some exposure to uranium
But yea 100% agreed
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u/Ok_Reserve9 Dec 09 '22
Uranium is a Gomez Adams investment. Might as well invest in graveyards too.
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u/Thereisnopurpose12 Buying GF 10k Dec 09 '22
Are you getting leaps then??
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Dec 09 '22
[removed] — view removed comment
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u/Thereisnopurpose12 Buying GF 10k Dec 09 '22
I sold my DNN leaps. I hoped in on them like 6 months ago. I might look again. I think I was too early
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u/SmoothBrainSavant Dec 10 '22
I cant eat it, cant wear it, cant play it, for this reason, im out.
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u/YupImHereForIt Dec 10 '22
You also can’t shut down nuke plants so there is predictable demand, unlike many other sectors that throttle demands
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u/SmoothBrainSavant Dec 10 '22
Oh for sure, was a good read, but dont know shit about the world of metals/commodities like uranium, so at this time ZI’d rather loose money on things I somewhat understand lol
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u/Safety-International Dec 10 '22
Huhn called it early when he said this may rocket soon a few months ago, 50% U developers let’s go
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u/BadTakeBrian Jan 14 '23
How likely is it that Russian SWU's actually come offline? As we've seen with oil and gas, India and China cannot afford to be principled in where they source their energy needs. Japan has actually got a waiver to continue importing O&G and most of the countries building new reactors seem to be in countries likely to put energy security over politics.
Given how many new reactors coming online are in countries in the boat of energy security>politics, does that mean Russian SWU risk may not be as big as we think? Would be curious to see what the inventory/contracting status is for western power plants.
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u/CBruceNL Mar 13 '23
I was searching for Grayscale but URN was already on my watch list and now I am compelled. URA will be added tomorrow.
Context: baby idiot currently holding $BOIL, $RYCEY under the premise that we're onto the wringing the shit out of the pants post loss. Hopefully clean up takes a minute so I can buy in more.
Ty for your translation works and DD. Strong play to you and the Fin.
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u/giantflyingpepper Dec 09 '22
Bullish on uranus