November 2, 2021

Uranium and Nuclear Power play key role in decarbonization

by Tajinder Dhillon.

As COP 26 gets under way in Glasgow, Scotland, we take a closer look at uranium and the nuclear energy market. The host nation published its “Net Zero Strategy: Build Back Greener” report last month and made it clear that nuclear will play a key role in the U.K.’s achieving net-zero emissions by 2050.

The U.K. aims to decarbonize the power system by 2035 and become powered entirely by clean electricity, subject to security of supply. This will be done through a portfolio mix of renewable sources (i.e., wind, solar, hydrogen) in addition to nuclear power.

With respect to nuclear, it announced a £385 million Advanced Nuclear Fund: up to £215 million to be invested in small modular reactors and £170 million for a research and development program on advanced modular reactors, both considered cutting-edge technologies. It also aims to bring at least one new large-scale nuclear project to the point of final investment decision by the end of this parliament.

A key input for nuclear reactors is enriched uranium, the fuel source that powers the reactor and enables the production of electricity.

Uranium spot prices have been range-bound between $25-35 per pound over the last five years, but recently skyrocketed to $50.25 per pound in September, reaching a 9-year high as shown in Exhibit 1 using Refinitiv Datastream. This milestone may have gone unnoticed by many but underlines a key shift in the market which can affect both miners and utility companies who need to source the commodity.

It is important to note that while utility companies often contract uranium in the term market (i.e., secure long-term supply), the move in spot prices are translating into higher term prices.

Exhibit 1: Uranium U308 Spot Price

The surge in spot prices is mainly attributable to investment vehicles that are purchasing millions of pounds of already-produced uranium. Sprott Physical Uranium Trust (RIC: U_u.TO) has been a key player in the spot market as they look to exploit the supply/demand imbalance that faces the industry over the next decade (more on this below).

Cameco 21Q3 results

Cameco Corp. (RIC: CCO.TO) is the second-largest publicly listed uranium producer ($9.7bn market cap) and published 21Q3 results on Oct. 29. While they missed analyst expectations on both revenue and EPS, they provided several comments around supply/demand dynamics and pricing activity.

Starting with demand, Cameco referred to the 2021 Nuclear Fuel Report which showed a 2.6% growth rate in nuclear fuel demand, up from 2% in the previous report. They are also positive that the demand for nuclear fuel will increase as companies who have committed to a net-zero target will need an energy source that provides safe, clean, reliable, and affordable electricity 24/7/365. Cameco states that 1/3 of the population has little or no access to electricity, while 85% of electricity generation is done by fossil fuels.

On the supply side, Cameco Corp. has curtailed supply of uranium since 2018 due to weak uranium prices. They decided to simply leave the uranium in the ground and placed the world’s largest uranium mine (McArthur Rivers) in maintenance mode for the last few years. On a related note, a similar strategy has been executed by NAK Kazatomprom AO (RIC: KAPq.L) which is the largest uranium miner globally.

Putting this together, Cameco states, “when you look at current productive capacity over the next decade, it only satisfies about 70% of utilities’ run rate requirements. That means to meet the remaining 30% of requirements, new production will be needed.” (Source: 21Q3 earnings call)

Furthermore, Cameco states that, “since Fukushima (2011), utilities have consumed over 1.6 billion pounds off of term contracts signed in the past, but they’ve only come into the market to replace about 800 million of that.”

Cameco has made clear that they will continue to be a responsible commercial producer and only bring new production to the market until they see utility companies enter the market and contract for long-term supply of uranium on a mass scale. It is only a matter of when and not if, according to Cameco.

Using Refinitiv Eikon Workspace to look for signals

Using Refinitiv Eikon Workspace, we can see the rise in uranium prices benefitting producers as shown in Exhibit 2. Using the Aggregates app, we look at all active publicly listed companies and organize the data using The Refinitiv Business Classification Scheme (TRBC).

TRBC covers over 250,000 securities in 130 countries to five levels of granularity, by specific industries, providing comprehensive, detailed, and up-to-date sector and industry classification. This is done through dedicated, local language speaking analysts who utilize company filings, Reuters news, and corporate actions services to assign and maintain a company’s activity.

For example, most uranium based miners fall under ‘Coal & Consumable Fuels’ using a GICS Sub-Industry scheme, which isn’t helpful for investors who want to screen and analyze for companies that exclusively focus on uranium. However, TRBC offers this level of granularity for investors.

The uranium industry has seen the largest positive revision in next-twelve-month (NTM) EPS estimates from sell-side analysts over the last 30 days (32.58%).

Refinitiv StarMine offers a suite of quantitative models and we note that the uranium industry has an aggregate Analyst Revisions Model (ARM) score of 76 out of 100. This is expected as the model incorporates analyst estimate revisions across revenue, EBITDA, EPS, while also incorporating change in analyst recommendations. The industry also has a Price Momentum aggregate percentile ranking of 79 out of 100.

Exhibit 2: Aggregates App

Source: Refinitiv Eikon Workspace

We also display the StarMine SmartEstimate growth rate which compares estimates for next year vs. current year. The StarMine SmartEstimate places higher weight on more accurate analysts and timelier estimates.

Both EPS and Cash Flow Per Share SmartEstimate growth rates are amongst the highest at 517.04% and 566.73% respectively.

The last column in the table utilizes Refinitiv ESG data and we can see the Uranium industry as an aggregate ESG score of 64.65 out of 100, which is the 7th highest ranking by industry.

 

Stay tuned for part 2 of this report, which looks at nuclear adoption at a country level, and which countries have the greatest nuclear installed capacity.

 

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