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How the next nuclear renaissance will affect markets

4 minute read

We believe the tide has turned in uranium and we’re entering the next nuclear renaissance. For investors, this creates the opportunity to take advantage of potential growth in uranium demand. Fundamentals are improving at a rapid pace, with increasing policy support from governments, a recontracting cycle by Western utilities, and a supply side not yet incentivised to significantly increase production.

Governments around the world are focusing more on nuclear energy in light of the increasing need for energy security. In addition, public support for nuclear continues to grow as people directly experience the reality of disrupted and expensive forms of electricity supply.

In addition, the global focus on green energy initiatives, with nuclear power having a role to play in the future energy mix, is another pillar supporting the positive medium-term investment thesis for uranium.

Growing political support for nuclear energy

In the US, last year’s Inflation Reduction Act supported nuclear power as a clean energy source while the Civil Nuclear Credit Program supported the existing US reactor fleet, and there has also been the introduction of the US Federal Strategic Uranium Reserve, with first purchases announced in December 2022.

Meanwhile in Europe, the inclusion of nuclear energy in the EU Taxonomy is a pivotal turning point, with Europe formally accepting nuclear as green energy.

In addition, Japan and South Korea both launched green taxonomies during 2022 which included nuclear. These countries are also bringing their nuclear fleet back online and reversed phase-out programs.

Even Australia has seen the re-emergence of the nuclear debate within political circles.

Effects of Russia/Ukraine on global energy markets

Following the invasion of Ukraine and resulting uncertainty in supply, there has been an even greater focus globally on greater energy security. Russia represents 14 per cent of global uranium capacity and dominates the downstream fuel processing industry with 27 per cent of global conversion capacity and 39 per cent of global enrichment capacity.

Russian exports of enriched uranium have around 28 per cent market share in the US. To offset Russian reliance, US lawmakers are currently seeking to introduce multiple policies which would support the establishment of domestic nuclear fuel production and strengthen America’s interest in nuclear energy by investing in technologies and improving infrastructure and supply chains.

Other sanctions have also been imposed on Russian products, but these are yet to meaningfully impact the uranium fuel cycle, given its critical importance. In addition, many US utilities continue to take delivery of Russian-sourced enriched uranium from legacy contract arrangements.

Three recent major developments may result in Western utilities increasing their focus on security of supply and potentially drive urgency in securing supply from “friendly” sources:

1. Kazatomprom, a Kazakhstan uranium producer, announced the sale of a 49 per cent stake in the country’s second-largest uranium deposit to subsidiaries of Rosatom, a Russian state-owned entity, which gives Rosatom access to a significant mining operation under development in Kazakhstan.

2. Kazatomprom received shareholder approval for a long-term supply contract with a subsidiary of China National Nuclear Corporation (CNNC), with the value being more than 50 per cent of the current total book value of Kazatomprom’s assets and the allowance for other transactions in the future.

3. Increasing risk of government interventions potentially leading to supply uncertainty.

What the rising uranium sector means for Australia

Given the global shift to nuclear energy, advisers should consider the significant medium-term value upside for the uranium sector, where prices are likely to rise with companies restarting projects expected to benefit most in the short-term.

For example, Boss Energy (ASX code: BOE) is expected to restart its uranium mining operation at its “Honeymoon Uranium Project”, which is located in the geopolitically friendly jurisdiction of South Australia, in the December 2023 quarter.

The company is fully funded, with around AU$100 million net cash with AU$100 million strategic inventory and production is scheduled to ramp up to 2.45 million pounds per annum within three years, with upside to both production levels and mine life through adding existing resources to the mine plan and exploration on near-mine tenements.

The main risk is project commissioning, which has derailed a number of new mines in the past few years. However, this risk is partly mitigated in relation to Boss Energy due to the strong excess liquidity position that it is in, as well as the fact that the project has a track record of processing uranium material in the past.

Provided the ramp-up in uranium production goes to plan, we believe Boss Energy is well positioned to take advantage of the expected upswing in uranium pricing given minimal long-term contracts have been locked in to date.

Based on the increasing importance of energy security, growing political support, and improving industry supply/demand dynamics, we believe the uranium sector is one for investors to keep an eye on.

Phillip Hudak, co-portfolio manager, Australian small companies, Maple-Brown Abbott