Investor Guide to the Uranium Bull Market - The New Nuclear Renaissance

1. Uranium prices have rebounded from a decade-long bear market due to renewed demand and constrained supply. Key demand drivers are new nuclear reactor construction and governments wanting to extend the life of existing reactors.
2. Supply is constrained due to underinvestment, logistical issues getting uranium out of Kazakhstan, and difficulty bringing idled mines back into production. Market caps in the sector are still small relative to the size of the industry.
3. Bannerman Energy, Paladin Energy and Boss Energy are ASX-OTC listed uranium miners seen as being well-positioned as near-term producers. Analyst valuations may undervalue their potential as institutional money flows into the sector.
4. NextGen Energy has a world-class uranium deposit but the timing of development will depend on securing debt financing and finalizing environmental approvals.
5. The spot uranium price could hit over $150/lb over the next 12 months driven by financial buyers, squeezing utilities that need to sign long-term supply contracts. But ultimately real activity will happen on confidential long-term contracts.

After over a decade in the doldrums, the uranium market is springing back to life. This creates major opportunities for investors who position themselves in the right uranium stocks before the herd piles in. With uranium prices up 50% over the past year to US$72/lb, the key dynamics reshaping the industry and how investors can profit from the coming uranium shortage are becoming more evident.

Demand Drivers - New Reactor Construction

The first demand driver is the wave of new nuclear reactor construction, much of it in Asia. There are currently 61 new reactors under construction globally that will require around 30 million lbs of uranium demand annually once operational. This new reactor demand comes at a time when the existing supply from mines is still below the level needed to meet total global demand.

Compound this with recent government decisions in Europe to extend the operating life of existing reactors rather than retire them early and new Small Modular Reactor (SMR) designs being implemented cheaper and quicker into regional demand. So the supply deficit that was already baked in is getting bigger. China gives a glimpse of where demand could go, with plans to expand nuclear generation from around 70 Gigawatts today to as much as 300 Gigawatts by 2035. That translates into 150 million lbs of annual uranium demand just from China.

Huge Supply Constraints

On the supply side, the industry is still working through the effects of a decade of underinvestment after the 2011 Fukushima disaster in Japan turned public opinion against nuclear in many countries.

The largest concentration of supply is from Kazakhstan, which produces over 40% of global mined uranium. But Kazakhstan faces ongoing logistical constraints in getting uranium exports out through Russia. Available supply is also constrained by existing long-term supply contracts with Russia and China limiting material available for Western utilities.

A common misconception is that idled mines can quickly restart production to meet demand. But in practice, only a handful of past producers like Paladin's Langer Heinrich mine in Namibia are likely candidates for restart in the next few years. For mining majors like BHP and Rio Tinto, despite higher uranium prices, their focus remains on core bulk commodities like iron ore and copper which they already produce. They are unlikely to ride to the rescue with a massive new uranium supply.

Market Structure

An unusual quirk of the uranium market is the mismatch between the opaque long-term contract market where utilities buy supplies, and the openly visible, but tiny, spot market that accounts for less than 5% of transactions.

Mining companies rightly argue that long-term contract prices are what really matter, not spot prices. But for investors, spot prices still provide a signal on sentiment. This is because financial entities like the Sprott Physical Uranium Trust have become active buyers, moving prices higher.

There is potential for the spot uranium price to overshoot $150/lb over the next year, which would squeeze utilities. But ultimately real activity will happen on confidential long-term contracts struck directly between producers and utilities.

ASX Uranium Investment Opportunities

Turning to ASX investment opportunities, a number of companies are poised to benefit from the pending uranium shortage.

Bannerman Energy (ASX:BMN) (OTC:BNNLF) is an Australian-based uranium resource development business. Bannerman is currently focused on Front End Engineering and Design (FEED) and project financing for the development of a 3.5 Mlbs pa open pit uranium operation in Namibia. They also have a study which shows they can increase production targets to double that. A big near-term producer in the making.

Boss Energy (ASX:BOE) (OTC:BQSSF) is leading the charge, having recently commenced uranium production from its Honeymoon in-situ leach (ISL) mine in South Australia. The company has a clear path to ramp up low-cost production to 3 million lb per annum in the coming years. Analysts often undervalue ISL uranium projects like Boss because of the lack of formal JORC-compliant resources. But ISL projects in Kazakhstan have demonstrated decades of production are possible without ever defining formal JORC-style resources. So greater upside potential exists than what standard DCF valuations indicate.

Another near-term producer is Paladin Energy (ASX:PDN) (OTC:PALAF) which is targeting the restart of its Langer Heinrich mine in Namibia in early 2023. Based on its production profile and being one of only a handful of potential new mines globally, Paladin deserves a scarcity premium despite already large gains.

Peninsula Energy (ASX:PEN) (OTC:PENMF) offers a cautionary tale that restarting idled capacity is rarely straightforward. Peninsula recently had its offtake agreement terminated unexpectedly by supplier Uranium One. This means it will now incur unplanned costs to accelerate the construction of its own processing capacity, pointing to a funding gap.

Longer term projects like NexGen Energy’s (TSX:NXE) Arrow deposit in Canada offer huge scale but are unlikely to begin production until later this decade after securing debt finance and final approvals.

Conclusion - Be Early, Be Patient

The uranium bull market is still in its early stages with further gains in uranium prices required to incentivize new production. Investors need to position early but be patient for projects to advance through financing and permitting hurdles. If supply fails to respond, the uranium price could go parabolic.

The uranium spot price could hit $150/lb over the next year as financial entities stockpile material. But he stresses investors focus on individual company fundamentals, not get distracted by short-term spot price volatility. Right now the uranium stars are aligning, and the window to position is ahead of the herd.