Nuclear Power Renaissance Brings New Optimism But Supply Chain Concerns Remain

• The nuclear industry is experiencing a renaissance, with renewed optimism and interest in nuclear power. Attendance and engagement at recent industry conferences reflects this.
• Utilities are seeking to diversify their uranium supply sources and are open to talks with potential new suppliers like junior miners. However, they want assurance of reliable delivery.
• There are potential shortages looming in the conversion and enrichment stages of the nuclear fuel cycle. New capacity coming online over the next few years should help address this.
• China has massive uranium requirements going forward and is looking to secure supplies from multiple sources globally, especially Africa.
• Prices for uranium and other stages of the fuel cycle have already increased substantially from lows a few years ago. Further volatility is expected but overall price direction seems to be up.

The nuclear power industry is experiencing somewhat of a renaissance after many years in the doldrums following the 2011 Fukushima disaster. Several recent major industry conferences have seen much stronger engagement and optimism compared to the more subdued affairs of the past decade. The mood is upbeat and there is renewed interest in nuclear power as a source of reliable base load electricity generation.

This was clearly evident at the World Nuclear Association's annual symposium held in London in September, as well as the International Uranium Fuel Seminar hosted by the Nuclear Energy Institute (NEI) in Charlotte, North Carolina in October. The NEI event attracted over 200 participants this year, including major uranium suppliers, utilities, traders and investors.

Olga Skorlyakova, Vice President of Market Strategy at uranium developer Bannerman Energy, noted the much improved atmosphere compared to conferences in the years following Fukushima when nuclear power was out of favor. She observed that attendees now seem more relaxed and engaged, with positive body language suggesting they feel nuclear has turned a corner.

Driving Nuclear Demand

Several factors are catalyzing nuclear's revival. Lifetime extensions of existing reactors, new build programs in some countries, and more nations announcing nuclear plans for the first time, are all increasing projected demand for uranium.

In the U.S., extending the life of the current reactor fleet rather than decommissioning plants will bring a continuous need for fuel. Overseas, countries like Turkey, Egypt and Poland are building their first nuclear plants. Established nuclear countries are also expanding - China has the largest building program with 50 operating reactors currently and 25 more under construction.

Even Italy and Sweden are now seriously reconsidering nuclear. The pipeline of current and prospective projects globally means uranium demand projections keep increasing. Skorlyakova pointed out that whereas five years ago the industry was worried about lack of demand, the conversations now are around ensuring adequate supply.

Securing Reliable Uranium Supply

On the supply side, utilities are focused on diversifying sources to reduce reliance on a handful of major producers. They are open to entering long term contracts with potential new suppliers such as junior uranium miners. However, they want assurance that these projects can deliver as promised.

Kazakh supply has been impacted by flooding at major mines and other delays. Supply from Niger was also affected this year when the government revoked certain mining permits due to civil unrest. With upheaval in the market, utilities are reevaluating their procurement strategies and want more supply diversity.

Skorlyakova believes utilities recognize that prices are unlikely to go back down and will probably continue rising. So they are willing to lock in contracts, even at higher prices than they would like, to ensure reliable future supply.

Junior miners need to instill confidence though that they can get into production within the proposed timeline and volumes. There is skepticism because many announced projects never materialized when uranium prices last spiked before Fukushima.

Thin Margins Across Nuclear Fuel Cycle

While the uranium market is expected to rebalance with time, there are more immediate concerns across other parts of the nuclear fuel cycle. Challenges are looming around conversion of yellowcake into uranium hexafluoride gas and then enrichment of that material.

Currently 40% of global conversion capacity and enrichment supply comes from Russia. But western utilities have been avoiding new Russian contracts since the Ukraine invasion and are unsure if they can even receive deliveries in light of sanctions.

Russia also provides around 20% of global uranium supply. Although that is easier to source elsewhere long term, conversion and enrichment have much greater barriers to adding non-Russian capacity rapidly. Shortages in these areas could impact the ability of utilities to fabricate finished fuel.

Skorlyakova detailed how thin spare capacity is based on World Nuclear Association projections. By 2030, western conversion capacity will be around 35,000 tonnes. But demand is estimated at 44,000 tonnes, leaving a significant shortfall even accounting for some Russian supply. Enrichment supply should be more adequate at 30 million SWU versus demand of 36 million SWU.

New production is coming, such as plans by Orano and Urenco to boost capacity 30% and 15% respectively. And China should be self-sufficient. But there are worries that any further supply disruptions or delays with new projects could strain the market.

Major Price Increases Across the Board

In response to the tightening supply situation, prices have already increased sharply from recent lows. For instance, conversion prices dropped as low as $4 per kgU as UF6 around 2015 but are now over $40. Uranium prices have tripled from the mid-teens range in 2017 to well over $50 currently.

Further volatility is expected in the short to medium term. The extreme would be losing all Russian supply, which would more than double prices. Although less severe scenarios are more likely, where western supply can cover reduced Russian material.

In any case, Skorlyakova believes the risk is to the upside for both uranium and conversion/enrichment prices given the lead times for nuclear fuel projects. For utilities nuclear fuel is a small portion of their overall cost base anyway, so while big price increases might be unpleasant, they are manageable.

The critical need is guaranteeing secured supply. To alleviate these concerns, new production and capacity must come online on schedule. Projects already proposed will help provided they avoid delays. Bringing additional spare capacity buffer would also reduce supply uncertainty. But that requires substantial investment soon.

China's Pivotal Role

Apart from the NEI seminar, a major development was China's first International Forum on National Uranium Resources. This event hosted by state nuclear firm CNNC signals China's intention to play a leading global role securing uranium resources.

Reflecting its position as the largest builder of nuclear plants, China projects uranium demand equal to the entire world's consumption today within two decades. China is accordingly looking to acquire uranium assets worldwide, especially in Africa which it relies on heavily.

All key uranium suppliers attended the Beijing forum along with several prospective African miners. While China is not secretive about its international acquisition strategy, transparency is still limited. This has fueled some wariness in the past among western firms.

But Skorlyakova contends China is simply acting rationally to lock in supply and sees no hidden agenda. As its nuclear fleet and uranium needs balloon, China is prudently taking steps to become more self-sufficient. Although this may influence market dynamics, China's involvement also helps finance new projects to everyone's benefit.

With demand swings having whipsawed the uranium market over the last decade, China's commitment provides more confidence in baseline growth projections. Its domestic buildup does not necessarily crowd out growth elsewhere either. Skorlyakova remains sanguine that the entire industry can prosper in tandem.

Takeaways for Investors

• Utility contract volume is increasing again after years of minimal activity, providing revenue visibility for uranium producers.
• Higher prices will incentivize new production to come online, especially from junior miners. But costs and lead times are key watchpoints.
• Portfolio diversity by country and geopolitics is even more crucial in the fuel cycle segments dominated by few suppliers.
• Announced capacity increases for conversion and enrichment should mostly realign supply, barring any major disruption.
• China's pivot to nuclear self-sufficiency changes market dynamics, however western demand remains strong regardless.

In summary, nuclear power is back in a big way after a lost decade. While the fuel cycle supply chain needs bolstering to fully leverage nuclear's growth, the industry generally has line of sight toward resolving pinch points. For investors, selectivity and vigilance around individual company execution is warranted. But broader sector tailwinds are blowing stronger than they have for a long time going into 2023.

Industry conferences signal renewed optimism in nuclear power. However, uranium supply diversity concerns and bottlenecks in conversion and enrichment capacity need resolving to fully capitalize on demand growth.

And here are investment thesis bullet points and conclusion:

The Investment Thesis for Uranium

• Global reactor growth drives uranium demand higher, especially in China
• Utilities signing long-term contracts again gives revenue visibility
• Existing mines have struggled with declining grades and rising costs
• Few new mines coming online until mid-2020s, requires price over $60
• Stockpiles amassed pre-Fukushima have dwindled, reducing oversupply
• Mirrors late-1990s setup before rapid rise to 2007 peak over $130
• New material can incentivize development of idled capacity
• Market in deficit with prices below production costs for most miners
• JP Morgan forecasting triple digit prices as demand outpaces supply

Conclusion

After a lost decade, fundamentals are aligning for a new bull market in uranium. While timing the bottom is difficult, the cycle almost certainly has turned. Developments on both the demand and supply side suggest the risk/reward for investors is skewed to the upside at current levels. Uranium equities offer asymmetric return potential as prices play catch up after years of languishing below incentive levels. Targeting quality projects with strong management execution track records should yield outsized gains in this rebounding sector.