Uranium: Are We Witnessing the Birth of a New Nuclear-Driven Super-Cycle?

• Uranium spot prices have pulled back to $95/lb after rallying from $60 to $106 over the past 6 months
• Supply shortfalls from major producers Kazatomprom and Cameco are expected to tighten the market later this year
• A structural supply deficit is projected to last for years, suggesting higher uranium prices for longer
• At current price levels, interest is growing in smaller uranium companies and projects in Africa and globally
• Parallels are being drawn to the 1970s uranium bull market driven by growing nuclear energy demand, rather than just the short-term 2007 price spike

Introduction to Investing in Uranium

Uranium has emerged as one of the best-performing commodities over the past year. The radioactive metal, a key fuel for nuclear reactors, has seen its spot price surge from around $30 per pound in early 2021 to over $100 in early 2024 before a recent pullback to $95. We assess the outlook and investment opportunity in the sector.

Tightening Supply Picture

A key factor behind rising uranium prices has been supply shortfalls from some of the world's largest producers. In January, Kazakhstan's state-owned uranium miner Kazatomprom warned that production increases would be marginal this year due to sulfuric acid shortages, implying a shortfall of 7-8 million pounds versus previous 2023 guidance.

It turns out that there is only going to be a marginal increase - originally they said they were going to ramp up by 10% but it seems like it's more or less going to be flat for this year, so that's going to be a shortfall of 7-8 million pounds which is fairly significant.

While Canada's Cameco, another top producer, announced steady output compared to 2022, the overall supply picture appears increasingly strained. Secondary market sources like utility inventories and underfeeding are limited. And new mine supply, despite growing interest, will take years to come online given long development lead times in the industry.

A Structural Supply Deficit

The impending supply gap looks set to be a multi-year affair. Current prices in the $90-100/lb range incentivize new production, but it will be slow to arrive. Most mines are thought to be economic at $100 uranium, but at $150, development would accelerate.

However, it's more of a time constraint - we're going to be in a deficit for quite some time and we'll see where the price ends up during this period. We're looking at a structural supply deficit that is going to run for years. Prices are going to be higher for longer.

Demand Growth Driving a New Bull Cycle

While previous uranium bull markets like 2007 were driven primarily by supply disruptions, the current market looks more like a demand-driven 1970s-style bull cycle coinciding with strong nuclear energy growth.

Some investors are making the comparison to 2007, but in reality it's more like 1970, the birth of nuclear energy when we had a decade-long bull market because of the ramp-ups and demand increase.

In the 1970s, the inflation-adjusted uranium price reached the equivalent of $175-$200/lb and remained elevated for a decade as a fleet of new reactors were built. Today, a similar dynamic is unfolding as countries embrace nuclear power to meet electricity demand while reducing carbon emissions. Dozens of new reactors are planned or under construction globally.

What's more, nuclear's low fuel cost insensitivity means little demand destruction would occur even at $200 uranium. At around 5% of operating costs, utilities can absorb higher U3O8 prices. Recent long-term contracting at elevated price ceilings near $130/lb - up from $80/lb months ago - shows utilities are willing to pay up for future supply security as shortfalls loom.

The Investment Thesis for Uranium

• Position for a potential sanctions-driven price spike: Monitor risk of US sanctions on Russian uranium supply
• Invest in a basket of uranium equities, focusing on quality projects and management teams
• Favor jurisdictions with strong resource potential like US, Africa, Canada and Australia
• Consider royalty and streaming companies for lower risk exposure to uranium prices
• Maintain a multi-year investment horizon and use pullbacks to build positions
• Be disciplined on valuations as equities re-rate; trim if prices get stretched

The uranium market appears to be in the early innings of a potential multi-year bull market driven by growing nuclear energy demand and a structural supply deficit. The mined supply response will likely be gradual, suggesting a period of elevated prices will be needed to incentivize sufficient production. Uranium equities offer strong upside potential but will be volatile. The recent pullback may offer an attractive entry point for investors, but a disciplined, long-term approach is warranted in this complex, opaque market.

The most compelling aspect of the uranium thesis is the potential for a demand-driven bull market akin to the 1970s rather than just a short-lived price spike. The world appears to be on the cusp of a nuclear renaissance as energy security and decarbonization goals align to accelerate atomic power development globally.

Countries from China to India and Europe are embracing nuclear as a clean, reliable source of 24/7 electricity. Over 50 new reactors are under construction worldwide, the most in decades. Dozens more are planned. And with reactor lifespans routinely being extended, uranium demand looks set to increase structurally, not just cyclically.

This is a multi-decade development story we're seeing in nuclear energy and we're only in the beginning. An inflation-adjusted 1970s uranium price equates to $175-200/lb today. And with little fuel cost sensitivity even at that level, utilities appear willing to contract for long-term supply at higher prices for the security of supply.

Even if all the big projects that analysts are forecasting come online by 2030, we'll still be at a deficit. We're going to need all the uranium miners to get into production. A 1970s-style demand shock in a chronically undersupplied market is a recipe for a potential super-bull cycle in uranium.