Investing in uranium may sound exotic but there are many reasons for it. The green transition demands clean, reliable, and affordable energy. These are all characteristics of nuclear energy.
- Where is Uranium Produced?
- Historical Uranium Prices
- Future Potential Prices for Uranium
- How to Invest in Uranium
Uranium is a gray chemical element. Thanks to its unique properties, uranium is used in nuclear plants to generate electricity. It is such a dense energy source that one kilo of uranium can generate the same amount of energy as 1.5 million kilos of coal.
Due to its military uses, as well as the accidents that have occurred in nuclear power plants in the past, uranium enjoys a very bad reputation.
However, it is undeniable that nuclear energy is clean, cheap, highly efficient, reliable, causes no emissions and produces very little waste. That means it can be combined with other renewable energy sources to dominate the energy mix of the future.
In addition, several countries, and in particular China, are working hard to innovate and improve the way nuclear energy is generated. The goal is to tackle the two biggest drawbacks of nuclear energy: the risk of accidents and waste disposal.
Smaller reactors, known as SMRs, are being developed to minimize the likelihood and impact of an unforeseen accident. And processes are being developed that will make it possible to recycle the radioactive waste, so it can be used again to generate more energy.
Regardless of your opinion of nuclear energy, the fact is that several major countries are planning to build nuclear power plants over the next few decades. Such expansion activity is concentrated in Asia: China, India, Taiwan, Indonesia and South Korea.
As a result, demand for uranium is set to increase in the future, as we will discuss later in greater detail. Because the supply of uranium is quite inelastic and it takes quite some time to develop new mines, or restart old ones, the price of uranium is also likely to increase. For this reason, investing in uranium can represent a unique opportunity.
Where is Uranium Produced?
As we can see in the graph below, almost half of all uranium production globally takes place in Kazakhstan. The other important countries are Canada, Australia and Namibia:
In fact, uranium production is so concentrated that more than half of what is mined worldwide comes from only 10 mines. The largest mine in the world is in Canada and produces 13% of all world production, and almost all the uranium produced in Canada. Kazakhstan has 5 of the 10 largest uranium mines in the world.
The supply of uranium is not something that can be easily increased overnight. Therefore, if there is a sharp increase in demand in the years to come, uranium prices can spike dramatically.
On the other hand, several uranium mines are not currently active. They are closed precisely because prices are too low and it is not economically viable to operate them. Those could, in time, be brought back online to satisfy the increased demand.
Historical Uranium Prices
The price of uranium has historically been very volatile and strongly correlated with commodity cycles. This means it has experienced spectacular ups and downs over the decades.
The price of uranium spiked very sharply throughout the 1970s. This rise came hand in hand with increases in the price of other commodities such as oil, gold, and silver. However, prices would start to drop at the end of the decade and stay in a bear market for over two decades.
The first decade of the 21st century saw a dramatic rise in the price of uranium. As we can see in the chart below, the price of uranium was around $10 per ounce in early 2000. However, by mid-2007, it had hit an all-time high of $136 per ounce.
This rally was precipitated by an increase in demand and the inability of supply to boost production. It was precisely the bear market between 1980-2000 that led to no new investments and, therefore, created the conditions for much higher prices later on.
Since the peak experienced in 2007, uranium fell below $20 in 2016. Apart from a slight increase in production, the Fukushima disaster in 2011 caused a dramatic change in sentiment and ultimately led to lower demand.
However, uranium demand has experienced a resurgence over the last few years. This is because the industry has been operating at a deficit, producing less than global annual consumption, and some of the largest uranium consumers have had to draw part of their reserves
Future Potential Prices for Uranium
To understand the upside potential in uranium prices, we can analyze both demand and supply dynamics.
On the demand side, we know that the last decade plus has seen a deficit in production. Obviously, a situation in which consumptions is higher than production is not sustainable in the long term.
In addition to that, global demand is set to increase sharply over the next two decades. This comes as a result of new nuclear power plants being built in Asia, predominantly in China and India, the countries with the largest populations in the world and whose economies are expected to grow the most in absolute terms.
And the richer an economy is, the more energy it requires to operate.
Below, you can see the projected nuclear capacity for major uranium consumers. It is worth highlighting the spectacular growth expected in China:
On the supply side, the bear market of the last decade has resulted into very little investment flowing into the sector. As a consequence, uranium production has not increased for over 10 year despite the economic and demographic growth the world has experience.
While it is true that some uranium mines are not currently operational and could be brought back online, we must bear in mind that the reason why these mines halted operations is that the price of uranium was too low.
After all, if the price of uranium is $30 per pound, all mines whose production cost exceeds $30 will remain closed until the price of the yellowcake rises sufficiently. Therefore, this relatively fast increase in supply is conditional on higher prices.
How to Invest in Uranium
Even though uranium is also a metal, it is obviously not something we can buy and store at home. These are the best options available for investing in uranium:
Sprott Physical Uranium Trust
The Sprott Uranium Trust is a fund that allows us to invest in physical uranium. Effectively, it works pretty much like a gold ETF. Sprott holds large amounts of uranium in storage in a safe facility and charges us an annual fee for that.
Investors can freely buy and sell shares of this trust, thereby getting a direct exposure to the price of uranium. All other investment alternatives are about buying equities of companies operating in the sector.
Uranium Producing Companies
The first type of equities that we can buy are those of uranium producing companies. The most important variable when it comes to analyze these companies are their size, cost of production and geopolitical risk.
In general, the larger the company, the more financial stability and the lower the risk. Larger companies are often also the ones with the lowest production costs, thereby are able to survive during a bear market.
While these larger, more established companies have less downside risk, they also offer less upside potential.
In fact, those companies with higher production costs are the ones that can benefit the most from rising uranium prices. They are, however, speculative investments.
Some of the world’s largest uranium producers, which may be relatively conservative options for investing in uranium are Kazatomprom (originally from Kazakhstan, and therefore more exposed to political risk) and Cameco in Canada.
Uranium Exploration Companies
Another option for investing in uranium is to buy shares of companies that explore for new uranium deposits. In this case, the goal is usually not to develop new mines, but simply to find and sell those new reserves to a producing company.
Of course, investing in these types of companies is very speculative. After all, most of them will never be able to make a profit. However, the few that do succeed will generate huge returns. In fact, it is not uncommon for the value of a uranium exploration company to increase 20, 50 or even 100 times if significant uranium reserves are discovered.
Uranium Companies ETF
Finally, another alternative to invest in the sector is to buy shares of an ETF of uranium companies. In most cases, these ETFs will be composed mainly of uranium producing companies, but some small exposure to uranium exploration companies.
An example of a uranium ETF is the Global X Uranium. If you click on it, you will see the main holdings of the fund, as well as its geographical distribution.
Investing in uranium through an ETF is a very convenient way to do it as we do not have to do any company analysis. On top of that, it is by design a diversified way to get exposure to the sector.
Investing in uranium is not for everyone. First, because many people do not have a positive opinion about nuclear energy. This is something that could change with a proper understanding of the energy sector and the energy demands that our standard of living requires.
Leaving that aside, we have already seen how many Asian countries have decided to build many new nuclear power plants in the coming decades to address the future electricity demands. Part of that will come from the mass adoption of electric vehicles.
Secondly, it is undeniable that investing in uranium carries its own risks. We have already seen how the price of uranium fell by 85% from its peak in 2007. And that led to the bankruptcy of many small companies.
While it is true that the current outlook for the uranium market looks very promising, anything is possible in the short term. Even those investors who are convinced that uranium will become substantially more expensive in the future, and generate large profits for companies in the sector, do not know when that will happen.
As a result, never forget the importance of having enough diversification in your portfolio, so you can survive all types of markets.
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