Germany’s (sort of) turnaround

Germany's first nuclear reactor, in Garching, near Munich, went live in October 1957.  In the early parts of the current millennium, the number of nuclear reactors in Germany peaked at 19.  Then, in March 2011, disaster struck in Fukushima, and Chancellor Angela Merkel did her famous U-turn.  She announced that all German nuclear power stations would be closed by the end of 2022.

That said, it is not correct to assume that German opposition to nuclear only started after Fukushima.  The Germans have always had a somewhat strained relationship with this energy form.  For example, in 1980, the German Green Party was formed on the back of a big “NO!” to nuclear energy.

Now, the war in Ukraine has caused another U-turn.  The latest from Berlin is that two of its remaining three, active nuclear power stations, all of which were due to close before the end of this year, will be kept on standby to provide back-up this coming winter, should Russia deliver on its threat to close the gas supply to Europe.

In addition to those power plants, another three nuclear power stations, which were switched off at the end of 2021, could still be switched back on without too many complications (but at a significant cost).  All the other power plants, which were in operation in 2011, are being dismantled, and can no longer be switched back on.  The three still in operation will produce about 5% of Germany’s electricity this year, whereas the final six accounted for 12% last year.

Germany is running out of uranium, though, which is intentional, as they didn’t think they needed more.  There was just enough uranium fuel rods in stock to make it to the end of 2022.  The German decision to keep a few reactors running have therefore had an instant impact on the uranium price.  Likewise, should they decide to re-start the other three, the uranium price will most likely rally further.

About one-fifth of all uranium used in the EU is sourced from Russia (Exhibit 2).  A ban on Russian fossil fuels will, at some point, probably be extended to include a ban on uranium from Russia.  That would not have a significant impact on other EU nuclear power plants, as they typically stock years of projected consumption.  For German power plants, it would be a different story, though.  Buying a meaningful amount of uranium in the spot market is expensive but possible.   The Germans would most likely have to pay a significant premium to the spot price, which was $49/lb at the close of last week.

The latest from Japan

Only a few weeks ago, Japan’s Prime Minister, Fumio Kishida, announced a U-turn similar to Germany’s.  Following the 2011 disaster at the Fukushima Daiichi nuclear power plant, the strategy has been to gradually wind down the entire fleet of nuclear power stations in Japan.  Although the accident in Fukushima Daiichi, which was the result of a massive tsunami, didn’t cause a single death, it did enormous damage to the human psyche.

Kishida attributed the decision to the current energy crisis, at least partially triggered by the war in Ukraine, which has caused energy prices to rise dramatically across the world.  Under the new plan, the country aims to bring back 17 of its 33 reactors by next summer and to extend the life of its entire fleet of nuclear power plants.  Not a single new nuclear power station has been built in Japan since 2011, but Kishida didn’t close that door either.

Just as the German decision affected the price, Japan’s blatant change of strategy has also had a positive impact on the uranium price, which has been in a bear market for many years.  More recently, though, the price is off its lows (Exhibit 3).  As you can see, the price peaked in May 2007 (prior to the outbreak of the Global Financial Crisis) at about $140/lb.  After a 3-year long slump, the price troughed in early 2010 at about $24/lb.  Then followed a valiant recovery attempt, but the Fukushima disaster put an end to that, and 5½ tough years followed. Since November 2016, when the price momentarily hit $15/lb, the price has been in an uptrend but, as is clear when you look at Exhibit 3, we are still lightyears from the 2007 all-time high.

Future expansion plans

Historically, most nuclear power stations have been built in the developed world, leading DM countries to dominate the nuclear landscape (Exhibit 4).  That is about to change, though.  As you can see in Exhibit A1 in the appendix, almost all nuclear power stations under construction are in EM countries, so the balance will change over the next few years.

From a CO2 point-of-view, that is good news.  The fear in our part of the world has always been (and, to a degree, still is) that EM countries want economic growth at any cost, and are not too fussed about the environmental implications and, as you will see later, nuclear is much greener than fossil fuels.  In fact, if it wasn’t for the waste problem, one could argue that nuclear is just as green as renewables.

There can be no doubt that the reluctance to add to the nuclear fleet in DM countries is, to a large degree, a function of Fukushima Daiichi.  Now, with the U-turn in Germany and Japan, it will be interesting to see what happens in other DM countries.  In that context, it is worth pointing out that the EU Parliament has recently agreed to label nuclear energy green.

In terms of the outlook for the uranium price, the expansion of nuclear across the EM world is more than sufficient for the uranium price to trade higher.  Renewed expansion in the DM world will only be an added bonus.

Nuclear 2.0

I call it Nuclear 2.0 but, in reality, one could argue that it’s really Nuclear 2.1 and 2.2 that is upon us now, whereas Nuclear 2.0 has been up and running for a while.  A much safer technology platform was introduced in the early years of this millennium.  The new technology has been deployed almost universally over the last 15-20 years when building nuclear power stations, and it should be pointed out that not a single accident – not even a minor one – has occurred anywhere in the powerplants built in the last couple of decades.  The new technology, apart from being safer, also allows for the nuclear waste to be recycled and, as a result, the waste problem has been dramatically reduced.

Two brand new technologies will be introduced within the next few years, which will most likely generate a new wave of interest in nuclear.  The first such new technology is called SMR, and the second is a move away from uranium (!).  When using this technology, the reactor will be fuelled by thorium, but let me go into SMR first, as that is the more ground-breaking, new technology.

SMR

SMR stands for Small Modular Reactor and is, as it says on the tin, a new, much smaller, reactor type.  The US Nuclear Regulatory Commission (NRC) recently agreed to certify the first such reactor, which has been designed and manufactured by NuScale Power.  If I tell you that a Nuclear 1.0 reactor requires space similar to that of a football pitch, an SMR reactor takes up the space of a tennis court.  And SMR reactors are manufactured partially by robots in a factory and shipped to the installation site and assembled there.  That dramatically reduces the risk of human errors in the manufacturing process.

A NuScale reactor is 20 m high and 2.7 m in diameter.  Each reactor can generate 77 MW of energy, and up to 12 of those units can be paired together for a maximum output of 924 MW, or about 90% of the average Nuclear 1.0 power plant.  All reactors will, independent of humans, switch off under certain conditions.  Also, all reactors are submerged in water tanks, built by concrete, and are resilient to earthquakes and impermeable to aircraft impacts.  In other words, the SMR technology offers significant safety features that Nuclear 1.0 doesn’t.

It is expected that the first US commercial installation will take place in Idaho, and that the power station will deliver the first electricity to the grid in 2029 (sources: newatlas.com and  NuScale Power).  NuScale has stated that the factory-based mass production capabilities will make SMR reactors cost-competitive with fossil fuel-based power stations, something which Nuclear 1.0 power stations have never been able to achieve.

One reason for that is the tiny land footprint of an SMR power station when compared to Nuclear 1.0 power stations.  An SMR power station is no bigger than it can fit into decommissioned coal-fired power plants, which are typically located in suburbs, much closer to where the energy is used.  That will dramatically reduce transmission costs and energy losses.

One final, but very important, point re SMR.  The Americans are far from the only ones with SMR ambitions, but they are the most informative, hence why I zoomed in on Nuscale Power.  Canada, the UK, Russia and China all have well-established SMR programmes, and the Chinese programme is considered to be the most advanced.  The Chinese believe that the first commercial, Chinese SMR reactor should be up and running in 2026.  According to the International Atomic Energy Agency, there are at least 33 SMR designs, which are currently being worked on around the world.

Thorium

Thorium is an alternative to uranium as fuel in nuclear reactors, but it is not a straightforward call, as there are both advantages and disadvantages associated with this fuel type.

Thorium is not fissile on its own, i.e. some fissile material (either U-233, U-235 or Pu-239) must be added to start the chain reaction.  Therefore, critics of nuclear power often call thorium  “uranium in disguise”.  That said, the two are not comparable.  Thorium is easily recyclable, and the fuel can be reprocessed, meaning that reactors can be fuelled without mining any additional U-235.  Also, as the thorium fuel cycle does not irradiate any U-238, certain long-term health risks to do with conventional nuclear (uranium) waste can be ignored.

It also worth bearing in mind that thorium is three times more abundant than uranium.  India, soon to be the most populous country in the world, holds by far the biggest thorium reserves.  Therefore, it shouldn’t come as a surprise that India, together with China, is at the leading edge of the curve on developing thorium-fuelled reactors.

On the other hand, irradiated thorium is more dangerously radioactive than uranium.  Also, thorium is harder to work with than uranium.  Thorium dioxide melts at 550°C higher temperatures than uranium dioxide, and it is also quite inert, making it difficult to chemically process.  Furthermore, scientists have little experience with thorium.  We know from Nuclear 1.0 what sorts of problems the lack of operational experience can lead to, and we have no experience with thorium.  You can read more about thorium here.  I also recommend you read this update on the Chinese thorium programme.

Should thorium, longer term, take a meaningful slice of the market, it will obviously reduce demand for uranium but, given the long lead times in this industry, this is not an issue to worry about in the next ten or so years.

An update on fusion energy

Fusion energy is effectively man’s attempt to replicate what happens in our solar system; what powers the sun.  In principle, we know it works.  The trick is to make it work in a controlled way.  Fusion will be the biggest game changer since the beginning of the industrial revolution.  We will suddenly have virtually endless amounts of clean energy available at near-zero marginal cost or, as Lev Grossman, lead technology writer in Time Magazine, puts it:

It's an energy source so cheap and clean and plentiful that it would create an inflection point in human history, an energy singularity that would leave no industry untouched.  Fusion would mean the end of fossil fuels.  It would be the greatest antidote to climate change that the human race could reasonably ask for.

When generating electricity in a fusion reactor, the only two ingredients required are water (seawater will do) and lithium, which makes up the fuel in the reactor.  If you don’t know much about fusion energy, I suggest you read the 2018 paper I did on the topic.  You can find it here.

Through electrolysis, water (H2O) is converted to heavy water (D2O), which is not radioactive.  D2O is also called deuterium oxide.  Deuterium is one of the three isotopes in hydrogen (the H in H2O).  The heavy water then goes into a fusion reactor.  Out comes plenty of clean energy (electricity).  To give you a sense as to how powerful the fusion process is, let me share some numbers with you. One glass of heavy water generates enough electricity to:

- power the average private home for 865 years;

- power the average electric car for 35 million miles;

- replace 10 million pounds of coal;

- replace 1 million gallons of oil.

(Source: Helion Energy.)

Fusion energy is our only realistic hope of achieving Net Zero by 2050, and more than 30 private companies around the world plus several public projects are now working on the challenge with billions of dollars being ploughed into their research programmes.  The key challenge has, for many years, been to achieve a net gain – i.e. more energy out than energy in – and that hurdle is now painfully close; hence why fusion energy is suddenly not that far away anymore.  As Fast Company said earlier this summer:

One milestone came quietly this month, when a team of researchers at the National Ignition Facility at Lawrence Livermore National Lab in California announced that an experiment last year had yielded over 1.3 megajoules (MJ) of energy, setting a new world record for energy yield for a nuclear fusion experiment.

Arguably the most advanced private sector programme, at least in the western world, is the one conducted by Helion Energy, a company based in Everett, Washington.  Backed by several billionaires,  Helion is quite clearly at the leading edge.  In fact, less than a year ago, the company promised to deliver the first electricity to the grid in 2024 (see here).  They haven’t backtracked on that promise yet.

There are several other promising fusion projects, but it is beyond the scope of this paper to go through them all.  Suffice to say, given the extraordinary impact that fusion energy will have, even if Helion fails to deliver on its promise, it is only a question of time before the code is finally broken.  In fact, it was broken last December (see here) although only for a second or two.  The challenge now is to make the fusion process stable enough that it can run continuously.  That, however, is not a scientific challenge but an engineering challenge.  The theory has been proven already.

Risks

Nuclear energy is, in general, associated with much less risk than generally perceived.  Few have ever died from accidents or pollution to do with nuclear (Exhibit 5).  As a matter of fact, as you can see, most other energy forms have caused far more deaths than nuclear has.  The only explanation I can think of is the fear factor.  Should the ultimate accident ever happen, there can be no doubt that nuclear will kill many more people than any other energy form.

In that context, Russia’s invasion of Ukraine is relevant.  Ukraine has 15 nuclear power reactors (all designed in Russia), at four different locations.  The two oldest units, Rivne-1 and Rivne-2 in the north-west of the country, date back to the 1970s and are, unlike the others, not equipped with reinforced concrete-steel contaminants.  Therefore, they are more vulnerable, should an accident happen, or should the Russians decide to attack the site.  How the war in Ukraine will unfold from here is anybody’s guess, but there can be no doubt that it poses a significant risk.

Investment implications

Unless you are a multi-billionaire with a few billion dollars to throw after fusion energy, at least for the next few years, the main investment opportunity lies in fission.  The combination of an extraordinarily hot and dry summer and Russia’s invasion of Ukraine has spelled it out in no uncertain terms that we need to make ourselves independent of fossil fuels as quickly as we can.  And all indications are that we cannot wait for fusion to be rolled out,  i.e. the key question is therefore the following:  how do you best invest in Nuclear 2.0?

Although I think thorium has a role to play going forward, it will most likely remain the minority of new reactors being built, which will be fuelled by thorium.  SMR is an altogether different story.  Given the smaller ground footprint, the much lower costs and the favourable safety aspects,  SMR will most likely be the preferred model going forward.  And that argument doesn’t get any weaker by including Russia.  Given the desire to cut the Russians out ASAP, few will wait for the fusion technology to be rolled out before going nuclear.   SMR is therefore destined to become the steppingstone between Nuclear 1.0 and Nuclear 3.0.

With rising demand for fission energy follows rising demand for uranium.  As things stand, due to years of underinvestment in the uranium mining industry, we know that demand for uranium will dramatically exceed supply in the years to come, and that is the case without a single new project being added.  Imagine what will happen to the mismatch between  demand and supply if  the arrival of SMR leads to many more nuclear reactors being built.  Exposure to uranium is therefore the best way for all but the wealthiest investors to play the exit from fossil fuels.

Within the uranium complex, the simplest and most liquid way to invest in uranium is through uranium mining companies.  The biggest, listed uranium mining company worldwide is Kazatomprom in Kazakhstan; however, I cannot get my arms around the risks associated with investing in Kazakhstan, so I would settle for no. 2 on the list, Cameco in Canada.  That said, when you invest in mining companies, you assume a fair amount of execution risk, which means you are exposed to a host of other factors, not to do with the uranium price.

If that is a non-starter, you should consider investing in companies like Yellow Cake PLC in London or Sprott Physical Uranium Trust in Canada (soon to be listed on NYSE as well).  Yellow Cake is a uranium broker, acting as an intermediary between the uranium mining industry and approved buyers of uranium, i.e. nuclear power plants and research laboratories.  Sprott Physical Uranium Trust was started by Sprott Asset Management to give investors the opportunity to gain exposure to uranium without assuming any risks other that the uranium price.  Both trade more or less 1:1 with the uranium price, but they are not as liquid as Cameco, making it a tricky proposition for larger investors.

Final few words

When I was young (many moons ago), I was very sceptical of nuclear as a safe energy form, and a few nasty accidents convinced me it was right to be sceptical.  Having said that, the introduction of recycling of nuclear waste, as most countries (ex. the US) do now, and a stellar track record of those nuclear power stations which have been built this century, have changed my views on nuclear.  In essence, it is a very simple piece of arithmetic:

There can be no doubt that, once Nuclear 3.0 (fusion energy) is rolled out commercially, nobody is likely to build another fission plant, but I wouldn’t worry about that.  The typical nuclear plant being built today has an expected lifetime of 50 years+.  In other words, demand for uranium may no longer grow incessantly, but there will still be plenty of demand for a very long time.

You shouldn’t worry that rising uranium prices will lead to lower interest in going nuclear, just like many countries are seeking to discontinue the use of natural gas at the moment.  The fuel cost as a percentage of total operating costs in the average nuclear power station is quite low.  I have seen estimates as low as 8% and as high as 30%,  but most nuclear power stations seem to be in the 15-20% range.  Even if the uranium price triples, that won’t be enough to deter interest, I believe.

Throughout this research paper, I have implicitly assumed that nuclear is greener than most other energy forms, but I have provided no proof of that.  Let me finish by providing that proof.  As you can see in Exhibit 6 below, nuclear produces, together with wind, fewer greenhouse gasses than any other energy form – four tonnes of CO2 equivalent for every GWh of electricity produced.

I should point out that the numbers in Exhibit 6 include emissions from mining and transportation of fuels, as well as building and maintenance of the plants in question, i.e. the numbers are all-inclusive.  However, despite the excellent safety record (Exhibit 5) and good green credentials (Exhibit 6), nuclear energy used for electricity production has been in decline over the past couple of decades and only accounts for about 10% now.  The bet you are taking by investing in uranium is that this number will begin to rise again.

Niels C. Jensen.

26 September 2022