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# Uranium – The Ultimate Defensive Investment?

The uranium story is on the supply side. By 2030 we will need two Kazatomproms, which presents an interesting challenge. Where are those pounds going to come from?

Riaz Rizvi, Chief Commercial Officer, Kazatomprom

# Issues to be addressed in this research paper

22 months ago, I wrote a paper called The Bull Case on Uranium. At the time of writing, uranium (U3O8) traded at approx. $24/lb. The first few months after having published the paper, the uranium price languished a bit, leading to a fair amount of stick from critics of the uranium bull story, and there are many of them. They are probably not in the same feisty mood any longer with the uranium price hovering around$44/lb, hence the obvious question – is the party over or is there more to come? In this paper, I will argue that we are still in the early stages of a multi-year uranium bull market which will, in my opinion, drive the uranium price above, quite possibly well above, $100/lb before it is all over. Before you read any further, I strongly recommend you read our initial paper on uranium from March 2020. In that paper, the bull case was based on the fact that demand for uranium is beginning to outstrip supply, and that it will take at least 6-7 years before new production lines can be added, as that is how long it takes to establish a new supply channel. (I should add that the Chinese have been able to do it in about five years, but everybody else takes longer.) Although our bull story from March 2020 remains intact, a few things have happened since, which makes the bull case even more compelling. This paper will focus on those developments. I will also spend time on the various risk factors which the critics have lined up against the bull case, and I will conclude that an investment in uranium quite possibly could turn out to be the ultimate defensive investment at a time where investors need to be more defensive. ## To continue reading... We publish investment strategies and opportunities in our research papers. This research paper is available to professional investors as part of ARP+ subscription. Already a subscriber? Login # Uranium demand & supply Let me begin with a few thoughts to do with the supply side. As you can see in Exhibit 1 below, in 2020, Kazakhstan accounted for no less than 41% of worldwide uranium production with Australia in a distant second position with 12%; i.e. Kazakhstan is by far the biggest supplier of uranium worldwide. This is important because of the ongoing unrest in the country. As you can read in this story from Reuters, the Kazakhs claim that uranium production in the country is unaffected by the unrest; however, that story isn’t over yet, and it is impossible to predict what will happen next. The second point I wish to make re the supply outlook has to do with Saudi Arabia and its ambitions to exploit its “huge” uranium reserves (their words, not mine). Although the country has never provided any official figures on its uranium reserves, the Guardian newspaper has gained access to some leaked, internal documents which put the Kingdom’s uranium deposits at an estimated 90,000 mega tonnes – about 1.4% of global reserves (see the story here). Those numbers suggest to me that Saudi Arabia will never become the major player in uranium that it is in oil. Furthermore, and as mentioned earlier, if it takes (on average) 6-7 years from when the decision is taken to establish new mining capacity to when the first enriched uranium can be delivered, we do not have to worry about Saudi supplies for quite a while. Even if I am kind to the Saudis and say that they can cut a corner or two, as they don’t have to deal with the bureaucracy we are embedded with in most democracies in the OECD, it will still take them at least five years before the first Saudi-made, enriched uranium (U3O8) can be shipped to a nuclear power plant somewhere in the world. The third point I wish to make on uranium supplies has to do with uranium production costs and the impact the cost structure has had on the supply side. You may recall the chart below (Exhibit 2) from the March 2020 paper, but it is an important chart, hence the need to reproduce it here. Back then, when the uranium price was in the mid-$20s, only two countries produced uranium at a profit. Now, with the price in the mid-$40s, about a dozen countries earn a profit from uranium mining. A simple, back-of-the-envelope analysis would therefore suggest that more mining capacity would probably be added at current price levels, but that hasn’t happened yet. Why not? The answer is relatively simple. Although the global average cost of production is around$40/lb, the ‘incentive price’ to add new mining capacity is at least $60/lb and, in some countries, much higher (source: kitco.com), i.e. with a price around$44/lb, many mining companies continue to draw on inventories rather than adding new capacity to existing production lines.

If you go back to Exhibit 1 for a moment, at the very bottom of the chart, you can see that current mining levels are well below demand levels – uranium miners are drawing on inventories instead and have done so for many years. This is a powerful indication that it is an unprofitable proposition to add to mining capacity, even when the price is modestly above the global average cost of production.

With global demand rising at a very predictable rate, and with global supply being set in stone for at least another handful of years, the bull story on uranium is essentially a supply story. For several more years, we believe that the uranium price is much more likely to go up than down, hence why we think the good times aren’t over yet for uranium investors.

In fact, global supply of uranium will not only not increase for another 6-7 years; it will actually shrink quite considerably. Some mines are close to depletion, whereas other mines have announced that they will close over the next few years, as they can’t make a profit at current price levels. You can see the impact from those announcements in Exhibit 3 below. I suggest you pay particular attention to the widening gap between demand and supply.

According to Uranium Energy Corp. (UEC), this year, global demand will total approx. 190Mn lbs whilst global production will only be about 160Mn lbs. In other words, one can expect a shortfall of 30Mn lbs. which will have to be covered mostly by inventory drawdowns. As you can see, global supplies will continue to fall short of global demand for many years to come with the shortfall getting bigger and bigger. UEC expects the cumulative shortfall through 2028 to be 334Mn lbs. Such a massive shortfall can obviously be addressed by opening new uranium mines, but that will only happen if the uranium price rises further.

As I have already pointed out, mining levels have not met demand levels for a number of years – inventory levels have been drawn upon instead. Unfortunately, I only have detailed inventory figures for the US but, as you can see in Exhibit 4, although US inventories have declined, they are not yet at a critical level. I suspect that to be the case elsewhere too as most nuclear power plants keep substantial inventories. Therefore, I should stress that my $100/lb forecast is not a short-term but a medium-term forecast. Another point I should bring up re Exhibit 4 is that it is supplier-controlled inventory levels which are very low. As you can see, inventories under the control of owners/operators are higher than they were 20 years ago and broadly unchanged more recently. This probably reflects operators’ concerns that supplier-controlled inventory levels are lower than they have been for many years. # Good news from Brussels The need to provide a clean and stable energy source to supplement wind and solar is finally being recognised at the highest level. Only days ago, the EU Commission presented a new climate act which labels nuclear (and gas) as green (see here). By making this move, the EU is seeking to mobilise private investments in activities that are needed to achieve climate neutrality by 2050. Too many member states still depend far too much on coal-fired power plants to generate electricity, and by labelling nuclear and gas green, the Commission has opened a door for member states that would otherwise struggle to meet the 2050 deadline. # Other reasons to add uranium to your portfolio Other factors are likely to drive the uranium price higher too. Take for example the fact that nuclear energy is very clean if one disregards the waste problem, but that is getting better too – more on that below. CO2 emissions from nuclear power plants are virtually non-existent (Exhibit 5), and the same is the case as far as other greenhouse gasses are concerned. Secondly, nuclear waste is not the problem it used to be. An American technology developed in the 1970s, and increasingly used in Europe and Asia, allows most, if not all, already spent nuclear fuels to be recycled. In France, for example, no less than 96% of the reusable material in already spent fuel is recovered and recycled. You can read more about that here. Thirdly, new reactor types, planned to come into operation before 2030 will further improve various safety aspects (see the story here). Talking about safety, other than in Chernobyl, hardly anyone has ever died from radiation or from any other incidents to do with the generation of electricity in nuclear power plants (Exhibit 6). If safety were a concern, coal and oil should be banned tomorrow – not nuclear. Chernobyl was admittedly a grim incident and is one of the key reason why so many people continue to be opposed to nuclear energy. While ’only’ 31 people died as an immediate result of the disaster, WHO predict that up to 4,000 people might eventually die as a result of the exposure to radiation (see here). Finally and probably most importantly, although wind and solar are both wonderful energy sources, unless we are prepared to take modern civilisation back to the dark middle ages, we shouldn’t allow renewables to account for too high a percentage of our energy supplies until we improve various ways to store energy. To keep it simple, neither the wind nor the sun is consistent enough. Because of that meteorological fact, power plants that rely on wind and/or solar for fuel, often struggle to deliver the output they are supposed to (Exhibit 7). Imagine if load shedding becomes almost a daily event as it already is in South Africa (for different reasons). We will soon have a revolution on our hands. # An example of what not to do Globally, Denmark is the country which generates most electricity from wind and solar – most of it from wind. In 2020, for the first time ever, more than 50% of the country’s electricity was generated by those two energy sources, and the high penetration has started to cause problems. On most occasions, too much electricity has been generated (it can be rather windy there), and the Danes have had to virtually give it away to neighbouring countries. However, electrification of the Danish car fleet is now happening at a pace which is testing the Danish grid to the limit. Consequently, electricity suppliers have had to raise retail electricity prices to ridiculous levels at peak times, for example when people come home from work and begin to charge their EV battery. The more electricity that is generated by wind and solar, the bigger the risk of load shedding, at least until storage capabilities improve. In other words, no other country should go down the road the Danes have taken – at least not yet. It makes no sense to go all-in for renewables before we can store the energy more cost-effectively, and that may take many years. If you don’t believe me, take another look at Exhibit 7 above. As you can see, US power plants relying on wind and solar to provide the fuel are running at full power only 100-150 days a year, and I don’t expect it to be much different in Europe. Don’t get me wrong. I am not against renewables – far from it – but I can assure you that load shedding is not the way forward. The grid would break down in an instant if everybody were to convert to an EV simultaneously. For now, we need a reliable energy source to form the basis of the supply chain, and the only option is nuclear if fossil fuels are a no-go. # Risks I have identified seven risks to the bull story on uranium. In no particular order, they are as follows: 1. Another major accident like Chernobyl or Fukushima. 2. The supply problem being resolved with new mine-openings. 3. Alternatives to uranium. 4. Recycling of spent uranium. 5. Better storage capabilities of electricity. 6. Conversion of green electricity to liquid hydrogen. 7. The commercialisation of fusion energy. #1: Another major accident like Chernobyl or Fukushima. This risk is the one feared by most but probably the least likely to materialise. The industry has come a long way when it comes to various safety aspects to be concerned about, and safety is about to get even better with a variety of new technologies to be commercialised over the next few years. Having said that, this risk will never be non-existent, but I urge you to take another look at Exhibit 6. As you can see, in reality, nuclear is far safer than most other energy forms, and I believe the negative psychology surrounding nuclear is playing games with our brains. #2: The supply problem being resolved with new mine-openings. If my prediction that the uranium price will go past$100/lb within a handful of years turns out to be correct, you can be almost certain that new mining capacity will be added at some point. Having said that, and as mentioned earlier, it takes (on average) 6-7 years from it is decided to open a new mine until the first U3O8 can be shipped, and there is currently nothing on the horizon.

Added capacity will therefore not become an issue for many years to come. That doesn’t mean that announcements to add capacity will not have a psychological impact, though, and that risk is hard to quantify. That said, it is yet another reason to seek exposure to uranium away from the mining industry, but more on that below.

#3: Alternatives to uranium.

As a fuel source in nuclear reactors, over the next ten years, thorium is the only alternative to uranium. There is not yet a single thorium-fuelled commercial reactor in operation anywhere, but a handful are under construction. Last summer, I wrote a research paper on thorium, which you can find here. If you read the paper, you will see that there are some advantages attached to thorium but also some disadvantages. Most importantly, when assessing the risk to the uranium price, an existing uranium-fuelled reactor cannot switch to thorium, so that is not an issue at all. The risk is that some new power plants, whilst at the planning stage, decide to go with thorium rather than uranium. Having said that, few will probably do that until a commercial thorium reactor has been up and running for a few years.

#4: Recycling of spent uranium.

In my book, this is the biggest risk. The technology to recycle spent uranium was developed by the Americans back in the 1970s, but they barred it shortly afterwards for safety reasons (they say). Other countries did not, though, and recycling spent uranium is standard practice in France, the UK, Japan, Russia and India today. In France, no less than 96% of the reusable material in spent fuel is recovered and recycled (see here).

More countries following this practice will obviously reduce overall demand for uranium. When researching in preparation for this paper, I came across the argument that recycling spent uranium is very expensive, hence not very likely to spread. Whilst correct that recycling spent uranium brings the price on fuel close to $150/lb, if fuel costs only make up 5-7% of total operating costs in nuclear power plants, such an increase is hardly meaningful when compared to the advantages. No, I think there is a different, and altogether more cynical, reason why recycling isn’t standard practice. Enriched uranium and plutonium are both bi-products in nuclear power plants and are needed in the weapons industry. If recycling U3O8 means starving the weapons industry of enriched uranium and plutonium to make nuclear weapons, who do you think the government will listen to when deciding whether to allow recycling or not? #5: Better storage capabilities of electricity. Storing electricity at scale is not an option today, which is one of the reasons you don’t want too much power to be sourced from wind and/or solar. Having said that, huge amounts of research and capital are going into this, as everybody realises that better storage capabilities will be a game changer. Timing? Impossible to say but, at this stage, it is more a question of reducing the cost of grid batteries than it is a technological challenge. Experts don’t agree on timing, but the consensus seems to be that cost-effective grid batteries won’t be introduced until the early 2030s. You can read more about that here. #6: Conversion of green electricity to liquid hydrogen. This technology is an alternative to grid batteries but with one or two added advantages. As it happens, heavy-duty vehicles (lorries, trains, ships and planes) are not suited for electrification. By converting green electricity to liquid hydrogen in a process based on electrolysis, all transport vehicles can run on green energy. The underlying technology has already been developed but, similar to the storage technology mentioned earlier, it is still inefficient cost-wise. As far as timing is concerned, my best guess is that the technology will become cost-efficient at approximately the same time as grid batteries. The good news from the nuclear industry’s point-of-view is that now, with nuclear deemed green in the EU, electricity coming from a nuclear power plant, if converted to liquid hydrogen, can also be labelled green – at least in the EU. #7: The commercialisation of fusion energy. This is the ultimate game changer, but the technology is still at least 10-15 years away. The most advanced fusion project is in California. The management there have said that they expect to deliver the first fusion power to the grid between 2030 and 2035. Once fusion power is up and running, the marginal cost of electricity will be close to zero, and conventional power plants – both nuclear and non-nuclear – will probably begin to shut down. Such are the advantages of fusion energy. A fusion reactor only needs water (sea water will do) and lithium to start the fusion process. Even better, a fusion reactor cannot melt down. Nor is there a meaningful amount of nuclear waste left over. For those reasons, I would expect most, if not all, anti-nuclear supporters to soften their stance. That said, I do not expect fusion to have any impact on uranium prices until the 2030s. # How to invest in uranium In March 2020, when I first recommended you to invest in uranium, my investment-of-choice was a British company called Yellow Cake PLC, which is listed on London Stock Exchange with the ticker YCA (see here). My recommendation back then was based on the view that when you invest in uranium mining companies, you assume a fair amount of mining execution risk which you don’t necessarily want to do. That view hasn’t changed. YCA was introduced to me by Nick Lawson at Ocean Wall back in early 2020 (thank you, Nick!). YCA is a uranium broker, operating as an intermediary between mining companies and licensed uranium buyers – either nuclear power plants or nuclear research laboratories. It is one of the most direct plays on the uranium price you can find today. As you can see in Exhibit 8, after getting listed in the summer of 2018, YCA traded sideways for a couple of years. However, since early 2021, the stock price has rallied and is up almost 50% over the last 12 months. Even better, at current price levels, you can acquire physical uranium at about a 10% discount if you invest in YCA rather than buying it on an exchange. YCA is not very liquid, though, and building a reasonably-sized position may take longer than you would like it to. Even worse, getting out of it again could prove even more difficult. For that reason, YCA shouldn’t stand alone in a sizeable uranium portfolio. Here are a few other ways you can seek exposure to uranium. Uranium ETFs – the most obvious option The simplest way forward is the ETF route. That said, there are a few issues to be aware of if you decide to take this route. For starters, uranium ETFs do not correlate particularly well with the uranium price – on average the correlation factor is only about +0.3. Secondly, uranium mining stocks dominate portfolio composition in all outstanding uranium ETFs and, as I have pointed out, I would like to reduce the mining risk as much as possible when investing in uranium. Thirdly, one of the world’s largest uranium miners, Kazatomprom which is based in Kazakhstan but listed on several exchanges around the world, accounts for 10-15% of total NAV in most uranium ETFs. In these uncertain times, do I want to be exposed to Kazakhstan at all? These are all issues you need to consider. By far the most liquid uranium ETFs are Global X Uranium (URA on NYSE), and North Shore Global Uranium Mining (URNM on NYSE). In URA, the world’s two biggest uranium mining companies – Kazatomprom and Cameco – account for almost 33% of total NAV (see here), whereas the same two companies make up about 32% of NAV in URNM (see here), i.e. the difference between the two ETFs is minimal when it comes to the weight of the most influential underlying companies. Other aspects are somewhat different, though. For reasons I will come back to in a moment, my two favourite ways to seek exposure to uranium is YCA and Sprott Physical Uranium Trust (SPUT). Those two account for a much bigger share of total NAV in URNM than they do in URA, so that would favour URNM over URA. The total expense ratio, on the other hand, is meaningfully lower in URA (o.69%) than it is in URNM (0.85%) so, if that is important to you, go for URA. Having said that, it is difficult to build a meaningful uranium portfolio without any mining exposure at all, and Cameco – the big Canadian uranium mining company listed on NYSE with the ticker CCJ – is hard to ignore. I feel more comfortable ignoring Kazatomprom, as considerable geopolitical risk always follows investments in Kazakhstan. Introducing SPUT SPUT was established in 2018 and is, as the name suggests, a closed-ended investment trust which holds physical uranium. It has grown dramatically since it was first established and now holds about$3.5Bn worth of physical uranium in the portfolio.

This has raised the obvious question in my mind: could it be that SPUT is the real reason the uranium price has rallied so much recently? Moreover, if uranium supplies are as tight as I am suggesting in this paper, how come SPUT have been able to find billions of dollars’ worth of physical uranium?

The answer to those two questions is essentially the same. Hedge funds and other financial institutions turned bullish on uranium before SPUT existed and were forced to buy physical uranium if they wanted to be exposed. There was no other way. When SPUT entered the frame, anyone with a desire to go long uranium suddenly had a much more pragmatic solution. Consequently, much of the physical uranium in the hands of financial players was sold to SPUT.

The implication of this is that, as physical supplies from financial players dry up, assuming SPUT continues to grow, the impact on the uranium price will only get bigger. Therefore, the entrance of SPUT is very bullish for the uranium price longer term.

Management of SPUT is looking to list it on NYSE in 2022 and have filed an application to do so. The listing is expected to take place in Q2 or Q3 this year. At the moment, SPUT trades on average 65-70,000 units every day (in Canada). The NYSE listing will, in my opinion, result in additional demand for, and liquidity in, SPUT, which is yet another reason to invest in the trust now. You can read more about SPUT and its expected impact on the uranium price here.

Introducing Fission 3.0

An altogether different option is to invest in a small Canadian mining company called Fission 3.0 which is listed on TSX Venture Exchange (ticker: FUU). It operates exclusively in the Athabasca Basin which is a region in northern Saskatchewan and Alberta, Canada. The Athabasca Basin is best known as the world's leading source of high-grade uranium and supplies about 20% of the world's uranium.

Although my preferred option is not to invest in uranium through uranium mining stocks, in this case, I am prepared to make an exemption. What I particularly like about FUU is its unique approach to exploration which is based on airborne mobile Geiger counters. To the best of my knowledge, nobody else uses this technology when looking for uranium. It allows the company to pinpoint its drilling holes, making it much cheaper to mine.

Having said that, FUU is a tiny company with a market capitalisation of only about C\$36Mn. Trading volumes are also tiny, leading me to conclude that you should not allow this company to make up more than a small slice of your uranium portfolio. The fundamental story attracts me, though. Should you be interested in investing in FUU, I would strongly recommend you speak to Nick Lawson before going to market. He can be reached on nick@oceanwall.com.

# Concluding remarks

Extraordinarily easy monetary conditions in most OECD countries has led to a gigantic bull market in most risk assets more recently. As central banks begin the journey of monetary tightening, one would expect most risk assets to face more difficult times, i.e. the challenge for investment managers will be to seek shelter in assets which are likely to offer robust returns in a less benign environment. Uranium stands out in that respect. Why is that?

Demand for uranium is highly predictable, and there is a simple reason for that. You only switch off a fission reactor if there is a serious problem (as in Fukushima), or you decide to switch it off permanently (as in Germany). First and foremost, it is far too expensive to start a uranium-fuelled nuclear reactor up again after having switched it off (tens of millions of dollars) and, secondly, fuel costs make up no more than 5-7% of total operating expenses in nuclear power plants, i.e. demand is very price inelastic. Therefore, demand is largely a non-factor – the key risks are on the supply side.

When constructing your uranium portfolio, precisely how it should look like is very much a function of size. When liquidity matters the least, i.e. the amount of money to be invested is modest, I would go with three names only – YCA (30-35%), SPUT (50-55%) and FUU (10-20%).

When you need liquidity the most, more diversification is required, and that is best achieved through an ETF until SPUT becomes more liquid. When it comes to the two options mentioned in this paper, I prefer URNM over URA even if it is more expensive.

In very large portfolios, I would start with as much as 90% in URNM and then gradually transfer the allocation to SPUT as it becomes more liquid. I am confident that the NYSE listing will help with that. The remaining 10% (on day one) I would allocate to SPUT, YCA and FUU, liquidity allowing. Should you have any questions, you are always welcome to call me on +44 20 8939 2900 or email me on nj@arpinvestments.com.

Niels C. Jensen

7 February 2022