The Upside For Uranium

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As more of the world adopts nuclear energy on the path to renewables, demand for uranium can only grow. Australia boasts several listed miners.

-Reactor building growing apace globally
-Upside for uranium pricing
-Australian-listed miners
-China’s nuclear conundrum

By Greg Peel

Bell Potter notes that as of March this year, 57 nuclear reactors were under construction around the globe. Shaw and Partners says 59, but doesn’t put a time on it, further noting this would add to the existing 436 reactor fleet, with a another 100 in the planning stage and 323 being proposed, quoting the World Nuclear Association.

Of Bell Potter’s 57 under construction, 22 are in China. The broker offers more stats:

During 2022, six reactors were connected to the grid (total capacity 9,054MW) and five reactors were shut down (-3,271MW). Thus far in 2023, four reactors have been connected to the grid, in Slovakia, China, the US and Belarus (3,772MW), and five have been shut down, in Taiwan, Belgium and Germany (-6,048MW).

The broker continues to see reactor growth across the globe, with China and India boasting both a comparatively young fleet and ambitious growth outlooks for nuclear capacity. Bell Potter estimates current raw uranium (U3O8) demand at 161mlbs/yr, expanding to 189mlbs/yr by the end of the decade.

Bell Potter currently estimates global supply for U3O8 at around 125mlbs/yr, expanding by around 11.48mlbs over 2023 with the addition of restart operations, particularly Cameco’s McArthur River mine in Canada.

As it stands, the broker currently estimates around a -24mlbs shortfall in the market in 2023.

According to tracking by uranium industry consultant TradeTech, spot uranium was trading at end-May at US$56.00/lb. Mid-term contract pricing was at US$58.50/lb, and long-term at US$56.00/lb.

As a result of Bell Potter’s estimations, the broker has revised its mid-term price deck (out to 2026), resulting in an increase to US$80/lb from US$60/lb, and subsequently raised its twelve-month target prices for three Australian-listed uranium miners under its coverage – Boss Energy ((BOE)), Paladin Energy ((PDN)) and Deep Yellow ((DYL)).

The broker has Speculative Buy ratings on both Paladin and Deep Yellow and a Hold on Boss Energy due to recent share price strength.

Boss Energy is due to restart its Honeymoon operation in South Australia in December and Paladin will restart its Langer Heinrich mine in Namibia in March next year. Deep Yellow holds tenements in Namibia and is looking towards production by the end of 2025.

Bell Potter has also initiated coverage on Alligator Energy ((AGE)) with a Speculative Buy rating. This company is in early-stage development of its Samphire project in South Australia, which the broker notes shows similarities to Honeymoon.

Bell Potter also makes mention of, but does not cover, Lotus Energy ((LOT)), which has an unfunded restart operation in Malawi.

Reasons to be Cheerful

Nuclear is becoming a more important part of the energy transition, Shaw declares, as governments face the reality that investment in renewables is not going to meet decarbonisation objectives due to limitations on transmission, batteries and firming capacity.

The broker has offered eight reasons to be positive on uranium:

-The aforementioned number of reactors being constructed, planned or proposed;

-The UK government has committed to a program of new nuclear plants;

-The US government has committed to support power plant life extensions;

-The EU has included nuclear in its green taxonomy legislation;

-China is aiming to build 150 new nuclear reactors over the next 15 years;

-The Japanese government has adopted a new plan to allow companies to operate existing nuclear reactors beyond the existing 60-year limit and to build next-generation reactors to replace decommissioned plants;

-France recently announced the creation of a pro-nuclear alliance with 12 European Union countries to advocate for nuclear energy and has announced the construction of six new reactors.

-A bill known as the Reduce Russian Uranium Imports Act is making its way through the US legislative process, proposing a ban on US imports of Russian-sourced uranium.

Shaw suggests the latter will further tighten the uranium market.

Shaw and Partners has a Buy rating on Paladin Energy and Lotus Resources, with a Hold on Boss Energy due to share price strength.

This broker also has Buy ratings on Peninsula Energy ((PEN)), as the company’s Lance project in Wyoming will be the first mine to restart production and is considered a major beneficiary of US government support, Bannerman Energy ((BMN)), which Shaw suggests is the most leveraged name in the (Australian) sector, with its Etango resource in Namibia offering both scale and scalability, and Silex Systems ((SLX)), believing its third generation uranium enrichment technology will revolutionise the uranium enrichment industry.

The China Syndrome

China is the biggest carbon emitter, notes French investment bank Nataxis, and it cannot dodge the green transition. To pursue "high-quality growth," China is ready to accept lower economic growth and a stronger emphasis on the environment. China will reduce its reliance on coal, but its options for the alternative energy mix may be more opaque. Among all possibilities, nuclear energy emerges to the surface after China sees breakthroughs in its technology.

China has a national goal of carbon-peaking by 2030 and carbon neutrality by 2060. However, as Nataxis notes, coal still formed 70% of China’s power generation in 2022, and nuclear energy only contributed 5%. Even on that low percentage, China’s size means 5% is enough to overtake France as the second largest consumer of nuclear energy in the world (after the US), accounting for 15% of global consumption.

It is widely expected the share of nuclear in China’s energy mix may rise to 7-8% in 2050. The increase looks small, but China’s nuclear demand will fuel sizeable investment as its electricity demand continue to grow, Nataxis suggests.

From a supply perspective, China has been actively building its home-grown technologies, and nuclear energy is no doubt a state-led strategic sector, Nataxis assumes. With stronger R&D input, China has improved based on French technologies and stepped up its ability to produce domestic contents, meaning it has its own intellectual property in reactor designs. China is using more of its self-owned intellectual property in new started nuclear plants.

Domestication of reactor components has increased from 19% before 2000 to 75% in 2016-2019. In other words, China's increasing autonomy means more than just building nuclear plants, but increasingly exporting whole facilities.

China has also bolstered its upstream supplies of nuclear fuel but is lagging downstream (uranium). China is dragging on the back end of its claimed closed fuel cycle. Nataxis’ estimates show China’s current storage capacity will reach its limit by 2026, which makes the construction of reprocessing facilities a pressing issue, which will come only by 2025.

For any nuclear energy producer, exporting its technologies can bring lucrative profits and geopolitical influence, Nataxis suggests. Russia emerged as a significant nuclear energy exporter, but the US and allies are attempting to move away from Russia as a source. There is thus an opportunity for other countries to fill the gap, and China is looking closely at potential deals.

How that goes down in a “no limits” relationship remains to be seen.

Given China's progress in mastering nuclear technologies in the past decades and its strong industrial base, the ultimate question is whether it can replace Russia. Even though China has come a long way, Nataxis argues it takes more than what it has achieved and how it works now to gain more export market share in nuclear energy.

Firstly, the financing model remains a big hurdle for other countries to decide whether to import China's nuclear technologies. Secondly, the commitment to constructing and operating a nuclear plant will require entire supply chains and talents to provide an overall package. Thirdly, the intense geopolitical climate may not bode well for China to export to most countries with high projected growth in nuclear energy demand.

In other words, will the world jump out of dependence on Russia and into dependence on China? The US, for one, has passed or proposed several bills regarding a shift away from Russian dependence, including incentivising both US domestic uranium production and domestic uranium enrichment.

Hence, Nataxis sees China as a growing nuclear power user with a stronger ability to produce and innovate. But there are still enormous challenges that China needs to tackle before becoming a global exporter of nuclear reactors. China will enter the global stage once it can provide more customised financing solutions with more complete chains, but geopolitics may also hold back its expansion, meaning any export growth will likely come from developing markets.

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