All Aboard For The Nuclear Renaissance 

This story features BOSS ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BOE

Positive nuclear industry dynamics and a recent pullback in prices for ASX-listed uranium shares prompts a review of brokers’ favoured exposures.

-Analysts remain upbeat on the uranium sector
-Spot price retreats, but term prices higher
-Broker selections following share price falls

By Mark Woodruff

A nuclear renaissance is coming, assures Morgan Stanley, noting it took the world 70 years to get to 390GW of nuclear power capacity, and the 2023 United Nations Climate Change Conference (COP28) set forth a promise to build another 740GW in 30 years.

Mine restarts and brownfield expansions will likely prove insufficient to restore equilibrium to the market, agrees Canaccord Genuity, in the face of rising power consumption due to electric cars, data centres and increasing Ai usage.

This broker remains upbeat in the longer-term on the uranium sector, as does Citi’s commodities team, which recently reiterated its bullish outlook, predicting upside momentum should resume in the second half of this year.

Indeed, a nuclear resurgence in the West could be data driven, suggests Canaccord, with the likes of Amazon, Microsoft and OpenAI recognising the low carbon nature of nuclear energy.

These broker outlooks place the recent retreat in uranium prices and equities into perspective and make a review of brokers’ favourite ASX-listed uranium exposures timely.

The price of yellow cake

While the current U3O8 spot price of around US$85/lb is down around -8% year-to-date, the more important contract price is 13% higher, point out the analysts at Canaccord Genuity.

The long-term contract market is where around 85% of uranium is transacted, and the analysts note elevated contracting levels as in the present have historically been a precursor for higher prices.

Activity has recently slowed in both the spot and term markets because, in the wake of the World Nuclear Fuel Market Conference, there has been significant conjecture about the ease with which US import waivers will be granted to source Russian product, explains the broker.

Morgan Stanley forecasts modestly softer term prices for FY25 and FY26 of US$71/lb and US$70/lb, respectively, but is not ruling out price spikes such as when the term price rose to US$78.5/lb last month.

Prices are subject to future supply/demand squeezes. For example, should the recent US ban on Russian uranium also be implemented by the EU/UK, 55% of global enrichment demand would need to be supplied from 41% of enrichment capacity, notes the broker, necessitating more uranium.

Following a decade of under-investment and material mine closures, such as at Ranger (in Australia’s Northern Territory) and the Cominak mine (in Niger), primary supply of uranium is at a 12-year low of around 123mlb versus market demand of circa 180mlb, according to Canaccord. Secondary supply shrinks this deficit to around -30mlb.

The stage is set for a sustained bull market, in this broker’s opinion, because of intensifying geopolitical concerns, a stumbling supply chain, and rising demand from non-OECD growth.

Government and community support is also improving due to an increasing recognition of nuclear energy’s positive contributions to decarbonisation, energy security and the provision of economically dispatchable electricity, Canaccord finds.

Concentration risk for utliities

As Canadian-based Cameco and Kazatomprom-linked projects accounted for 62% of 2023 primary mine supply, utilities are increasingly focused on concentration risk in their respective books, reports Canaccord.

Global mobile uranium inventories have been decreasing since around 2017, and this trend has been accelerated by the likes of covid, which roiled production in Kazakhstan and Canada.

As a result of this mine concentration risk, the broker expects a new wave of mine development and a more diversified supply chain, but cautions uranium projects have historically been challenging to sanction due to funding, regulatory hurdles and human resource shortages, all of which increase the risk of uranium price spikes.

The rise of financial entities acquiring U3O8 has also contributed to a falling inventory overhang at utilities since 2017, explains Canaccord, along with stockpiling by India in anticipation of future reactor fuel needs (and as a hedge against future shortfalls). Also, China continues to acquire pounds ahead of consumption for future use.

Canaccord continues to forecast a rise in uranium term prices over the medium-term toward the broker’s long-term price of US$80/lb for ‘Western-friendly’ jurisdictions.

Where should investors turn for uranium exposure?

At the beginning of June, Bell Potter noted the valuation discrepancy between uranium producers Boss Energy ((BOE)) and Paladin Energy ((PDN)) had widened over the prior month.

Paladin had executed the restart of its Langer Heinrich mine seamlessly, with first production on March 30 this year, while Boss had previously experienced a delay to commence production at the Honeymoon operation in South Australia.

At a share price of $4.53, Boss was trading at an around -40% discount to Bell Potter’s valuation when research was issued in early-June, prompting the analysts to describe the company as a value play. A recent share price sell-down by a company director had further weighed on the company’s share price at the time.

Following further weakness across the uranium sector, the Boss Energy share price is currently trading around $4.00.

Bell Potter reminded investors Boss is soon to bring its 30%-owned Alta Mesa mine (located in Texas) into production, while the ramp-up at Honeymoon is progressing. 

Next Canaccord Genuity (Speculative Buy; target $6.00) followed up with research late last week noting production had commenced, and first sales are expected in the next 60-90 days, making Boss the only multi-mine producer on the ASX, and one of few globally.

The US is seeking to re-establish its nuclear supply chain, making Alta Mesa very much a growth asset, in this broker’s view. Because only 7% of the company’s output is contracted, Boss remains highly leveraged to the U3O8 market price.

Bell Potter currently has a Buy rating for Boss Energy and a Hold for Paladin Energy, with targets of $6.35 and $15.70, respectively.

Morgan Stanley also has a Buy rating for Boss but adopted a different stance for Paladin in research released at the same time as Bell Potter’s (on June 9).

This broker noted Buy-rated Paladin (target $17.45) had outperformed peers and the index year-to-date, yet still anticipated more share price upside, given the valuation appeared cheap compared to peers using an enterprise value/resource multiple.

Paladin’s resource base consists of not only Langer Heinrich but also Michelin (a sizable Canadian resource), and dormant Australian resources, which are currently impacted by a uranium mining ban.

Michelin is likely to be unlocked first, with management expecting a pre-feasibility study to be completed by FY26. Paladin is also looking at options to lower upfront capex by operating the Michelin open pit before developing underground, explained the broker.

The recent pullback in Paladin’s share price (in line with the U3O8 spot price) is an opportunity for investors, agrees Citi, which retains a Buy rating and $17 target.

In February, Shaw and Partners initiated coverage on NexGen Energy ((NXG)) -market capitalisation of nearly $5.7bn- which is developing the Saskatchewan Rook I uranium project, and suggested it would be difficult to overstate the exceptional quality of the resource underpinning this project.

This broker could see potential for the project to generate more than CA$3bn and started off with a Buy rating and $17.50 target.

Further uranium stocks on the ASX

Behind NexGen Energy, Paladin Energy and Boss Energy have market capitalisations of around $4.2bn and $1.7bn, respectively, but opportunities also present elsewhere.

The analysts at Bell Potter have recently returned from a site visit to Paladin’s Langer Heinrich operations in democratic and politically stable Namibia, where Deep Yellow ((DYL)) and Bannerman Energy ((BMN)), with market capitalisations of $1.41bn and $614m, respectively, also own operations.

The Tumas uranium project in Namibia is the most advanced project within the Deep Yellow portfolio, consisting of 121Mlbs U3O8 spread out across three main deposits, noted the broker. A final investment decision is expected for the project in the fourth quarter of 2024.

In the FNArena database of brokers monitored daily, both Bell Potter and Morgans have Speculative Buy ratings for Deep Yellow and an average target of $1.77, suggesting just over 25% upside to the latest share price.

Buy-rated Petra Capital believes Bannerman Energy is well placed to attract development funding at its Etango uranium project, given an uncommitted offtake and a clear need for new uranium supply to enter the market.

Front End Engineering Design (FEED) studies are now complete and capex inflation concerns have been addressed following the definitive feasibility study around 18 months ago, explains the broker.

Outside the database, Canaccord has Speculative Buy ratings for both Deep Yellow and Bannerman Energy. The broker applies the same rating to Lotus Resources ((LOT)), which has an 85% interest in the Kayelekera Uranium Project in Malawi, and fully owns the Letlhakane Uranium Project in Botswana.

Silex Systems ((SLX)) weighs in at a $1.3bn market capitalisation and is a different beast to stocks mentioned previously. The Silex laser enrichment technology is applied to the production of different grades of fuel for the nuclear power industry, and is licensed exclusively to Global Laser Enrichment (GLE), a business venture comprising Silex (51%) and Cameco (49%).

GLE is aiming to move to full commercial operations at the Paducah Laser Enrichment Facility (Kentucky) in 2028, which is around three years earlier than originally planned, noted Buy-rated Shaw and Partners in February.

While the company is focused on the commercialisation of the Silex technology for nuclear applications, the technology may also be used in silicon quantum computing via the enrichment of silicon.

Several juniors not currently under Canaccord’s research coverage, but which are making significant progress with their respective developments were recently listed as follows: Alligator Energy ((AGE)), Aura Energy ((AEE)), Berkeley Energia ((BKY)), Cauldron Energy ((CXU)), DevEx Resources ((DEV)), Elevate Uranium ((EVE)), Global Uranium and Enrichment ((GUE)), Laramide Resources ((LAM)), Orpheus Uranium ((ORP)) and Toro Energy ((TOE)).

****

FNArena publishes a weekly update on the ins and outs of the uranium sector. This week’s update: https://fnarena.com/index.php/2024/06/18/uranium-week-spot-price-hits-pause/

****

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms