Nuclear power is a clean, efficient, and essential source of electricity used to meet the world’s growing energy demands. Nuclear power can produce electricity at a greater scale while minimizing greenhouse gas emissions. This helps countries expand their electricity grid and usage, while limiting air pollution. According to the International Atomic Energy Agency (IAEA), roughly 10% of the world’s electricity was generated from nuclear power in 2019. This is approximately one-third of the world’s low-carbon electricity. There was an increase of 2.5 GW(e) in net installed capacity since the end of 2018 and it is projected to increase by 25% over current levels to 496 GW(e) by 2030, and by 80% to 715 GW(e) by 2050. The infographic below shows the current status of nuclear power generation.1
Uranium fuel enables nuclear power plants to generate electricity. A single uranium pellet, slightly larger than a pencil eraser, contains the energy of a ton of coal, three barrels of oil, or 17,000 cubic feet of natural gas.2 Demand for the commodity is largely driven by global nuclear power output. Despite expected growth in nuclear power, and a correlative increase in uranium demand, gaining exposure to this commodity can be difficult. Uranium trades with thin liquidity on futures exchanges and there are ownership restrictions related to its usage in weapons production.
The following analysis seeks to shed light on uranium by answering six key questions:
- What is uranium, and how is it extracted?
- How is uranium used to generate electricity, and what are uranium’s advantages?
- What is the outlook for uranium demand?
- What is the status of uranium supply?
- Are uranium prices expected to recover?
- How can you invest in uranium?
WHAT IS URANIUM, AND HOW IS IT EXTRACTED?
Uranium is a heavy, dense, and radioactive metal, making it a potent source of concentrated energy. Uranium is found in most rocks in concentrations of two to four parts per million and is as common in the Earth’s crust as other metals such as tin and tungsten.3 Uranium is generally recovered from the ground using open-pit mining, underground mining, or in-situ leach (ISL) methods.4
Open-pit and underground mining methods collect rocks that contain very low concentrations of uranium. In a milling process, the rocks are crushed and ground into fine fragments, while water is added to create a slurry – a semi-liquid mixture. Sulfuric acid or an alkaline solution is mixed with the slurry, allowing 95-98% of the uranium to be recovered. Uranium oxide, also known as yellowcake, is precipitated from this solution. Yellowcake must undergo yet another enrichment process to make it viable as nuclear fuel.5
In-situ leach (ISL) mining is the preferred method for extracting uranium, as it is more cost-effective and environmentally friendly than open-pit or underground mining.6 ISL involves pumping a solution called a lixiviant into the ground to dissolve uranium from the rest of the rock formation. The uranium extract is then recovered from the ore, purified, concentrated, and dried to produce yellowcake. 7
The table below highlights the major differences between the recovery methods discussed above.8
Unlike many other commodities, uranium is not highly concentrated in a handful of geographic areas. Instead, it is found in many places around the world, as depicted in the chart below.
HOW IS URANIUM USED TO GENERATE ELECTRICITY, AND WHAT ARE URANIUM’S ADVANTAGES?
Nuclear power is one of the few sources of electricity that combines large-scale power output and low greenhouse gas emissions, with costs comparable to those of traditional fossil fuel power stations.
Similar to coal or natural gas power plants, nuclear reactors generate electricity by producing immense heat. This heat induces steam, which propels a turbine connected to an electric motor. As the turbine rotates, the electric motor produces electricity. In nuclear power stations, however, the heat is not generated by burning fossil fuels, but rather by splitting uranium-235 atoms in the process of nuclear fission.9
The energy released through nuclear fission is thousands of times greater than the energy released through the process of burning similar amounts of fossil fuels. This makes nuclear power a very efficient method of generating utility-scale power. In addition, it means the ongoing fuel costs for nuclear power plants tend to be quite low, given the minimal amount of material needed to power the plant.
The amount of heat or energy generated from 1kg of different fuel types can be found in the table below.
In terms of levelized costs, nuclear power is cheaper than coal and is significantly cheaper than solar thermal, biomass, and offshore wind farming.13 It is notable that although levelized costs are decreasing across the varying types of plants coming online, the costs associated with advanced nuclear plants have fallen faster since 2015 than other areas like biomass.
Section 111(b) of the Clean Air Act requires conventional coal plants to be built with carbon capture and sequestration (CCS) to meet specific CO2 emission standards. Coal with 30% CCS meets the New Source Performance Standard (NSPS).
WHAT IS THE OUTLOOK FOR URANIUM DEMAND?
Nuclear power contributes about 10% of the world’s total energy supply and is a major source of energy in developed markets such as the EU (26%) and the US (19%).15, 16, 17 Globally, there are 53 reactors currently under construction, representing a 15% increase in nuclear electricity generation capacity. In addition, there are 110 reactors planned, representing a 30% rise in current nuclear capacity, largely led by emerging economies such as China, Russia, and India.18 Increased demand is driven primarily by countries like India and China, to contend with the dual dilemma of substantial electricity requirements and increasing air pollution problems. China, the world’s largest market for uranium, plans to increase its nuclear power capacity significantly. Currently, China has 47 operational reactors, with another 11 under construction, and an additional 43 planned.19
The Chinese government intends to create 150GWe of nuclear capacity, which would constitute about 10% of the nation’s energy mix by 2030. The International Energy Agency (IEA) predicts that China will triple its nuclear energy capacity in the next 20 years. It forecasts that China will outpace the European Union and the U.S. and become the biggest nuclear power producer by as early as 2030.
With emerging countries such as China and India continuing their extensive nuclear expansion plans, “newcomers” such as Bangladesh, Egypt and Turkey have improved their prospects for new reactors. In early 2019, France modified its policy to delay a planned reduction in the share of nuclear power and allowed the extension of reactor operating lifetimes to beyond 40 years. 20 A new concept of small modular reactors (SMRs) is in development; this is a technology that could be deployed to power a small town or mining operation. These reactors are small and flexible and have a power capacity of up to 300 MW(e), and their output can fluctuate according to demand. There are about 50 SMR designs globally, in different development stages, with three already in advanced stages of construction in Argentina, China and Russia, all scheduled to start operations between 2019 and 2022.21
Therefore, the demand side of the equation looks promising: UxC estimates that uranium demand will grow 49% to over 290 million pounds of U3O8 by 2035 from 195 million pounds U3O8 in 2019.23, 24
WHAT IS THE STATUS OF URANIUM SUPPLY?
Uranium supply consists of new production from mining activity and existing inventories, largely from decommissioned nuclear weapons stockpiles. Since 1980, weapons-grade uranium in the US and the former Soviet Union has been blended down to be repurposed as reactor fuel as part of nuclear disarmament agreements. This steady flow of supply has kept uranium prices, as well as mining production, artificially low.
Supply from mining production meets approximately 85% of current uranium demand, with the remainder being met with commercial stockpiles, nuclear weapons stockpiles, recycled plutonium and uranium from reprocessing used fuel, and some from re-enrichment of depleted uranium tails. 25 These supplies, however, are being depleted and, according to UxC, will drop to 23 million pounds of U3O8 per year in 2030 from an estimated 49.7 million pounds U3O8 per year in 2018.26 Although this supply stream will continue to play a meaningful role in the near and medium term, its impact will likely dwindle over the long term, requiring more investment in new mining production to meet expected future demand.
KAZATOMPROM – A GAME CHANGER IN URANIUM MARKET
Kazatomprom is considered the uranium industry’s Aramco. It is the world’s largest uranium producer, accounting for approximately 20% of worldwide throughput. And in 2018, Kazatomprom’s uranium production was 21% of the global output.27 The state-owned company controls all uranium exploration and mining in Kazakhstan, as well as other nuclear-related activities like the sale of uranium and uranium products under long- and short-term contracts and in the spot market.
Kazatomprom is one of a few established and publicly traded uranium firms with a combination of producing assets, free cash flow (FCF), and solid balance sheet. As the world’s largest uranium supplier, it has strategic links with countries such as Russia, China, Japan, India, South Korea, Canada, Iran and the US. AREVA SA, Cameco Corp, Kansai Electric Power and several Russian and Chinese companies have joint ventures with Kazatomprom. Given its leadership role in the uranium market, Kazatomprom has significant influence over global uranium prices through the management of its production levels.
In late 2018, the company sold its 15% stake, valued at $3 billion, in Kazakhstan’s first initial public offering (IPO) since 2005. The launch was on the newly established Astana International Exchange (AIX) and the London Stock Exchange (LSE) and resulted in Kazakhstan’s sovereign wealth fund, known as Samruk-Kazyna, retaining 85% of the company’s share capital.29 The listing was part of Kazakhstan’s broader “Complex Privatization Plan” (spanning 2016-2020), which aims to privatize state-owned enterprises, and demonstrated the government’s commitment to privatize its state-owned businesses, following numerous delays. The listing occurred as uranium prices reached their highest levels in two-and-a-half years. Prices spiked after a string of mine closures across the globe, which forced producers (such as Cameco) to buy uranium in the spot market to fulfil long-term sales contracts. 30
One of the reasons cited by the company to go public was to capitalize on attractive long-term fundamentals of the uranium market. Kazatomprom’s IPO was a significant catalyst that triggered the current strong and growing investor interest in the uranium space. The company’s IPO was followed by Uranium Trading Corp’s (UTC) IPO. UTC is a uranium investment and trading company.31 Following the IPO, the spot price of U3O8 reached its peak in 2018 at $29.15 per pound.
Kazatomprom still maintains that it will reduce its production levels of uranium by 20% – a plan it announced in December 2017. The company uses low-cost in situ leach method for all its mining assets, which helps it adjust production levels and respond to changes on the uranium market more rapidly and cost effectively compared with conventional mining methods. 32
ARE URANIUM PRICES EXPECTED TO RECOVER?
Uranium prices took a hit following the 2011 Fukushima nuclear disaster, which led to the multi-year shutdown of all nuclear power plants in Japan. Over the past eight years, the global nuclear industry has recovered production of nuclear power beyond pre-Fukushima levels. Japan has put a concerted effort into restoring its nuclear capabilities, having a total of nine nuclear power plants fully operational in 2019.33
Uranium prices were supported by production cuts in early 2019. However, political uncertainty impacted prices with US President Trump increasing pressure on Iran through the imposition of sanctions and Section 232 investigations into uranium imports. US uranium producers, Energy Fuels Inc. and UR Energy Inc. prompted the investigation by filing a trade petition with the US Department of Commerce, seeking to study whether uranium imports pose a threat to the national security, and proposing that 25% of the requirement be sourced domestically.33, 34
The world’s largest uranium company, Cameco Corp., announced the indefinite extension a previously temporary shutdown of its flagship McArthur River mine. Kazakhstan’s national atomic company Kazatomprom upheld its commitment to reduce 20% of its planned production in 2020. These production cuts may reduce a uranium inventory glut, as Cameco and Kazatomprom together control about 38% of the world’s uranium supply. Aggressive production cuts and rising demand could clear the bulk of uranium inventory and support higher prices. 35
HOW CAN YOU INVEST IN URANIUM?
Gaining exposure to uranium can be more nuanced than to other more commonly traded commodities, like oil and gold. One solution is purchasing uranium mining stocks or exchange traded funds (ETFs) that own a basket of those mining stocks. Another is to gain access to uranium futures, which trade with relatively light liquidity. Individual mining stocks can have high idiosyncratic risks, which may be mitigated to a degree by owning a broad set of uranium mining stocks from around the world. Individual stocks can also be somewhat of a levered play on the underlying commodity price, given the high fixed costs associated with mining. While uranium futures offer exposure to the spot price of uranium, they can be subject to negative returns associated with contango- when the spot price of the commodity trades below its future price.
We believe investing in uranium through the Global X Uranium ETF (URA) may provide an efficient and cost-effective method for accessing a broad basket of companies involved in uranium mining around the world.
URA: The Global X Uranium ETF (URA) provides investors access to a broad range of companies involved in uranium mining and the production of nuclear components, including those in extraction, refining, exploration, or manufacturing of equipment for the uranium and nuclear industries.
Please click on the fund name for current holdings.