Nuclear power has become an essential source of electricity to meet the world’s growing energy demands, as it can generate power at an enormous scale, is cheaper than many other alternative fuel sources, and emits minimal greenhouse gasses. Countries seek to meet the rapidly growing electricity demand while limiting pollution, and the World Nuclear Association (WNA) expects nuclear generation capacity worldwide to increase to 482GWe by 2035 from 391GWe in 2017, representing 23% growth.1, 2
Uranium is the fuel that enables nuclear plants to generate electricity. Demand for the commodity is largely driven by global nuclear power output. Despite anticipated growth in nuclear power, and in turn, rising demand for uranium, gaining exposure to this commodity can be difficult. Uranium trades with thin liquidity on futures exchanges and there are ownership restrictions, given its usage in weapons.
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 2 to 4 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 or 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. Sulphuric 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 this approach 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, whereby it is 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 that are comparable to 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.10
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 1 Kg of different fuel types can be found in the table below.
In addition to the power density of uranium, nuclear is also among the cleanest methods of producing electricity, in terms of greenhouse gas emissions.
In terms of levelized14 costs, nuclear power is cheaper than coal and is significantly cheaper than solar thermal, biomass, and offshore wind farming. It’s notable that although levelized costs are decreasing across the varying types of plants coming online, the costs associated with Advanced Nuclear plants has fallen faster since 2015 than other areas like Biomass.
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 Europe (27%) and the US (20%).16, 17, 18 Globally, there are 57 reactors currently under construction, representing a 13% increase in nuclear electricity generation capacity. In addition, there are 152 reactors planned, representing a 46% rise in current nuclear capacity, which is largely being led by emerging economies such as China, Russia, India, and South Korea.19 Increased demand is primarily driven by countries like India and China, to contend with the dual-dilemma of massive electricity needs and increasing air pollution problems,
China, the largest market for uranium in the world, plans to increase its nuclear power capacity significantly. Currently, the country has 41 operational reactors, with another 17 under construction, and an additional 43 planned.20 Nuclear power provides just over 4% of electricity in China, leaving significant room for the nuclear energy sector in China to grow. The Chinese government intends to create 88GW of nuclear capacity, which would constitute about 15-25% of the nation’s energy mix by 2020.21 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 U.S. and become the biggest nuclear power producer by as early as 2030.22
Therefore, the demand side of the equation looks promising; UxC estimates annual uranium demand to grow 42% to over 270 million pounds U3O8 23 by 2030 from 190 million pounds U3O8 in 2016.24
What is the status of uranium supply?
Uranium supply consists of new production from mining activity and existing inventories, which is largely from decommissioned nuclear weapons stockpiles. Since 1980, weapons-grade uranium in the US and the Soviet Union has been blended down to be repurposed as reactor fuel as part of nuclear disarmament agreements. This steady flow of supply kept uranium prices, as well as mining production, artificially low.
Supply from mining production meets approximately 87% of the current uranium demand, with the remainder being met with supplies from decommissioned weapons.25 These supplies, however, are being depleted and, according to UxC, will drop to 31 million pounds U3O8 per year in 2025 from 46 million pounds U3O8 per year in 2016.26 Though this supply stream will continue to play a meaningful role in the near and medium term, its impact will dwindle over the long term, necessitating greater need for investment in new mining production to meet anticipated future demand.
Are uranium prices expected to recover?
Since late 2017, major uranium suppliers have resorted to production cuts to support the weakening uranium prices – the most notable being the cutbacks in Canada and Kazakhstan. In November 2017, Cameco Corporation temporarily suspended operations at its McArthur River mining and Key Lake milling operations in Canada. McArthur, being the world’s largest uranium-producing mine, accounted for 11% of global uranium production in 2016. In July 2018, Cameco announced the extension of the McArthur River mine production cut for an indefinite period. In December 2017 in Kazakhstan, Kazatomprom – the nation’s largest uranium producer – declared a 20% cut in its production targets for 2018-2020. These production cuts are expected to ease the uranium inventory glut, as Cameco and Kazatomprom together control about 38% of the global uranium supply. Aggressive production cuts and rising demand are expected to act as catalysts to burn off the bulk of uranium inventory and supporting higher uranium prices.27, 28, 29 30
How can you invest in uranium?
Gaining exposure to uranium can be more nuanced than other more commonly traded commodities, like oil and gold. One method is to buy 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. They 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.