Will a uranium recovery stick this time?

A fresh wave of optimism is washing across Australian uranium explorers as nuclear power stakes a claim in the drive to decarbonise the world, but a second wave of genuine demand from power utilities is required to make the recovery stick.

There’s a lot in that opening comment which is based on the sharp share price rises by most uranium explorers with stocks such as Deep Yellow, Boss Energy, Elevate Uranium and Lotus Resources up by more than 50% since January.

The first point to consider is that the uranium industry has been here before, tantalising investors with spectacular price rises, such as the three-year boom from 2005 to 2008 when the price rocketed up by more than 400% from US$34 a pound to US$140/lb.

Then, a crisis in Japan dented confidence in nuclear power, after an earthquake and tsunami severely damaged the Fukushima Daiichi power plant and drove the uranium price down to US$17/lb by 2016.

Renewed optimism

The long road back to today’s five-year high price of close to $US35/lb has been aided by the mothballing of uneconomic mines and, more recently, by investment funds buying surplus uranium in the belief that a sustainable recovery is underway, and the price could continue rising.

Morgan Stanley, a leading investment firm, is tipping a short-term (spot market) price of $US48.50/lb in 2024 while long-term contract prices could be significantly higher.

Optimists certainly see a strong case for nuclear power given its zero-carbon credentials and the hope that accidents at power plants, such as Three Mile Island in the US in 1979, Chernobyl in Ukraine (1986), and Fukushima (2011), will not be repeated.

The bull case for uranium is built on a combination of ongoing demand from the world’s 445 currently operating nuclear reactors which supply roughly 10% of the world’s electricity, new reactors as demand for carbon-free electricity grows, the development of new (and smaller) reactors, as well as a lack of investment in new uranium mines.

An example of what the future of nuclear power might look like is the resurrection of the decommissioned Trawsfynydd power plant in Wales, which has been earmarked for the installation of a new generation of small nuclear reactor which will be cheaper and easier to operate.

Challenges remain

Encouraging as the prospect of a nuclear power revival might be, there are hurdles for uranium explorers and potential miners to overcome with the most important being greater acceptance of the nuclear option by governments and the broader community, which has been programmed to believe that nuclear power is dangerous.

The irony of anti-nuclear brainwashing is that it can now be demonstrated that more damage has been done to the environment by burning fossil fuels than has ever been done by nuclear power.

In time, the anti-nuclear activists might even consider an apology for driving public opinion down the carbon pollution blind alley.

Pre-emptive buying

A more immediate issue for the uranium industry is to see the first wave of rising prices upgraded into a long-term higher price.

For that to happen uranium buyers need to be power utilities rather than speculative investment funds such as London-based Yellowcake and the more recently created Sprott Physical Uranium Trust.

Investment fund buying of uranium, and some buying by uranium explorers themselves, has several purposes.

Fund managers obviously believe that a uranium shortage will develop, and they will trouser handsome profits when power generators are forced to buy more fuel.

Explorer/miners are buying uranium for similar speculative position taking, but also to demonstrate to future customers that supply is available even before mining starts and a customer can be confident of getting what it wants.

There is a risk in the pre-emptive buying spree by organisations such as Sprott and Yellowcake and that’s the rather obvious point about surplus uranium being shifted from one secure warehouse to another without much more being consumed by power companies.

In time, the power companies will have to buy more fuel. Additionally, it’s anticipated the decarbonisation drive will foster a surge in nuclear power station construction, especially if new designs can be proved safe and smaller reactors can be more easily constructed.

An alternative view of uranium, and the one miners don’t like was aired earlier this year in the influential Lex column of London’s Financial Times newspaper which noted how the low-carbon factor had restored investor interest in the fuel.

But the flipside of the good news is a big inventory overhang which is slowly being absorbed, though perhaps not fast enough, and that’s before big (and low cost) uranium producers such as Kazakhstan’s national mining business, Kazatomprom, boost output.

Morgan Stanley counters the Lex argument by pointing out that higher prices can be expected in the near term as “commercial inventories are drawn down, investment demand continues, and mine supply remains below 2019 levels”. The bank has uranium at the top of its “commodity thermometer” as the hottest metal.

Uranium explorers to watch

For investors with an interest in uranium there is a smorgasbord of choice that includes:

Up 56% or $0.28 to $0.78 in the year to date is Deep Yellow (ASX: DYL) as interest grows in its portfolio of assets in uranium-friendly Namibia and a plan to become a producer of 5-10Mlb of low-cost uranium a year.

Confidence in the stock is boosted by its experienced management team.

More than 120% higher since the start of the year is Paladin Energy (ASX: PDN), which was last trading at $0.58.

A survivor from past uranium booms, Paladin is ready to stage a comeback with the restart of its Langer Heinrich mine in Namibia.

As it progresses plans to restart the Honeymoon uranium mine in South Australia, Boss Energy (ASX: BOE) has risen $0.07 (70%) in the year to date to last trade at $0.17.

Honeymoon has a long operating record and will be relatively easy to restart.

Lotus Resources (ASX: LOT) is up $0.075 (58%) in the year to date at $0.21 as it works on the restart of the Kayelekera mine in Malawi with plans to produce 2.5Mlb of uranium per annum.

Formerly Marenica Energy, Elevate Uranium (ASX: EL8) has risen $0.27 (196%) in the year to date and was last trading at $0.40.

Elevate controls the Marenica uranium project in Namibia and an extensive portfolio of uranium tenements in Australia.

Bannerman Energy (ASX: BMN) last traded at $0.18 and is up $0.082 (82%) as it moves towards development of the Etango-8 uranium deposit in Namibia.

After its ASX debut in mid-April, 92 Energy (ASX: 92E) has remained above its $0.20 IPO price and was trading at $0.28 late on Wednesday, as interest grows in its portfolio of uranium projects in Canada’s Saskatchewan Province.

In the long-term, the global decarbonisation theme is likely to ensure interest in uranium is maintained as nuclear power makes a comeback as a zero-carbon source of electricity.

In the short-term, share price influencing events will include a continuation of the rising trend in the spot-market uranium price (and news about long-term contractual prices) as well as the World Nuclear Association symposium to be held next week (8-to-10 September).