Going Nuclear: 3 Indices, 1 ETF and Seeking Alpha

Over the past decade, investing in energy has been a standout theme for investors. With growing emerging economies, looming climate change, and the specter of peak oil, energy promises to remain in the scope of investors for years to come.

One area of interest has been nuclear power. Nuclear offers the benefits of zero carbon emissions and is well suited for large-scale, base-load power generation. Indeed, nuclear waste is an issue, but with proper planning and policy, waste can be managed. For investors, the main concern is how best to capture the nuclear economic opportunity? I am fortunate to have a professional investing background and the opportunity to be currently employed in the nuclear power industry. Quite possibly, I have unique insight. That being said, nuclear power once dormant, now burgeoning, is widely misunderstood - leading investors to make to make choices based on misperceptions. I'll share some insight, hoping to add some alpha along the way.

Let me start by stating that from an investor's standpoint, nuclear power is just getting started. For the past 30 years, the industry has seen little to no growth. Newly planned projects and those underway will dramatically change the growth prospects for dozens of companies and promises to supply plenty of opportunities for investors. Unfortunately, investors enthused about these prospects have chosen uranium producers as the primary proxy for the nuclear sector.

Don't get me wrong, I am not a uranium mining basher. I am simply trying to shed some light on the dynamics of the industry. The nuclear fuel market by my estimation is a $16 billion annual market. According to the Energy Information Administration, total dollars spent on uranium in 2006 was $1.2 billion. That figure won't be much different for 2007. Taking into account the dramatic price rise of uranium, it would be safe to project annual uranium sales will reach $4 billion to $7 billion over the next 5 to 10 years.

Still, as you can see, uranium remains only a portion of the nuclear fuel market. Furthermore, a meaningful share of the uranium market is largely unavailable to investors. For instance, Russian military excess uranium inventory makes up at least 10% of the uranium supply. As a first lesson, get involved in the total nuclear fuel market. Not just it's smaller sub-sector. Seek out the miners, but don't leave out the enrichers, fabricators, technology and service companies, and (unique to the industry) those that handle the spent fuel.

Of course, as new power plants come online, the demand for uranium will increase. But, that is years down the line. In the meantime, outsized gains will be made by those building and deploying the new power plants. According to a 2008 Congressional Research Services report on nuclear fuel, there are 27 reactors currently under construction globally. Planned and proposed reactors total 208. Using a conservative figure, $2.5 billion per project, capital spending for current projects is roughly $67.5 billion (or, $10 billion per year). Planned projects add up to $520 billion - assuming a conservative 20-year timeframe, planned capital spending comes to roughly $26 billion per year. Estimates notwithstanding, revenues from power plant deployment presents a tremendous opportunity for investors - clearly, one that should anchor the nuclear power investment theme.

There are very few investment vehicles in the nuclear industry. Again, we are at the start of what appears to be a long growth phase - mistakes and misperceptions will be made…nothing to be ashamed of, but potentially costly nonetheless. Let's take look at the 3 nuclear indices and the one exchange trade fund [ETF].

First, the DAXglobal Nuclear Energy Index and the Market Vectors Nuclear Energy ETF (NLR). This ETF mirrors the DAXglobal Nuclear index, and it's the only nuclear ETF currently available. The index sector breakdown is as follows; 42.2% uranium mining, 25.6% plant infrastructure, 24.0% nuclear power generation, 4.6% uranium storage, 2.3% uranium enrichment, and 1.3% nuclear fuel transport. This index and the associated ETF are missing out on the lion's share of nuclear power related revenues. Furthermore, the index is heavily weighted towards a very narrow segment of nuclear power generation, namely uranium. I believe this index is more a uranium index with added nuclear components. The DAXglobal Nuclear Energy Index and the Market Vectors Nuclear Energy ETF poorly represent the real nuclear energy industry.

The Ugly

Second, is the S&P Global Nuclear Energy Index. The index sector breakdown is 50.7% nuclear energy production and 49.3% nuclear energy materials, equipment, and services. Amazingly, the nuclear energy producers listed in the index are large diversified utilities with nuclear power generation playing only a small portion of the revenues generated in this group. The top ten holdings in the S&P nuclear index account for 70% of the index. Uranium companies make up 20% out of the 70%. Utilities make up 33% out of the 70%, leaving 17% out of the 70% to players that would benefit from the current and coming build out. Looking at the data, this index is more of an electric utility index with added nuclear components. Like the DAXglobal(sm) Nuclear Energy Index, the S&P Global Nuclear Energy Index will be hard-pressed to capture the economic opportunities offered by the nuclear renaissance.

And, The Good

Last, we have the World Nuclear Association [WNA] Nuclear Energy Index. Here's the breakdown of the index; 25% power generation, 25% technology/equipment and services, 20% nuclear fuel, 15% reactor vendors, 15% construction. The WNA index is comprised of 66 companies of which 7 are uranium miners making up 15% of the total.

Looking at this data, it is clear that this index is more levered to the real nuclear economy. The index is well balanced, diversified and truly global. Is it perfect and beyond critique? No. But, for what is available to investors today, this index hits the mark. I don't know who or how the DAXglobal(sm) Nuclear Energy Index and the S&P Global Nuclear Energy Index were constructed, but I do know that the WNA Nuclear Energy Index Committee is comprised of John Ritch, Dr. Zack Pate, and Joseph LaCorte. I don't know Mr. Ritch or Dr. Pate personally, but I can tell you that they are industry insiders with decades of experience. The composition of their index reflects a very unique industry perspective. Used properly, the WNA Nuclear Energy Index can be a valuable tool to investors, industry analyst, bankers, and companies within the industry. In the coming quarters, there are sure to be ETFs based on the WNA index. Investors and ETF providers should make note.

In closing, I want to emphasize one last point. Indices and ETFs are important tools for intelligent investing. Yes, if you're not using them, you're not investing wisely. Even if you never own an ETF, these tools are valuable for measuring and benchmarking. As an investor, measuring against proper benchmarks allows you to make more accurate assumptions and properly measure performance of individual companies, investment portfolios, mutual funds, other market sectors, and the overall general market. Measuring performance and/or investing along side in poorly designed (or misguided) benchmarks can prove very costly in the long run.

Disclosure: none

Comments

[JohnB:]

How can one invest in WNA?

2008 Feb 19 10:42 AM

[SGriskonisJr:]

world-nuclear-news.org...
According to this article will be available in March

2008 Feb 19 11:18 AM

[wunderhof:]

wna.snetglobalindexes....
The list as of 12/07.

2008 Feb 19 01:21 PM

[Bermark:]

Here is a Canadian Mutual Fund that is all uranium miners
www.middlefield.com/ur...

2008 Mar 01 11:00 AM

[trinity:]

What's the best way to invest in the pebble bed techology?

2008 Mar 01 02:12 PM

[user117:]

hi, is there a way to invest in this index that you highly recommended? (wnai index) thanks

2008 Mar 20 06:46 PM

[starboard:]

Right on. Another approach is to try to access the nuclear power build out by addressing companies that are involved in the entire nuclear power spectrum---engineering firms, reactor manufacturers, equipment suppliers, maintenance services, low level radwaste disposal, in addition to uranium miners and fuel cycle suppliers. I like to look at each of these potential investment segments. There are some opportunities out there but these are limited by constraints (the need to go to foreign exchanges, avoiding huge industrial conglomerates whose nuclear busineess is a tiny % of the company, etc.) I have picked some stocks but I feel that it may be a long time before the market recognizes their potential. In closing, your insights are some of the best that I have found.

2008 Mar 20 07:21 PM

[zawy:]

Uranium has increased 470% in the past eight years. I wonder if this nuclear fuels expert cashed in on that up trend. And although nuclear production has languished, at least entergy sure has had a pretty good run the past 20 or so years, up a factor of 12.

2008 Apr 03 08:22 PM