Although many people consider oil to be the world's most hated commodity right now, in actuality, this title falls upon oils much disliked brother, uranium. Since the Fukishima disaster in 2011, the spot price of uranium has fallen from a high of $136 in 2007, to its current price at $33.75; much of this price gain occurred from 2005 to 2007 during the uranium bubble, which seemed to have been sparked by fears of short term supply issues secondary to a major flood in Cigar Lake, an enormous reserve of uranium.
For several years, it seems the whole world had moved against nuclear energy over fears of another Fukishima, as we are still dealing with the unknown consequences of this disaster today. Many nuclear plants were canceled, and many plants that were deemed to be in high risk locations were closed (especially in Japan); for quite some time, it seemed pretty bleak for the uranium industry. However, within the last few years, growth in demand for nuclear sites have created a new area of growth for the uranium industry. There are currently 67 nuclear plants in planning or construction throughout the world, with the majority to be built in China, Russia, and India. The list can be seen in the image below, sourced from the Nuclear Energy Institute.
There are many articles, however, discussing the eventual rebound in the uranium industry due to these nuclear starts, and I don't want to beat a dead horse. The price of uranium has two additional growth sources that are almost never discussed: the emergence of electrical vehicles and the decline of the oil and coal industries. Although there is a significant amount of debate as to when the shift towards electric vehicles will occur, it seems reasonable to estimate that within 30-40 years, we will have the vast majority of the worlds vehicles being electric. This will put an enormous pressure on the grid, while at the same time more traditional electricity production methods such as coal, are being phased out. Much of the eventual decline in demand oil will be accompanied by a growth in demand for electricity, yet despite this eventual inverse relationship, both commodities are very cheap right now. Therefore, not only is uranium a great market to consider investing in right now, but it also offers somewhat of a hedge if you are exposed to oil companies.
It is no secret that electrical vehicles are changing the way that we move about in the world; we are just scratching the surface right now, and this industry will continue to grow in the near future. Almost all automobile manufacturers are spending research money on electrical vehicles, and many companies have already released electrical models such as Nissan (OTCPK:NSANY), Ford (NYSE:F), and General Motors (NYSE:GM). Other companies, such as Tesla (NASDAQ:TSLA), have become increasingly popular as a 'pure' electric vehicle play, despite awful fundamentals underlying the company. We know that many parts of the United States are already experiencing pressure on their electrical grid to try and accommodate the insurgence of electric vehicles; this trend will get much worse with time as the US will likely continue to be a leading market for electric cars. The majority of the United States' electrical energy is produced from coal. However, due to carbon emission concerns, it is likely that this industry will be increasingly phased out in the future, as can be seen by the share prices of formerly great coal companies such as Peabody Energy (NYSE:BTU) and Cloud Peak Energy (NYSE:CLD).
I think almost everyone is in agreement that electrical vehicles will replace combustion engines eventually, however, the question is when? I covered in a previus article as to why electric vehicles will not ever completely replace oil, and it may provide some additional background. The Energy Information Association, far from an unbiased source, estimates that by 2040 aproximately 95% of vehicles will still be powered by combustion engines. I personally find this estimate far too conservative, however, I would believe this statistic over claims that electric vehicles will completely replace internal combustion engines by 2040. In reality, the truth is usually somewhere in the middle of the more extreme claims.
We have had many improvements in the efficiency of various products over the years, such as with computers, refrigerators, and many other technologies. However, despite this trend, per capita electricty consumption around the world has increased slightly on average, although there are many countries that were exceptions to this rule. Compound that with the growing world population, and the large number of countries that are moving from developing to developed, and it is very clear that this trend will continue to grow for decades to come. Finally, adding the impact of electrical vehicles to the mix, and it no longer becomes a debate: We will absolutely be using more electricity in the future.
Fortunately we already have years of data on electricity consumption across the world, and the trend has been continually upward. I have attached a chart below showing the growth in electricity demand throughout the world over the last few years.
Many speculate that alternative energies such as solar or wind power will eventually fill the gap, however, a closer look at the data does not reveal this. Aproximately 22% of the worlds energy is consumed by renewable resources, however, the vast majority of this is done through biofuels, which are incredibly inefficient, and are not as beneficial to the environment. Furthermore, the environmental cost of producing solar or wind projects may actually exceed the benefits from carbon reduction. There are other forms of renewable energy such as hydro-power, but this also has limitations due to geography, while also disrupting the local habitat of rivers.
Looking closely at solar energy, which has the best outlook of all the renewable sources, still has many limitations. First, the production of solar panels is ironically devastating to the environment. There are tailing ponds in China that are wreaking havoc on the local ecology due to the toxic metals that are required to produce solar panels. In addition to this, there is the cost of mining and manufacturing the metal, both of which are very costly from an environmental perspective. Finally, solar panels are vulnerable to damage, and require significant maintenance to maintain functionality.
The next best alternative energy source is wind power, which also shares a number of limitations. Wind turbines are very large, and like solar panels, require a huge amount of natural resources to simply produce the turbine. Maintenance can be very expensive on wind turbines, and many locations have been plagued by constant damage such as when they are in the flight paths of birds. Just like with solar energy, unless there is a dramatic improvement in technology, there is no way that wind power can effectively provide the majority of the worlds electricity.
Despite being considered a renewable resource, biofuels are actually incredibly inefficient, and produce large amounts of carbon as a byproduct of burning; this is increasingly used in very poor countries, however, this industry has very limited large scale uses. Several authors have pointed out that if biofuels became the primary source of electricity, we would have worldwide famines in a relative brief period of time.
The coal market has been hit the hardest in the last few months, especially more recently as the world contemplates the long term pricing of carbon. Despite this trend, coal is still the largest source of electricity in the world; in fact, even in the United States it is the most common source of electricity. Although we have more than enough coal to last us several generations, it appears that the trend is moving towards complete elimination of the industry, at least in the wealthier Western nations like the United States and Canada.
Although we still do not have a solution on what to do with leftover nuclear waste, there are essentially no environmental consequences to nuclear energy if the waste is kept safe and there are no accidents. Unfortunately, when there is an accident at a nuclear plant, the consequences can be absolutely devastating, and are difficult to wipe from memory. Chernobyl absolutely devastated Russia, and much of the area cannot be lived in to this day. Safety improvements in technology have prevented another Chernobyl, yet other accidents still occurred. Despite the up to 1 million deaths caused from cancer after Chernobyl, we have never had any other accident that really compares with respect to damage. The next closest example of course, was Fukishima; this incident has been very stressful as we still do not know the full impact of the damage. We know that the cause of this meltdown was due to the earthquake and tsunami that hit Japan, and there has already been a movement to decommission all nuclear plants that are located near fault zones, as well as near the ocean. Despite these awful tragedies, we have learned a great deal from them, and policies and procedures have changed across the entire world.
Nuclear power is an incredibly efficient electricity source, which cannot be matched by any of the competing energy sources. As of 2012, 10.9% of the world's electricity is produced from uranium. There are also a large number of nuclear power plants that are currently under construction, or are planning construction, as can be seen earlier in the article.
How to Invest in the Nuclear Industry?
Hopefully by now you have read the whole article, and even researched some of the references that I provided to see the data for yourselves. It is quite obvious at this point that a combination of the increased demand for electricity, the move away from coal powered electricity, and the failure of renewable energy sources to fill the gap, will ultimately result in a major worldwide shift towards the only remaining option: nuclear energy. This trend, despite the lack of movement in the uranium market, has already started in Asia, and it is only a matter of time before it spreads to the West.
The best way to capitalize off of the growth of the nuclear industry is to invest directly in uranium mining companies, of which there are quite a few in existence today. Many companies are pure play uranium miners, in which they specifically mine just uranium; other companies, usually gold and silver mining companies, mine uranium as an adjunct to their other revenue sources. Barrick Gold (NYSE:ABX) is perhaps the best example of this, as they are the largest producer of gold in the world, while also having substantial uranium deposits. The more diversified companies offer much more of a hedge as their business is exposed to a number of larger variables; most often the success of these companies depends upon a combination of the strength of the US dollar, and the nuclear industry.
When looking at the pure-play uranium miners, there are a whole range of companies to choose from including from the pre-production phase, to relatively large uranium producers such as Cameco (NYSE:CCJ). Cameco Corporation is the world's largest producer of uranium, and currently is responsible for approximately 20% of the world's uranium production. I have spent a fair bit of time researching a number of uranium companies, and have come to the conclusion that Cameco offers the best long term buy on nuclear energy. There are many much smaller uranium companies, however, I have yet to find one that I like as much as Cameo; in fact a very significant number of these companies, in a sustained depressed uranium price environment, will likely become insolvent. However, if you are absolutely convinced of a relatively short term rebound in the price of uranium, I would strongly recommend one of these distressed companies; I personally do not believe that uranium will suddenly rise, and think that it is very likely for a uranium prices to remain relatively low for several years as the aforementioned trends discussed in this article will occur over several decades. However, once this uranium growth trend becomes accepted by the mainstream, the value opportunity will be long gone.
Despite the anticipated growth in demand for uranium, there has not been a comparable increase in supply. It seems that most of the other companies do not have the capital to invest into the market right now, and many of these companies will only be able to grow in the event of a rise in the price of uranium. Across the board, Cameco corporation seems to be the only company that is meaningfully increasing their uranium production in the downturn, and it does not seem possible that Cameco's production will offset all of the growth in the demand, suggesting that prices will rise in the medium term.
CCJ data by YCharts
Cameco currently produces a fifth of the world's uranium, while maintaining slightly positive earnings after impairments for the first nine months of the year. Cameco focuses on low cost uranium mining, and has been willing to be patient to reap these rewards; most of the other uranium companies have cost of production which is much higher than Cameco. Cameco has been able to significantly increase their production during the uranium downturn, with much of the production coming from their Cigar Lake project, which has recently surpassed production estimates by producing over 10 million pounds, greatly exceeding the estimate of only 6 to 8 million. Cameco has been able to maintain fantastic cash flow over the last few years, which has allowed Cameco to continue to grow their operations in the downturn. There seems to be no end in sight for Cameco to continue to be able to grow while uranium prices are depressed, which makes Cameco the perfect rebound play on Uranium.
I am planning on covering a small number of uranium companies over the next few weeks and months, starting with Cameco Corporation, to suggest some recommendations based on various levels of risk. If you are unable to wait for these publications, then I strongly recommend starting your research on Cameco, and working your way downward. I will also be covering some gold mining companies in the future, which will include non-pure play uranium miners such as Barrick Gold.
Based on all of the available data, it seems very clear that the world's demand for electricity will continue to rise at a relatively substantial rate; renewable energies will not be able to replace the phasing out of coal, which suggests that unless there is an unexpected massive technological breakthrough, the world's electricity will be produced from nuclear energy sources which derive their power from uranium. The uranium market has been depressed for years, and there are a large variety of pure-play and diversified miners in the uranium market; based on this information, it seems that Cameco Corporation offers the best long term play on the growth of nuclear energy for the conservative investor.
Disclosure: I am/we are long CCJ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own Cameco on the TSX
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.