By Chris Berry (@cberry1)
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· A full five years after the meltdown at the Fukushima-Daiichi nuclear facility very little has changed within the nuclear industry.
· Nuclear power’s contribution to the global electricity mix remains steady at roughly 11% according to the IEA.
· Globally, the nuclear fleet numbers 440 in size across 30 countries requiring around 170 million pounds of uranium. 66 reactors are under construction and another 173 are planned.The existing fleet generates 382 GW of electricity.
· The uranium market is adequately supplied with current demand at 172 million pounds of U3O8 and primary supply of 146.5 million pounds plus secondary supplies of 42.9 million pounds as of 2014.
· The current uranium spot price of around $28 per pound reflects an evolving dynamic consisting of excess supply, reactor underfeeding (excess enrichment capacity), and uncertainty around the Japanese reactor fleet where only three of the 54 reactors are back on line.
· Current prices are too low for producers to consider major capital investments with many believing that the incentive price is ~$65 per pound.
· The recent Paris COP21 agreement, whereby 193 countries agreed in principle to move towards carbon-free sources of energy is a catalyst for cleaner sources of energy. Nuclear currently stands alone as the single scalable source of base load electricity. Japan’s intention to re-start a select number of reactors in their existing fleet going forward is also a positive catalyst, though many are disappointed that this hasn’t happened sooner.
· Another tailwind has come from the strength of the US Dollar. The USD has appreciated by 16% against the Canadian Dollar, 29% against the Kazakh Tenge, 20% against the Australian Dollar, and 59% against the Russian Ruble – all major uranium producing jurisdictions. This has alleviated producer margin compression somewhat.
· New reactor technologies, including Small Modular Reactors (SMRs), are a welcome sign but could be indicative of lower long-term uranium demand. This will be an interesting dynamic to watch closely.
· Despite the many paradoxes, uranium remains critical to the growth of zero-emission base load electricity; I believe the underperformance of a basket of uranium names demonstrates a unique contrarian opportunity in a moribund commodity sector.