In 1987 Paul Slovic, the famous decision theorist, published work into a theory of how the public’s perception of risk differs from what an expert would consider rational. The example that best illustrated this was that of nuclear power, which all groups ranked at, or close to, the most frightening in a list that included smoking, motorcycles and handguns.
Things haven’t changed much since. A recent survey of attitudes on different sources of energy from the Pew Research Center tied nuclear energy with fracking, both of which marginally pipped coal to the post for the prize of least-popular energy solution in the US (renewables win the branding competition).
One might expect the stockmarket to be better informed and closer to the experts in Slovic’s study. After all, participants have a financial incentive to be right. But sentiment here doesn’t seem much better. The industry market capitalisation of uranium miners has fallen by 92% from its peak, from around $130bn in 2007 to $8bn today. The uranium price has gone from $130/lb to $25. The number of uranium miners has gone from around 400 to around 40.
The current narrative around nuclear is that it’s just too dangerous. Who knows when the next Fukushima, Three Mile Island or worse, Chernobyl will be? And why take the risk? Natural gas prices have collapsed thanks to fracking and innovation is lowering the cost of installing renewables every year. This, continues the narrative, is why everyone is shutting down their nuclear-power plants. In the US, for example, the Energy Information Administration projects nuclear generating capacity to decline by 99.3GW to 79.1GW by 2050.
Even if what we’ll call the “dangerous, dear and dying” narrative was correct (which it isn’t), I’m going to show you that the current uranium price is uneconomically low – even if the nuclear industry has no future. We’ll then better understand how phenomenally attractive current valuations are when we realise that in reality it has a very bright future.
The opportunity in nuclear
Uranium is the basis of the fuel that powers nuclear-power plants. The market is a duopoly consisting of Kazatomprom and Cameco, who control around 60% of the market. The most expensive item in the production of nuclear-powered electricity is the capital cost of the plant, which will typically be around $8bn-$10bn for a 1GW reactor. The uranium cost is negligible, so large declines don’t make nuclear a more economically attractive energy option any more than large increases make it less so.
Deals between utilities and miners are usually done bilaterally using long-term contracts. There is a spot market, but it is not large or liquid and consists primarily of inventory tweaking by other players in the value chain (eg, conversion services). The “term price” of around $30/lb has fallen by nearly 70% since peaking in 2007. Partly, this mirrored similar industry dynamics throughout the commodity complex in the early 2000s, after most of the industry was caught out, starved of capital during the tech bubble and downsized for a low-growth future, just as China’s rapid industrialisation was taking off. Uranium buyers suddenly found themselves contracting into a highly supply-constrained market.
By the turn of the decade, nuclear-power plants were being planned by governments left, right and centre: the US, China, Russia, Japan, Korea, Taiwan, Sweden and the UK all looked to boost their nuclear capacity. Other EU countries such as Italy, Spain and Belgium were reassessing their own nuclear policies. Fifty countries (mostly emerging markets) declared an interest to the International Atomic Energy Agency (IAEA). It was music to the uranium miners’ ears.
The global shutdown
Then, in March 2011, an earthquake off the coast of Japan triggered a tsunami that hit the island just north of the Fukushima district. The nuclear plant at Onagawa was protected by its 46-foot seawall. The reactor shut down as planned, no radiation was released and no one was hurt. Further down the coast though, things didn’t go so smoothly. The seawalls weren’t as high as those in Onagawa, which meant the back-up generators were flooded. There was no way to cool one of the damaged reactors. An explosion saw the release of radioactivity into the environment. After this happened, Japan took its entire fleet off line.
Japan shut down all but one of its nuclear plants, while Germany accelerated existing plans to decommission its entire nuclear fleet. Even France, one of the oldest proponents of nuclear in the world, wobbled, saying it would shut down 20 of its 58 power stations. The uranium market collapsed, not only because of the excess capacity, but because demand collapsed too. The nuclear winter had begun.
Yet the current term price of $30 is nowhere near enough to satisfy annual consumption of around 180 million pounds. Estimates of the industry’s marginal cost of supply are currently at least $50, although it’s not clear why even that price would necessarily make sense for the industry. Current prices, roughly equal to the cost of production at the McArthur River mine – the largest uranium mine in the world – haven’t been enough to prevent a suspension of activity there by its owner, Cameco.
In a report from the third quarter of 2019, the company states: “We will not produce from our tier-one assets to sell into an oversupplied spot market. We will not produce from these assets unless we can commit our tier-one pounds under long-term contracts that provide an acceptable rate of return for our owners”. Production at three of its other mines remains suspended at the time of writing. Cameco isn’t the only one talking the talk. Kazatomprom has also suspended production at key mines in the last few years. Paladin Energy with its two mines in Africa has curtailed production and the US Department of Energy’s transfer programme has been suspended.
The squeeze on uranium
How much downside can there be here? Miners are saying very clearly that they will not supply the market at these levels. You might think that for prices nevertheless to remain at such depressed levels there would be no demand. But it’s not quite that simple.
As already stated, most uranium transactions take place bilaterally, covering a period of several years. Once a utility company buys the ore, it takes a couple of years for it to be processed and enriched into something that can be used as fuel. All purchases will be made to manage and secure the expected inventory required over the next seven to ten years, so there is rarely an immediate need to buy. So utilities have waited as the price has fallen. Then again, without fuel, you can’t produce electricity. Buyers don’t want to be forced into a costly shut down. So a panic-buying squeeze is plausible under the right conditions.
How close might we be to those conditions? According to UX Consulting, the last big long-term contracting round was in 2012. Deliveries for that round are likely to have peaked in 2018. So maybe – now? It’s even possible that we’ve already seen the canary in the coal mine in other parts of the value chain. The processing and enrichment players followed a similar cycle to the miners: building out too much processing capacity in a fit of collective overexcitement, just as Fukushima forced a rethink of nuclear power and a collapse in demand. The market for conversion services was suddenly badly oversupplied and the prices cratered, bottoming at $5/lb in 2017.
Since then though, a large conversion facility in the US shut down, bemoaning the uneconomic environment. Prices have risen by a factor of four. And this has done so without any nuclear renaissance. Why will the uranium prices be any different? If prices make new highs, we’ll be looking at gains of around five times from current levels.
The coming nuclear power renaissance
So far, so tantalisingly asymmetric. Let’s now zoom out a bit and go back to where we started, which was the “nuclear has no future” narrative. Remember? Nuclear is dangerous and uncompetitive given the collapse in the cost of renewable generation, which is why the world is gradually turning off its nuclear plants? Right? Wrong.
Let’s start with the supposedly growing cheapness of renewables. It’s true that the unit cost of solar and wind has fallen sharply over the past ten years. The problem is that those lower solar and wind unit costs haven’t translated into lower electricity prices for the countries that have used them.
The problem isn’t related to the cost of the units but to their fundamental unreliability. For example, in 2015 and 2016, Germany added 10% more wind capacity but only generated 1% more electricity from wind, because it wasn’t very windy in those years. Solar, obviously, can only generate electricity when the sun shines. So for most of the year during the morning and evenings – the time of peak electricity demand, the supply of solar disappears. During the daytime, the opposite happens. Demand is low but sun is abundant, so prices crash. Indeed, on very sunny days, solar can overproduce to such an extent that prices go negative.
These intermittency problems put the German grid under significant pressure in 2017 as the country integrated more wind and solar (7% and 12% respectively). More than one hundred times that year electricity prices went negative during the day, as operators had to pay large buyers (usually in neighbouring countries) as much as six cents/kWh to avoid overloading the grid (standard electricity prices internationally are around ten cents/kWh).
This is obviously a huge cost for the operators, which ultimately shows up in the price end-consumers have to pay. Similar types of problems have been encountered in California, which with 10% solar generation has had to offload electricity to Arizona and in China, which has had to vent (“curtail”) coal-produced electricity to give priority on the grid to that created by suddenly strong wind.
You might think that batteries would be the solution here and you’d be right. Except it’s a very, very distant solution. Bill Gates has invested more than $1bn in renewables. He said in 2015: “There’s no battery technology that’s even close to allowing us to take all of our energy from renewables and be able to use battery storage in order to deal not only with the 24-hour cycle, but also with long periods of time where it’s cloudy and you don’t have sun, or you don’t have wind”. Renewables are a welcome and necessary addition. But they are fundamentally ill equipped to comprise more than 10%-15% of most grids. For baseload, necessary for the surges, there are only three possibilities: coal, natural gas and nuclear.
Coal is, of course, highly polluting. Natural gas is cleaner and dumps only half as much carbon into the atmosphere. But it’s not actually that cheap outside of the US. In China, for example, nuclear is cheaper than gas and nearly competitive with thermal coal. Nuclear is 100% carbon free and completely clean.
Nuclear power: safer than you think
“Except for the accidents!”, you’re probably thinking. Yet it might surprise you to know that in both Three Mile Island and Fukushima, the problem wasn’t so much the accident, but our panicked response to it. According to Tetsuya Ohira, an oncologist at the Fukushima Medical University, the speed of the evacuation and the lack of medical personnel accompanying vulnerable residents from nursing-care facilities resulted in a situation where “scores of patients died in an evacuation that was supposedly intended to minimise radiation exposure. The life-threatening risk to these people was not radiation, but discontinuation of daily medical care”. The problems caused by the Three Mile Island accident were very similar. When the reactor partially melted down the container worked. No radiation leaked into the surrounding area. The problem, again, was the panic.
The pioneering behavioural psychologist Paul Slovic, mentioned above, had this to say about the incident: “the accident at the Three Mile Island nuclear reactor in 1979 provides a dramatic demonstration that factors besides injury, death and property damage impose serious costs. Despite the fact that not a single person died and few if any latent cancer fatalities are expected, no other accident in our history has produced such costly societal impacts. The accident… devastated the utility that owned and operated the plant. It also imposed enormous costs on the nuclear industry and on society, through stricter regulation (resulting in increased construction and operation costs), reduced operation of reactors worldwide, greater public opposition… and reliance on more expensive energy sources”.
Chernobyl was different. Radioactive materials leaked and people died. But how many? The majority of the initial casualties were those working on the site, or sent to the immediate scene to extinguish the fire. We don’t know how many of the 1,000 or so initial workers died of radiation exposure, but let’s assume the worst and say that all of them died. Ultimately, it’s been estimated that about 600,000 people were registered as emergency recovery workers and 5,000,000 were inhabitants of designated “contaminated areas”. Of these last, virtually none were exposed to anything more than background radiation and most suffered less exposure than a person living high up in a mountain range, where background radiation is higher.
A more useful narrative
Overall, there may have been as many as 5,000 killed by the Chernobyl disaster, which, unlike Three Mile Island, was a disaster. But 5,000 is roughly how many coal miners died in one year (2006), in China alone. And Chernobyl was and is the very worst nuclear power accident that has ever been experienced. In Henan in 1975 the Shimantan Dam burst during a typhoon, killing 171,000 people. Yet few think that good enough reason to cease hydro production.
You may well wonder why, if nuclear is so clean and safe and cheap, the world is scaling back its nuclear ambitions. Well, the answer is – it isn’t. It may be the case that we pay too much attention to what the US and Germany are doing, extrapolating that into some kind of proxy for what “the world” is doing. Or it may be that we’re just not paying attention. France never did shut down any nuclear plants, while Japan is bringing its plants back on line. More importantly, China is as serious as it ever was, as are Russia and India.
So the “dangerous, dear and dying” narrative is all wrong. Usually, when everything everyone says about something is wrong, there’s an enormous opportunity at hand. We talked earlier about the extraordinary commodities bull run of the early 2000s, when Chinese demand exploded just as supply had been crunched. Fortunes were made. I think that’s what’s basically about to happen in uranium.
• Dylan Grice is the co-founder of Calderwood Capital. This story is reprinted with permission from the firm’s newsletter, Popular Delusions. Sign up to receive it at calderwoodcapital.com/subscribe. With special acknowledgement to Segra Capital Management for their uranium investment contributions (contact mike@segracapital.com for information)