Big broker muses: How to play the uranium bull market?

Markets are always moving in cycles, and investing themes appear to bubble up and die away just as quickly as they arose. One thing is for sure, though: Aussie investors love investing in their favourite mining companies!

As we draw to the end of 2023, it feels like, thematically, this was the year of lithium’s demise and uranium’s succession. When we look at the price charts of each commodity, it’s clear the demand-supply dynamics appear to have shifted towards excess demand for uranium versus excess supply for lithium.

A tale of two commodities! Lithium carbonate vs Uranium charts. Source: Trading View

Local broker Bell Potter has weighed in on the ASX uranium sector today, in a research note titled “Uranium Sector Musings”, they highlight several reasons why uranium is growing in interest among global investors.

Firstly, Bell Potter notes a positive tilt towards countries recognising the need to expand nuclear power production in order to achieve the goal of net-zero emissions by 2050. The broker refers to the signing of a declaration by 22 countries at the recent COP28 conference to triple nuclear energy capacity. This declaration echoes a similar initiative that occurred at the World Nuclear Association symposium in September.

Bell Potter suggests that by their estimates, if the world were to achieve such a target, global consumption of uranium would increase from the current 161 million pounds U3O8 to “over 500 million pounds”.

On the contracting front, Bell Potter notes that a particular South Korean nuclear power utility recently put out to tender a contract to purchase six million pounds of uranium with a contract price of US$58/lb to US$90/lb for five years. As yet, no producers have taken a bite, and Bell Potter takes this as a sign of strengthening pricing power among uranium producers.

The current uranium spot price is around US$81/lb – so you can see why producers might be reluctant to lock themselves into that US$90/lb cap over five years. Bell Potter isn’t in any doubt as to who currently holds the balance of power in the market, “this is a suppliers’ market…”, they said. Security remains the paramount concern among uranium consumers, and there is presently a “lack of near-term options for utilities to draw on”.

“Higher prices are needed”

On uranium prices, Bell Potter notes that “Nuclear demands are increasing whilst uranium supply remains at risk”. The broker suggests “higher prices are needed” to stimulate the extra production required to bridge the looming gap between demand and supply.

There are some risks to a higher uranium price. Bell Potter suggests if the uranium price continues to rise, it will put pressure on the profit margins of nuclear power utilities which generally operate within a heavily regulated pricing structure.

Also, Bell Potter acknowledges the elephant in the room in terms of global uranium supply – Kazakhstan’s Kazatomprom. Kazatomprom is responsible for about two-fifths of global supply and the company’s own guidance indicates a production ramp up over the next few years. Bell Potter notes this factor “will be key over the coming years”, but also cites current market consensus which suggests Kazatomprom will be unable to meet their intended production goals.

“Ways to play it”

OK, so how can investors take advantage of a potential bull market in uranium? Bell Potter has a few favourites among the ASX-listed uranium cohort.

Boss Energy (BOE)

Bell Potter likes Boss’s stable and secure supply

Their first tip is Boss Energy (ASX: BOE) which they rate as a “Speculative Buy”. According to Bell Potter, Boss’s most attractive trait is its “stability of supply”, as well as the fact Boss’s Honeymoon mine operates in Australia, which they consider a stable jurisdiction.

Bell Potter also appreciates Boss’s “known asset and management team”. Bell Potter says its valuation for Boss Energy is $5.53, based upon a 10% premium to the broker's net asset valuation for the company.

Deep Yellow (DYL)

Bell Potter suggests Deep Yellow has an “attractive portfolio” of advanced projects

Bell Potter’s next tip is Deep Yellow (ASX: DYL), which the broker believes “has an attractive portfolio of two advanced projects in Namibia and Western Australia”. Also, since the Vimy merger, the combined company now has a “Mineral Resource Estimate (MRE) of 392 Mlbs U3O8, and an Ore Reserve of 110 Mlb”.

Bell Potter rates Deep Yellow as a “Speculative Buy” and has placed a valuation of $1.81 on the company.

Alligator Energy (AGE)

Bell Potter things Samphire is the jewel in Alligator Energy’s crown

Bell Potter’s final tip is junior explorer, Alligator Energy (ASX: AGE). Alligator Energy has two major projects in South Australia in Samphire and Big Lake, and the Alligator Rivers project in the NT.

Samphire, which is Alligator Energy’s most advanced project, is a proposed In Situ Recovery (“ISR”) operation near Whyalla, which has a resource estimate of 18.1 million pounds U3O8. Bell Potter labels this a “BOE style project” which could produce “~1Mlbs U3O8 production over a 12-year mine life”.

Bell Potter rates Alligator Energy as a “Speculative Buy” and has placed a valuation of $0.08 on the company.