Which ASX companies are best positioned to capitalise on uranium demand?

It feels like only a short time ago that nuclear energy – and uranium – were distinctly out of favour. The explosion of the power plant in Fukushima was front of mind, and there was a number of plants that were shut down in the aftermath.

Yet, in a world where we are increasingly seeing power shortages and the need to push towards greener forms of energy, nuclear power is starting to look like a viable and complementary option. Suddenly, we’re looking at uranium in a way we haven’t for years and it’s propelling prices. But which companies can capitalise on the increasing demand before supply ramps up?

“In our view, the opportunity in uranium is who is going to be in production in the next half-decade. Because after that, there could be a lot more mines. That’s when you could see the uranium price – which has now gone from $30-$40 a pound to circa $90 – start to peel off," says Stephen Wood, co-founder and portfolio manager for Eiger Capital.

"For now, it takes a while to get a mine up. If you’re in production, now should be your time."

In this episode of The Pitch, Wood discusses why nuclear energy has become complementary to the green transition, how it has fuelled the rise in uranium prices, and two ASX companies currently positioned to take advantage of the demand.

Note: This interview was recorded on Wednesday 27 March 2024. You can watch the video or read an edited transcript below.

https://youtu.be/-5DTbh2v7rg

EDITED TRANSCRIPT

Why is nuclear energy complementary to the green transition?

Wood: The thing about a nuclear power plant is while the upfront cost is often quite high, the plants have an extremely long life. There are nuclear facilities that were built in the '60s that are still running. The fuel costs are relatively low because of the monumental energy density that is in uranium, certainly a lot lower than what is needed in a gas or coal-fired plant on a given day, because a lot of material needs to go into those.

The cost of moving the uranium around is trivial compared with shipping coal out of Newcastle up to China or Japan, or to moving LNG around. Shipping uranium around in a bathtub is trivial.

You have a very long plant life, a plant whose fuel costs are relatively low once you get it built, the fuel itself is extremely cheap and easy to move around. What you have with a nuclear power plant is very low marginal costs once you have it up and running. And, of course, zero emissions in terms of CO2, methane and all the things we’re trying to abate.

What does this mean for the outlook of uranium prices and what other key drivers are there?

Like all commodities, it all comes down to how much has been invested, what is available, and how quickly people can get supply if demand goes up. This is where we go through, for lack of a better term, a "Fukushima" cycle where we go back 15 years and uranium is trading at $70 a pound. We’ve got the world industry looking at reactors, particularly in China, as a way to generate a lot of energy and provide some form of diversity and self-sustaining nature to their energy requirements. Then Fukushima hits, the nuclear industry basically stops and over the course of three-quarters of a decade, the uranium price goes from $70 a pound to $30-$40. In that phase, mines are shut down all over the place. It’s mothballed at $30-$40/pound.

That’s pretty typical of a commodity cycle. The price gets low, enough supply comes out of the market and then something changes with demand – or it may go the way of lead, where it just becomes less wanted and slips away forever.

Four or five years ago, the nuclear industry globally went through a massive renaissance. It dawned on people that there was a base load power problem. This is a great technology to help firm up solar and wind or complement pumped hydro. The world over, we’ve now got a massive renaissance in the construction of reactors, particularly in China and India, the US, Korea, and the Middle East, including the UAE.

The real opportunity for an ASX investor is the commodity cycle. There is little doubt, given hundreds of reactors will be built in the next decade, that at the end of the day, the world is not short of uranium. What is comes down to is who is in production in the next half-decade when all of that underinvestment comes home to roost.

If you happen to be in production in the next half-decade, you get to cash in. It’s safe to say that if the nuclear industry keeps going the way it is, and the outlook gets better and better, there will be more and more mines. Despite the fact you might need five times as much uranium in 10 years’ time as you need now, what is also likely is that supply might go 5 times or 10 times. The real opportunity, in our view, is now the next half decade.

It is a bit like lithium. Lithium had been through a big downturn. EV cars were meant to come and a lot of lithium mines were closed. Then it did come and the mines that kept running and hit pay dirt. Now a lot of lithium suppliers have come and the EV industry has hit a plateau. Everyone is questioning, why is the lithium price in the toilet?

In our view, the opportunity in uranium is who is going to be in production in the next half-decade, because after that, there could be a lot more mines. That’s when you could see the uranium price – which has now gone from $30-$40 a pound to circa $90 – start to peel off. For now, it takes a while to get a mine up. If you’re in production, now should be your time.

Can you share a few examples of how you are investing in this space?

For us, it’s about the next half-decade. You’ve got to be in production now or very soon.

Boss Energy (ASX: BOE), which is a brownfields operation in South Australia had an existing mine that was closed. They’ve been revitalising it for the last two to three years and then they’re going to take it into production in the June quarter. It will take a couple of years to ramp the mine up, but they’re going to have product available in the back half of this year and prices are high. Even if they have a few hiccups around ramping up the mine, you just get to smooth those over at $30-$50/pound. You’ve really got to be on top of your game if the price has dropped $20-$30/pound. At $90/pound, it’s a great time to be launching a mine. So we like Boss Energy.

The other one that, also a brownfields mine and a market darling around 2006, is Paladin Energy (ASX: PDN). Their mine is about twice the size of Boss Energy’s and is in Namibia. It’s one of the most stable environments to invest in Africa. They’re back online in the September quarter. They’ve been reinvesting in bringing that mine up to speed over the last 18 months.

Boss Energy is going into production soon, but we’ll have a slower ramp-up. Paladin goes into production and has a bigger mine in the back half of this year and will probably ramp up a bit quicker. So either of those.

There are plenty of listed alternatives to those two on the ASX, however none of them are going to be in production. We’re not prepared to project what the uranium market will look like in four to five years, so you’re better off investing in the companies that can generate a lot of cashflow in calendar year 2025-26.