Uranium has become a hotspot in the commodity market this year. The price of this energy metal recently broke through the integer threshold of $100 per pound, marking the first time since 2007. The significant increase in uranium prices has also led to a continuous rise in uranium stocks. For many commodity investors, especially those who have missed out on previous opportunities, is there still a chance to get involved in uranium stocks?
Before addressing this question, let’s first talk about the driving forces behind uranium demand. There are three specific drivers: the United Nations Climate Change Conference (COP28), the US “Inflation Reduction Bill,” and artificial intelligence (AI) technology.
At the 28th United Nations Climate Conference, 22 countries made an unexpected declaration: global nuclear energy capacity is expected to reach three times its current level by 2050, directly driving the demand for uranium. The United States has committed to allocate up to $500 million under the “Inflation Reduction Bill” to establish uranium supply for advanced nuclear reactors, thereby mitigating geopolitical risks such as the Russia-Ukraine conflict. As for artificial intelligence, the rapid development of this technology has created a significant increase in energy demand. As a result, many technology giants have begun discussing Small Modular Reactors (SMRs) as a way to meet energy needs, with Microsoft (NASDAQ: MSFT) even announcing plans to purchase and install small modular reactors.
While uranium demand is rapidly increasing, supply is severely lagging behind, and this is a long-term issue. It’s no wonder, considering the prolonged low uranium prices, leading to insufficient investment in exploration and development in this field. The current investment level is only one-third of that in 2007 and 2008. Even if investment in new mines were to increase now, the exploration and production cycle is lengthy, so it’s a case of “distant water cannot quench present thirst.”
Looking at this year alone, a major catalyst for the uranium market is the US proposal to ban the import of low-enriched uranium produced in Russia and to increase the US strategic uranium reserves. This is a rare occurrence; the last time the US bought uranium on a government basis was in the 1950s.
While the long-term low uranium prices have caused excitement in the market due to the recent sharp rise and also brought a hint of unease to investors, there are concerns about the sustainability of the price increase. Especially the new variable of investment funds may lead to uranium price fluctuations. However, in the total cost of nuclear power generation, uranium prices account for only about 2%, meaning that the rise in uranium prices has minimal impact on nuclear power companies.
Although the spot price of uranium has doubled in the past 6 months, not all uranium stocks have tracked this increase. Many stock prices have not reached their highs in 2021, so there is a need for future gains.
In terms of stock selection, the most value-added potential should come from companies in the later stages of development, such as those where feasibility studies prove that the projects are economically viable and can withstand a certain degree of uranium price decline, especially those companies with projects about to go into production. As for uranium producers, profitable companies are the best choice.
