Uranium: This Time, for Sure

3 reasons uranium's upturn might finally be here...

The URANIUM sector is beaten down, writes Byron King in Addison Wiggin's Daily Reckoning.

It crashed hard six years ago, right after the nuclear disaster at Fukushima, Japan, in March 2011. After Fukushima, uranium miners, processors and nuclear equipment makers sold down and have pretty much stayed down.

However, the uranium industry has just begun to turn around. You may have even heard about it in the news lately. The takeaway, however, is that we currently have an open window to get into the uranium space near the bottom.

Uranium is critical to running the world. In many countries, it literally keeps the lights on. There's an entire investment space devoted to uranium production and associated companies that process "yellowcake" – uranium oxide – to move it through the industrial cycle. Uranium is the foundation to a multi-billion-Dollar global industry with immense investment promise.

During its last two boom cycles, in 2004-07 and 2009-2011, early investors could have seen gains around 600% and 185%, respectively.

There are three big reasons that uranium is set to turn around. The first is an increase in demand for nuclear power.

500 More Nuclear Plants
Although uranium hasn't been in the investment limelight lately, nuclear power is significant. According to the World Nuclear Association (WNA), 440 nuclear power reactors operate today in 31 countries, with a combined capacity of over 385 gigawatts of electric capacity (GWe).

In 2014, these units provided 2,411 billion kilowatt hours (kWh), or over 11% of the world's total electricity. As recently as 2015, says the Nuclear Energy Institute, "13 countries relied on nuclear energy to supply at least one-quarter of their total electricity".

This represents just the existing demand for nuclear power; it's the day-to-day "load" on the global grid. However, I recently met with key players in the energy space, including Spencer Abraham, former US senator (R-Michigan, 1995-2001) and secretary of energy (2001-05). At a dinner, I sat next to Secretary Abraham for about two hours, discussing politics, energy policy and uranium.

I also had a long discussion with an individual whose professional career has been involved working with major uranium mining companies and nuclear-based electricity generators.

Later in his career, this individual advised both the US and Russian governments on uranium, up to and including respective national policy that affected weapons-grade material. He's highly knowledgeable about uranium production and pricing from sources as far afield as Kazakhstan, Australia, Canada, the US and nations in Africa.

After meeting with these energy insiders, it is clear that nuclear power is increasingly coming back into demand as a global source of energy. Across the world, many nuclear plants are under construction, in design or being planned at early stages.

Most new-build reactors are sited in Asia, particularly China, South Korea and India, all with fast-growing economies and rapidly rising electricity demand.

Dovetailing the Asian buildout, many countries with existing nuclear power programs (Argentina, Armenia, Brazil, Bulgaria, China, the Czech Republic, India, Pakistan, Romania, Russia, Slovakia, South Korea, South Africa, the UAE, Ukraine, the U.K., the US) plan to construct new nuclear reactors over and above beyond those now under construction.

In all, according to WNA, over 160 reactors are planned with a total net capacity of some 182 GWe; over 300 more are proposed. The primary reasons for this increasing demand are energy security concerns, uncertainty about future access to carbon-based fuel and overall greenhouse gas constraints on carbon burning – combined with basic economics. This has "put nuclear power back on the agenda for projected new capacity in many countries."

Kazakhstan Tightens Supply
As more nuclear plants are built, the plant operators must lock in the source of their uranium for decades to come. The plants themselves may take 10-20 years to plan, design and construct, and then they have a service life of 50-75 years or more. It's a multigenerational commitment.

All existing nuclear plants, and the utility companies that own and operate them, already have firm contracts in place to lock up future supplies of uranium fuel. These decades-long contracts are with big-name uranium producers.

On occasion, however, utility companies may require additional supplies of uranium fuel, maybe for technical reasons. In that situation, they'll buy uranium on the "spot" market.

During the past six years, many Japanese utilities didn't need uranium they had coming in under long-term contracts, because they had shut down all their nuclear plants after Fukushima. Some of this unneeded uranium found its way back onto the spot market due to resale by Japanese middlemen.

As with any commodity, a glut in supply drove down prices. This contributed to a depressed uranium space, which helped drag down share prices of many primary uranium producers.

In addition, the world's single largest national uranium producer is the nation of Kazakhstan. It inherited a massive nuclear complex after the Soviet Union collapsed.

For several years, Kazakh miners went all out with mining and processing, and the country's overseeing agency, Kazatomprom, sold the material. This contributed to the global glut of yellowcake and processed uranium – and led to historically low prices for uranium and miners.

But this past January, the Kazakh government made a critical decision. Rather than continue mining the country's uranium to sell at a depressed price, the Kazakh government ordered Kazatomprom to scale back on output by 10%. This reduces the quantity of uranium available for export sale and tightens global supply.

"Kazakhstan controls about 40% of the overall global market for uranium," writes Michael Ambrozewicz at Seeking Alpha, "so the 10% cut amounts to approximately a 3% reduction in global uranium supply."

News of the Kazakh government's new, restrictive uranium export policy hit global markets like a bombshell. Within hours, uranium spot prices began to creep up, while share prices of many listed uranium companies began to rise.

After seeing this recent growth, you might be wondering if it's too late to get into the uranium market...But there's another signal we're seeing that tells us now is the perfect time to get in the game.

And Then There's Trump
At one point in time, the US was nearly self-sufficient in uranium. But today – after many years of US environmental regulation and general anti-industry and anti-nuclear sentiment – the US imports over 90% of the uranium it uses in its nuclear plants.

President Trump is focused on reducing the US trade deficit and creating jobs. Uranium imports involve billions of Dollars in trade flows and tens of thousands of potential jobs in the uranium industry.

Maria Korsnick, president and chief executive officer of the Nuclear Energy Institute, said in a recent interview that (as Bloomberg put it) "Trump will throw more support behind nuclear power than the Obama administration, which gave a higher priority to wind and solar power."

In addition to increasing global demand and tightening global supply, President Trump will likely move the US toward a more national-oriented uranium supply policy, which will benefit any well-run US producer.

Investment professionals see this already. Trading volumes have increased as institutional money moves into the uranium space. Luckily for us, retail investors have not quite caught the bug yet.

Uranium has been beaten down for so long that many investors are skeptical of today's rising prices. But we're just at the beginning of a tightening in uranium supply. (Kazakh officials have already signaled that they like getting paid more for producing less.)

We expect prices to rise as more and more nuclear power plants are built and contracts for future uranium supplies are locked in. That's why you need to invest now, before most retail investors catch up.