The Uranium Trend Report 2017
A Critical Energy Source
may have a Breakout Year in 2017!
Technology is more important than commodities. True, elements like silicon and lithium are essential components of our technological base. However, without human ingenuity, without information, these elements are just stuff.
If the opposite statement were true, regions blessed with natural resources would be the superpowers of this generation. South Africa could very well be the leader of the free world, followed by places like Sudan or Afghanistan. Instead, countries like Japan — which has very little minable natural resources — leverage considerable geopolitical weight. It’s how we utilize our resources, not how much of it we have.
What does this all have to do with uranium?
Without it, we lose our footing on our future. By taking nuclear power off the table, we shackle ourselves economically at a time when we can ill afford it. Further, we put ourselves unnecessarily behind other nations.
The anti-nuclear lobby will argue that there are several alternatives to uranium energy that doesn’t involve the risk of a catastrophic meltdown. While it’s true that nuclear energy is the only power source that has this uniquely dangerous risk, that doesn’t mean other sources are economically or socially viable.
Wind power is a prime example of the fallacious arguments against uranium. Much of the public assumes that wind is the purest, cleanest form of energy. After all, the system is leveraging natural weather conditions to power electrical generators that can be used to feed hungry homes and businesses. But the real truth is far dirtier than people realize.
Louise Gray, environmental correspondent for The Telegraph writes:
A study in the Netherlands found that turning back-up gas power stations on and off to cover spells when there is little wind actually produces more carbon than a steady supply of energy from an efficient modern gas station.
The research is cited in a new report by the Civitas think tank which warns that Britain is in danger of producing more carbon dioxide (CO2) than necessary if the grid relies too much on wind.
Wind turbines only produce energy around 30 per cent of the time. When the wind is not blowing – or even blowing too fast as in the recent storms – other sources of electricity have to be used, mostly gas and coal.
However it takes a surge of electricity to power up the fossil fuel stations every time they are needed, meaning more carbon emissions are released.
The idea that wind energy alone can fulfill our power needs is patently false. As the Netherlands study demonstrates, power from an external source is required to start the functioning of the wind turbines. That drives up utility bills, and also increases emissions — a very trendy environmental topic as of late.
Wind power is also fundamentally flawed from a scientific perspective. The generalized work-energy principle states that the sum of the initial energies of a system plus the work done on the system by external forces equals the sum of the final energies of the system. Mathematically, this works out as Ui + W = Uf.
The only way a generator can generate power is to be “net profitable,” to use financial terminology. That is, the work done on a system must overcome any zero or negative work in the system. For example, when you first walk into a gym, you are able to lift weights with ease. However, after working out for some time, the same weights become more difficult to lift. At a certain extreme point, it becomes impossible to lift. That’s because the work you are able to generate is not enough to overcome the negative work “performed” by the earth’s gravity on the weight.
This is the reason why perpetual motion machines are impossible. Every machine that has been invented by man thus far cannot escape the scientific principle of negative work. Outside factors such as air resistance prevents a full and uninterrupted transfer from potential energy into kinetic, or realized, energy.
Again, you may be wondering what this has to do with uranium. Actually, the work-energy principle has everything to do with uranium, and all sources of energy. There is no such thing as free energy as that would be a violation of Newton’s Laws. Since no one has disproved Newton yet, it’s safe to assume that the work-energy principle is a universal concept.
On a practical scale, what this principle tells us is that all power sources have a cost. It is the balancing of these costs that will shape our energy infrastructure for decades to come.
Wind power fails on almost all fronts.
- It’s a cumbersome apparatus that requires power to produce power.
- The magnitude of the energy required to start up a wind turbine system is so great that it increases utility bills instead of decreasing them as it should do.
- This “negative ratio” then creates environmental damage.
- It’s pretty much a lose-lose proposition.
Uranium, on the other hand, has a major win under its sleeve. From my 2013 report on uranium:
From a pure economic standpoint, no other terrestrial resource provides the power and compactness of uranium. This is the main reason why nations both endowed with plentiful resources and those that lack continue to acquire uranium in heavy amounts. Yes, there are other energy alternatives, but many sacrifice either cost or space, and nothing comes close to the nuclear returns of the kilowatt to dollar ratio.”
There’s no point in ignoring the economic principle of our energy strategy. When people flip on the light switch, they expect two things to happen. Number one, and most obviously, the light must turn on. But the second expectation is that the financial cost in doing so will not be onerous. Otherwise, people will skimp if push comes to shove, and that sort of consumer deflation will have broad consequences.
Therefore, uranium is not just a matter of a critical energy source, which it most certainly is. Additionally, uranium allows people to enjoy and utilize electrical power without the financial weight of unproductive generators. It also allows former third world nations to get a tremendous leg up in terms of energy productivity. The often political hindrances that we impose upon ourselves only hurt us in terms of global competition.
This political correctness is not an issue to be taken lightly. While we Americans may enjoy unquestioned dominance towards global affairs, the status quo is far from guaranteed. In terms of population trends, we are witnessing a slow demise of growth in traditional western powers. For example, the U.S. population grew 14% between 2000 and 2015. On the other hand, Saudi Arabia’s population grew 47%, according to data from the World Bank.
In fact, a majority of emerging market nations are backed by strong, double-digit population growth. This has two implications. Number one, there will be millions upon millions of people demanding higher standards of living, and access to new technologies. That only drives up all sources of energy, including uranium. Because uranium has the best power efficiency ratio, it will be among the highest demanded energy resources.
Second, global growth involves the rise of nations whose ideologies are not necessarily aligned with ours. If we don’t keep pace at least economically, our influence will necessarily diminish. That’s why I believe the current political sentiment against uranium will fade. It just has to — there’s no rationale in letting political correctness be an economic stumbling block.
What we’re left with, ultimately, is a unique opportunity to profit from a core commodity that is trading at deep, multi-year discounts.
Earlier this year, Sprott Global Resource Investments Ltd. ran an enlightening — and if I may say so, electrifying — article about uranium as a potentially massive opportunity.
First, there is the more conspicuous point that uranium is a limited market. Yes, there are several mining stocks available to choose; however, compared against sectors such as gold and silver, nuclear energy simply doesn’t have as much bullish sentiment.
Like anything else, narrow markets have their pros and cons. The obvious risk is liquidity. There’s perhaps nothing more frustrating than getting the sector right but the specific asset wrong. That fear is magnified exponentially when dealing with uranium mining stocks. Not all of them are equal, and unrelated problem such as financial mismanagement can derail an investment, even if the uranium spot price were to rise substantially.
But the upside is that you’re dealing with a low volume sector that is potentially bound to see a rise in interest. Thus, the limited market is “proof” that you’re not buying an asset class that’s overcrowded. In other words, get ready to enjoy the benefits of the early stages of a bull market!
A second argument is that prices burst during the peak of the uranium bubble in 2007. In the immediate years following the onset of the Great Recession, uranium — like other assets — were clawing their way back to stability, if not profitability. Tragically, the Fukushima disaster occurred, sending shockwaves throughout the nuclear industry. In the wake of the disaster, few would understandably touch the sector.
Should investors buy in now, they are buying at a time of great disillusionment. Several mining companies have been gutted, and there are deep discounts to be had. However, according to Sprott’s research, currently,
“there are more reactors operating and in the pipeline (meaning under construction, planned, or proposed) than there were before Fukushima.”
Essentially, this means that there is a disconnect between the technical price action of several uranium stocks, and the fundamentals of the industry. The people that actually have “boots on the ground” realize that the sector is growing, irrespective of what goes on in the stock market.
Potential Supply Squeeze
Adding to this point is a third argument — uranium may soon experience a supply squeeze. According to data from investment firm Raymond James, by the year 2020, demand will outpace supply. Furthermore, as the years progress, demand will continue to move higher, while supply will become increasingly rarer. That is just begging for a bullish revival in uranium.
Like other commodities and energy markets, uranium mining doesn’t operate in a vacuum. More demand would equate to more pressure on producers to ramp up the supply chain. It also means that speculative junior mining companies are economically incentivized to search for future deposits. Yes, it’s a tremendous risk, but as the spot price of the underlying asset moves higher, the risk becomes more and more palatable.
Don’t be surprised, then, to see other energy markets — ie. fossil fuels — rise to feed the broader uranium machinery. Precious metals would likely come into play as well due to their utilitarian value. Finally, construction and equipment companies may see a bump up as one industry lifts another.
These are some of the reasons why you’ll want to consider uranium as an investment idea now as opposed to waiting. But Sprott goes on to explain another dynamic that few investors may appreciate.
Uranium is Highly Finicky
Uranium is a highly finicky material. Running out of fuel for a nuclear reactor isn’t simply a matter of a financial loss or a personal inconvenience. Without a constant stream of a specialized blend of uranium, a reactor could easily fall into meltdown mode. Obviously, that’s extremely undesirable, which is why facility operators plan their supply chain years in advance.
In other words, nuclear powerplants must constantly procure new sources of energy to stay operational, and more importantly, safe for human habitation. While procurement hasn’t been too much of an issue in past eras, we are headed steadily towards the end of the decade. That’s exactly when Raymond James forecasts the supply squeeze. More problematic is the fact that inventory is purchased years in advance.
There’s also a little pressure point called a contract. Back during the bubble phase of the uranium market, several end-users panic-purchased long-term inventory in a bid to avoid ever-escalating prices. That fear never materialized due to the bubble collapse. Unfortunately for these operators, contracts are legally binding. Many companies have been buying uranium at unnecessarily high prices, which explains some of the volatility in the sector overall.
A majority of the supply contracts were for 10 year terms. By doing simple math, several companies will now have expired terms, which means they can buy up more uranium at a cheaper price. Since global demand has largely recovered from the Fukushima disaster, there is a greater incentive for these operators to buy as much uranium as they can afford.
We are then facing a circumstance where tons of companies could be bum-rushing their way towards a sole commodity. That will likely continue for years to come, while supply simultaneously dwindles. According to basic economic principles, the only way that producers can combat running out of inventory prematurely is to raise the price. According to Sprott and like-minded experts, this is a powerful bull market that you want to get in front of, not chase.
The other thing to consider is that a sector bull market could very well ignite a uranium revolution in the U.S. At the present time, our country is the “world’s largest consumer of uranium used in nuclear power plants, which provide approximately 19 percent of the Nation’s electricity,” according to the U.S. Geological Survey. However, more than 90% of nuclear energy is imported from foreign powers.
Bluntly speaking, in order for American nuclear energy to remain viable, we need to develop homegrown sources, or at the very least, have relationships with trading partners who share similar economic and ideological mores. There are multiple projects that are in development which provide promising geological data.
Although there will always be political and environmental challenges to nuclear energy, an added bonus is the surprise election of Donald Trump. Running on a pro-business platform, Trump has promised to reinvigorate our economy. That can’t happen unless we address our manufacturing base. By focusing on uranium, the next President can kill two birds with one stone.
We also should consider that Trump has full control to run his mandate. Republicans are generally business-friendly, and will be looking to facilitate economic channels. One easy way to accomplish this task is to lessen or even outright eliminate onerous legislation. In fact, there’s a lot of talk about softening some of the language in Dodd-Frank and other financial regulations. If the Republicans can find success there, it shouldn’t be too much of a stretch to incorporate nuclear energy into the mix.
One of the most exciting elements about a potential uranium rally is that this will finally be a commodity surge based on “positive fundamentals” as opposed to the fundamentals of fear. Yes, the gold and silver bull run of the early 2000s to the peak of 2011 was spectacular and record-shattering. Inarguably, though, the precious metals complex ran on the fear of what the U.S. Federal Reserve will do.
This is fine so long as the fear is justified. But when conditions take an antithetical turn — such as deflation from inflation — the commodity loses a vast majority of its investment appeal.
But an upcoming uranium rally wouldn’t simply rely on a supply squeeze. Surely, that will provide much, if not most, of the impetus. We should also look, though, to the ailing economy. People are desperate for jobs and the only way that a net increase in the labor market can occur is if we create brand new sectors, or we build the heck out of long forgotten ones.
Again, the Trump administration will play a major role. In all practicality, he can’t ignore the opportunity in uranium. Demand is growing, and increased supply is a necessity. By solidifying the American uranium industry, our next President can fulfill one of the toughest promises made in every campaign trail — create jobs for the middle class. With this simple gesture, he would help meet both domestic and international energy demand.
This is a win-win for all involved.