Warren Buffett once said that “the stock market is a mechanism for transferring wealth from the impatient to the patient“. I intend to heed Buffett’s words by holding this stock at least until the end of the decade.
The nuclear option
Yellow Cake (LSE:YCA) is a fund that holds uranium, the fuel used to produce nuclear energy. By investing in it, I get exposure to the spot price of uranium without any of the exploration, development or operational risks of a mining company.
But why would I want exposure to the uranium price? Put simply, I believe the clean energy transition, in addition to a supply shortfall, could drive the uranium price up.
Uranium supply squeeze?
On the demand side, there are around 440 nuclear reactors globally, requiring some 62,500 tonnes of uranium each year, according to the World Nuclear Association.
Meanwhile on the supply side, mines produced 48,303 tonnes of uranium in 2021 – or 77% of the utilities’ annual requirements.
How is this shortfall being plugged? Utilities are having to dig into their stockpiles, which are sizeable (estimated at 200,000 tonnes globally in 2020).
Although utilities still have rainy-day funds, I believe a supply crunch could come. Stockpiles can’t fill the gap between demand and the supply mined indefinitely.
At the same time, Yellow Cake has bought up 8,000 tonnes of uranium since 2018. Its Canadian counterpart, the Sprott Physical Uranium Trust, has taken 26,000 tonnes off the spot market since 2021. In total, that represents 70% of the uranium that’s mined worldwide in one year.
A radioactive rethink
There are 52 nuclear reactors currently under construction globally. The Japanese are planning on restarting 17 shutdown nuclear plants and developing next-generation reactors, a major policy shift on nuclear energy a decade on the from the Fukushima disaster. Even notoriously anti-nuclear politicians in Germany are looking at extending the operating life of the country’s three remaining nuclear reactors as winter blackouts loom.
Nuclear energy offers a reliable source of baseload power with zero carbon emissions. For that reason, it wouldn’t surprise me to see demand for uranium continue to increase over the coming decade.
Once stockpiles are depleted, I feel the price of uranium would have to rise to bring marginal miners online to fill the deficit in production.
Of course, this could take many years. Or, more worryingly, another nuclear catastrophe could cause the world to fall out of love again with uranium. I have to bear this in mind as a risk to my investment.
How high could it go?
Uranium has been in a bear market since the 2011 Fukushima disaster. The price of uranium dropped like a stone from $71 per pound to an all-time-low of $21 in late 2016. Today, it floats around the $50 mark.
How high might it go?
According to Rick Rule, former President and CEO of Sprott US Holdings, an incentive price of $75 per pound is needed within five years.
He said in an interview in June: “Either that, or the lights go out. Those are the only two choices.”
Assuming Rule is right, that could mean a 50% upside over the next five years.
I’ll continue buying the shares, as I think the price of uranium per pound could even overshoot $75 given a strong enough supply squeeze.
