Nuclear is once again a key part of the UK’s energy strategy
Thursday 14 Apr 2022 Author: Tom Sieber

One of the biggest takeaways from the UK’s new ‘Energy Security Strategy’ announced on 7 April was that nuclear power would be a crucial part of the Government’s plan for secure and sustainable energy.

The issue has become particularly pressing amid surging energy costs and the impact of Russia’s invasion of Ukraine. In this article we will look at how the UK’s plans sit in a global context and the different investment options for playing a revival in the nuclear space.

AMBITIOUS PLANS

The UK Government wants to boost the country’s nuclear capacity to 24 gigawatts by 2050 from a current 7 gigawatts, a target underpinned by plans for eight more reactors on existing sites. This would account for somewhere around a quarter of projected electricity demand.

Small modular reactors are expected to play a role in this nuclear expansion and UK engineer Rolls-Royce (RR.) is working on designs which could largely be built in a factory, reducing development time and costs.

A new government body, Great British Nuclear, will be set up immediately to bring forward new projects, and a £120 million Future Nuclear Enabling Fund is set to be launched imminently.

URANIUM PRICES HAVE SURGED

The UK’s position increasingly chimes with a global push towards nuclear which has been reflected in a significant increase in uranium prices.

They’ve surged to $61.60 per pound, the highest since just before Japan’s Fukushima nuclear plant disaster in 2011.

This event, which resulted in significant radioactive leaks, resulted from a major earthquake and tsunami which hit the power supply and cooling systems on three of the plant’s reactors leading to meltdowns.

In the aftermath countries, particularly in the West, turned away from nuclear power on safety concerns and uranium sank to lows of below $20 per pound. In response many uranium miners cut output and shelved developments.

Bringing production back online and ramping up activity is likely to take time and, along with the new-found demand for nuclear power, that is likely to lead to a supply deficit of uranium.

Co-manager of nuclear-focused investment trust Geiger Counter (GCL) Keith Watson tells Shares: ‘It’s tight, the inventory of material fuel feedstocks in the US is towards the bottom of a typical two-to-three year working capital level and while mothballed brownfield sites are being brought back into production you are still looking at a huge gap by the end of this decade.

‘Lots of greenfield sites will be needed and it takes time to bring any form of development online, particularly with uranium.’

SUPPLY DEFICIT

Watson says it can require anything up to two or three years for independent miners to get more supply online, or 12 to 18 months for state-owned operators.

His colleague on the Geiger Counter trust, Robert Crayfourd adds that demand from the Sprott Physical Uranium Trust (U.UN:TSE) is affecting the market whereby a rising uranium price drives greater demand for the investment product and just adds to the upward pressure on pricing.

The contribution of Russia to the global uranium market and the fact that major producer Kazakhstan has historically shipped its uranium through Russia are also factors contributing to a tight global supply outlook.

The chances of higher prices leading to demand destruction look relatively limited with Geiger Counter’s Watson observing that ‘around 5% of the cost of running a nuclear plant is accounted for by uranium costs even after the recent spike’.

WHY NUCLEAR?

In terms of why countries are turning to nuclear again, Rohan Reddy, the director of research at exchange-traded fund provider Global X, says: ‘The biggest thing is there are no greenhouse gas emissions associated with nuclear and when compared with other zero-emissions alternatives like solar and wind, what’s really attractive about nuclear is how reliable an energy source it is.’

As Reddy observes nuclear energy’s average capacity factor is above 90, which means the average plant remains online generating electricity more than 90% of the time.

Because they are reliant on the wind blowing and the sun shining, solar and wind typically have capacity factors of less than 50%.

This means that unlike nuclear they cannot currently be used for so-called baseload energy – i.e. sources of power for the grid which have consistent, unchanging output.

Battery storage is seen as a long-term solution to this problem but, for now, the batteries required to store power for renewables remain large and expensive – even if there has been significant progress on this front in recent years.

This leaves nuclear power as perhaps the most realistic option for global governments looking to increase energy security and supply while at the same time hitting net zero targets.

HEAVY CHINESE INVESTMENT

China, which has already invested heavily in nuclear power in recent years, has a pipeline of new nuclear power which is larger than the rest of the world combined according to December 2021 figures from analytics firm GlobalData.

Geiger Counter’s Crayfourd notes that in Europe and US the shift in policy is likely to be reflected initially in an extension of the life of existing plants. Any new builds announced now are unlikely to be operational until the early-to-mid 2030s.

He adds: ‘In the next five, six, seven years we are likely to see small modular reactors coming through in a bigger way and they are likely to be far better understood; these could have a faster roll-out of two to three years.’

Crayfourd says the key difference a more supportive policy environment for nuclear can make is to reduce the cost of financing nuclear developments through initiatives like state-backed loans. He notes that around 60% to 70% of the cost of the Hinkley Point C nuclear plant, currently being built by French utility EDF Energy (EDF:PA) in Somerset, relates to such financing.

HOW CAN UK INVESTORS GET INVOLVED?

Global X’s Reddy says the difficulties of directly tracking the price of an opaque uranium market means ‘uranium miners are the most directionally correlated’ way of gaining exposure to the nuclear theme.

Canada’s Cameco (CCO:TSE) is the largest listed uranium producer in the world and the second largest uranium producer globally after Kazakhstan’s state operator Kazatomprom. Cameco’s shares trade on the Toronto Stock Exchange and the New York Stock Exchange.

Most uranium miners are listed in either Canada and Australia so investing in their shares involves extra costs and complexity for UK investors and the risks associated with backing individual companies.

An alternative route for UK investors is to look at two stocks on the London Stock Exchange, namely the Geiger Counter investment trust and Yellow Cake (YCA:AIM) which invests directly in physical uranium.

Geiger Counter has a relatively high ongoing charge of 2.67% and the recent strength in the uranium market has led to its shares trading at a 12.8% premium to net asset value. This reflects the trust’s scarcity value, given limited options for direct exposure to uranium and the nuclear sector on the UK market.

Its performance over the last three years is impressive with a share price total return of 241.6% against 60.9% for the Association of Investment Companies’ Commodities & Natural Resources sector, of which it is a constituent.

It invests in a diversified portfolio of uranium miners, with a slight small cap bias which could help support higher growth.

Yellow Cake, which trades in physical uranium, recently announced a plan to purchase $3 million worth of its own shares to narrow the current discount of around 8% to its own net asset value.

Elsewhere, investors can gain lower cost, diversified exposure to the wider energy space through iShares Global Clean Energy (INRG). The exchange-traded fund has an ongoing charge of 0.65% and a material weighting of around 14% to companies involved in nuclear energy.


Various UK-listed shares with nuclear exposure

Rolls-Royce could have a significant footprint in the nuclear sector in the future if its plan to develop small modular reactors (pictured) comes to fruition.

Several other UK stocks provide engineering support and related services to the nuclear industry. These include James Fisher (FSJ), which focuses on testing and analysis as well as specialist equipment, and Babcock (BAB) which has worked on nuclear decommissioning at Sellafield and has been a major supplier of services to the UK nuclear sector since the 1950s.

Around 50% of the world’s nuclear power plants rely on critical valve technology from specialist engineer IMI (IMI).

In the small cap space, Goodwin (GDWN) produces various components for the nuclear sector including primary pump casings for nuclear reactors.

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