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The asymmetric benefits of investing in nuclear power

November 4, 2020

The asymmetric benefits of investing in nuclear power

Uranium has long been a controversial material, but recent changes on the supply and demand sides, and a growing demand for reliable, low-emitting power generation makes the other yellow metal very hot property, according to Arnott Capital portfolio manager Kenny Arnott. Speaking at Reach Markets’ Meet the Fund Manager webcast last week, Mr Arnott said “Uranium represents a promising, asymmetric investment opportunity”.

Uranium has long been a controversial material, but recent changes on the supply and demand sides, and a growing demand for reliable, low-emitting power generation makes the other yellow metal very hot property, according to Arnott Capital portfolio manager Kenny Arnott. Speaking at Reach Markets’ Meet the Fund Manager webcast last week, Mr Arnott said “Uranium represents a promising, asymmetric investment opportunity”.

Asymmetric investors look for thematic opportunities which have a far greater upside risk than downside risk – a strategy which Mr Arnott’s Arnott Opportunity Fund has used to deliver annualised returns of 22.15% (roughly three times the MSCI World Index’s 7.31%).

 

Changing uranium market

The current uranium market fits this asymmetric bill nicely due to a confluence of factors – notably the growing demand for the material at a time when supply is being reduced – demonstrated by the graph below.

Source: kitco.com

Following the Fukushima disaster in 2011, demand for uranium dropped off and dragged prices with it. But demand is growing (China has gone from 3 nuclear power stations to 45 in just 15 years) and 2020 appears to be the year a supply shock rocks the industry.

That’s good news for uranium bulls, according to Mr Arnott.

 

“When a commodity market goes into oversupply, you have a whole number of producers that ultimately end up operating or selling at an operating cost well above where they’re selling so they go out of business or they go into care and maintenance and you get a whole lot of buyers, in this case utilities purchasing uranium, who get very comfortable buying very cheaply,” he said.

 

But when an inflection point is reached and oversupply swaps rapidly to undersupply, prices tend to move “extremely” in one direction, he further added.

 

The new China syndrome

Much of this increased uranium demand comes from China, which is investing heavily into nuclear power as part of an aggressive decarbonisation program to bring emissions to net-zero by 2060. The plan will see fossil fuels drop from 57.5% of the country’s energy mix to 52% by 2025, while renewable and nuclear power will grow from 32% to 42%.

China’s unique political system lends an extra layer of reliability to these forecasts too, Mr Arnott said.

 

“Ultimately, we see China just as one large mega corporation which has the ability to set hundred-year policy. When they set policy for thirty years they generally don’t change it and if they do change it, you’re probably going to get about 3 to 5 years warning,” he said.

 

“That’s very different to investing in the US where our election cycle means investing beyond a five year horizon can be challenging because you may have new fiscal policy implemented – so, we love investing alongside Chinese themes, it really seems to remove a lot of risk,” he added.

 

Australian miner stepping into the vacuum

With one of the world’s largest uranium producers – Kazakhstan’s KazAtomProm – forced to cut production due to COVID-19 and the Russian Suspension Agreement curbing output from Russia, buyers will need to find new sources of the precious yellow metal.

One explorer well-placed to capitalise on these shifting market forces is Australian listed company Marenica Energy (ASX:MEY), which holds 94 million pounds of uranium resources. In the past year, Marenica has doubled its uranium resources and is currently the largest holder of nuclear fuels exploration rights by area in Namibia14 – a major uranium production and export nation with strong government support for the industry.

This includes the Hirabeb palaeochannel, where horizontal loop electromagnetic surveying uncovered mineralisation along a 36km-long stretch of palaeochannel – a distance almost akin to the width of the English channel.

The company has recently completed testing of a new, patented beneficiation process – developed in partnership with the CSIRO – at their Angela uranium project in the Northern Territory9. This process, called U-pgradeTM, resulted in a roughly 77% decrease in acid consumption (down about 80kg of acid per tonne of ore) and improved uranium extraction by 2.8%.

As the acid used in this process costs $0.40 per kilogram, a 77% decrease in consumption paves the way for significant operational expenditure savings.

Please join us for an upcoming Investor Briefing with Marenica Managing Director Murray Hill on Friday 6th November at 11am AEDT. Book here.

 

Reach Markets have been engaged by MEY to help manage their investor communications. As the advisers assisting in the management with their Share Purchase Plan (SPP), Reach Markets may receive fees depending on whether the SPP is taken up by investors

 

Sources:

 


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