Ur-Energy Investment Thesis – Part III

Favorable Future Prospects

China is the fastest growing nuclear player in the world and this will profoundly impact the future of nuclear power.  They need nuclear power to satisfy a voracious appetite for energy but there are also signs China wants to establish itself as a credible overseas partner for nations seeking to revitalize or expand their civil nuclear programs.  Through its partnership with French utility powerhouse EDF, the Chinese are now major investors in the Hinkley C project (England’s first new nuclear power station since 1995).  Chancellor Osborne announced that the UK will allow Chinese companies to take a stake in British nuclear power plants, which have traditionally been funded by the taxpayer.  Beijing also has a reactor deal on the table to supply Pakistan with two more nuclear reactors, worth some $9 billion.

Another interesting development is the emergence of entirely new reactor designs.  We need to de-carbonize energy production and nuclear power should be the go-to technology.  While nuclear power plants are ultra-efficient to run, be prepared to write a big check if you want to build one.  Ask Buzz Miller, the executive vice president of nuclear development for Southern Company.  The price tag for Vogtle 3 and 4 has risen to $4.8 billion.  One potential game changing technology that could lower costs is a Molten Salt Reactor.  As the name implies it uses molten salt instead of water for cooling.  Gareth Cook profiled the technology on New Yorker online:

“It’s based on a method that worked successfully at the Oak Ridge National Laboratory, in Tennessee, in the nineteen-sixties. Called a molten salt reactor, it eschews rods and, instead, dissolves the nuclear fuel in a salt mixture, which is pumped in a loop with a reactor vessel at one end and a heat exchanger at the other. In the vessel, the fuel enters a critical state, heating up the salt, which then moves on to the heat exchanger, where it cools; it then travels back to the vessel, where it heats up again. Heat from the exchanger is used to make steam, and, from this, electricity. At the bottom of the reactor vessel is a drain pipe plugged with solid salt, maintained using a powerful electric cooler. If the cooler is turned off, or if it loses power, the plug melts and all of the molten salt containing the fuel drains to a storage area, where it cools on its own. There’s no threat of a meltdown.”

The point is nuclear power didn’t die with Fukushima.  It remains a dynamic industry and we are likely to see innovations in plant design that will make it even safer and more competitive with natural gas and coal.  China’s leading the way:

  • Mainland China has 17 nuclear power reactors in operation, 30 under construction, and more about to start construction.
  • Additional reactors are planned, including some of the world’s most advanced, to give a four-fold increase in nuclear capacity to at least 58 GWe by 2020, then possibly 200 GWe by 2030, and 400 GWe by 2050.
  • China has become largely self-sufficient in reactor design and construction, as well as other aspects of the fuel cycle, but is making full use of western technology while adapting and improving it.
  • China’s policy is for closed fuel cycle.

Much has been said about the expiration of the Russia-U.S. HEU “Megatons to Megawatts” program.  It means that 24 million pounds of secondary supply is coming offline without any replacement—this is equivalent to the entire production of Cameco Corp.  It’s not clear where the new supply will come from but many believe a uranium supply crisis is brewing.  According to David Talbot, senior mining analyst at Dundee Capital Markets, the weak spot price still threatens future mine supply with more closures, cancellations and deferrals of mining projects.  He believes the fundamentals support much higher prices, but Japanese restarts are needed to provide a psychological boost for the industry.

Grant Isaac, Cameco Senior Vice President, gave an excellent presentation on the uranium market at the 2013 Scotia Bank Mining Conference.  The transcript is available on Seeking Alpha and I strongly suggest reading it if you are seriously considering any investments in this sector (http://seekingalpha.com/article/1873841-camecos-management-presents-at-2013-scotiabank-mining-conference-transcript?all=true&find=cameco).  He said that the uranium market is in a transition period from being supply-driven to demand-driven.  In past years, an abundance of secondary supply (i.e. HEU program) always tempered the price levels of uranium.  With supply declining against a backdrop of low production, it leaves the impression that a perfect storm is in the works for uranium.

If the long-term fundamentals are so strong why are current prices so low?

No one’s buying yet for all the reactors under construction and the utilities are well covered for the time being.  They are in ‘wait and see’ mode due to the large inventory buildup in Japan and general uncertainty on the supply side.  Ultimately, the utilities will return to the market.  When they do, spot prices will recover.


Final Thoughts

Is UR-Energy a wonderful business that will grow forever?  Not quite, but it has considerable investment merit at the current price.  This is a junior mining company with exceptional management; they execute the project plan with professionalism and run a very lean business.  In fact, this operating efficiency is central to the URG brand and makes them competitive in almost any market.  I’m sticking to my guns on this one.

You should never get emotional about a stock.  Your desire to purchase a business should only be driven by the fundamentals and never by what the Street or anyone else thinks.  The market should never force your hand—you can take strikes all day long if you like, swinging only when the odds are truly in your favor.  Value Investing is for the disciplined and patient few with the courage to think and act independently.

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