Secular Trend: Electricity Demand

15 Nov 2019 . Category: Investment

Investment Thesis

Global electricity demand predicted to increase by 76% by 2030. Drivers for this include population growth, increasing use of electric vehicles and trend towards greener forms of energy.

While many will choose to play this trend with renewables, nuclear power offers a compelling investment alternative with asymmetric risk/reward profile.

Uranium is an extremely cyclical boom/bust business. The current cycle is unusual in that there are 2x reactors coming online compared to the last cycle, which are significantly larger than existing ones. This is happening against a backdrop of dwindling (& opaque) stockpiles / insufficient supply as mines are shut down and discoveries left undeveloped / producers turning into buyers. In short, Supply is severely constrained while demand is increasing significantly.

This supply/demand dynamic has created a huge opportunity which, once shortages become apparent, has the potential to give significant returns.

Key points:

  • Green form of power, emissions free, cheap and (importantly) constant.
  • Demand(I): Currently ~450 reactors. Proposed: China 184, India 7,Russia 9.
  • Demand(II): By 2030, China will consume all current U3O8 supply.
  • Demand(III): Util. Contracting ramping up from 2020. Anticipate not enough Uranium.
  • Supply(I): Extraction cost far below spot → price rises or shortages (catalyst).
  • Supply(II): New mines take years to develop / re-start → no quick fix.
  • Price(I): Near low, around $25/lb. Plummeted from $130/lb → $20/lb.
  • Price (II): Utilities want certainty of supply. Price secondary (¼ fuel rod cost)
  • Price(III): Fraction of spend for utility companies(~5%).Scope to increase dramatically.
  • Price(IV): Demand is price inelastic, higher prices do not choke off demand.

Method

Fund options limited & expensive. Invest directly in basket of Uranium companies which are leveraged to the Uranium spot price.

Preference for companies that can be producers in this cycle and are less likely to dilute shareholders. Include geographic spread and mix of small/large companies. Will avoid US listed equities due to reporting obligations (W-8BEN).

Investment Considerations:

  • Timescale: Around 5-10 years for demographics / supply crunch to fully play out.
  • “Success rate of mines going into production is not only low, it’s exceedingly low.”
  • Expectation (I): In last bull worst performing stock increased 20x. Asymmetric risk reward.
  • Expectation (II): Small sector - once retail pile in, expectation is for ‘violent upside’
  • Risk(I): Nuclear accident significantly impacting demand. Unlikely permanent.
  • Risk(II): Company issuing shares to fund development, diluting existing holders. Likely.
  • Risk(III): General crash causing forced sales. Unable to get finance - credit squeeze. Likely.
  • Diversifier: Not dependent on global macro but on Uranium fuel cycle → uncorrelated.

Me

Iain Benson is a real person and not a grassy plant viking. He lives in Northern Spain. In his spare time, Iain likes tinkering with his Raspberry Pi, going for long walks and drinking wine. Preferably all at the same time.