Uranium Investing

With nuclear power picking up speed, utilities and governments are going to need a lot of capital in order to build the future nuclear fleet.

So far in 2016, the uranium price has been bumping along around US$34 per pound of U3O8, with utility buying remaining sluggish. As Raymond James highlights in a recent uranium industry update, 2016 could prove to be another year of flat performance — the firm is expecting an average price of US$38 for the year.
However, despite the slower market, there are still plenty of reasons to remain bullish on uranium. For one thing, Japan is expected to continue restarting its reactors, with a total of eight anticipated to come online by the end of the year. Further, China should be bringing an estimated 10 gigawatts online.
In light of those events, and due to utilities’ abnormally high long-term uncovered requirements, Raymond James believes utilities could come back to the market at any time to resume a normal pace of long-term contracting. As such, the firm is calling for a much higher average uranium price of US$50 in 2017.

Naysayers on nuclear power

That positive outlook for uranium means that by extension there is a positive outlook for nuclear power. And indeed, many in the uranium space are optimistic about the role nuclear power will play in the global energy mix in the future.

“Nuclear energy has low life-cycle greenhouse gas emissions and has the potential, with innovative technologies, to serve humanity effectively for a very long time,” International Atomic Energy Agency Deputy Director General Mikhail Chudakov said late last year. “When considered in the broader context of sustainable development, nuclear power enhances energy security and reduces damage to ecosystems and impacts on human health.”
That said, there are still some naysayers. One is Morgan Stanley (NYSE:MS) investment banker Anthony Ianno — speaking at the annual Platts nuclear conference in Washington, he told investors that “the economics of nuclear are very challenging.”
Why? Because when compared to the cost of natural gas, nuclear capital costs five times as much. Ianno believes that makes the case for nuclear power a tough one to make. “It’s hard to make a decision to invest in new nuclear. It’s very hard for a CEO to make that decision. It’s easier to say no than to go forward,” Ianno said.

6 ways to fund nuclear power

Ianno’s comments bring up a good question: how can nuclear power be funded? World Nuclear News (WNN) recently looked at six ways to finance nuclear projects. Here’s a brief overview:

  1. Corporate balance sheet financing: WNN explains that corporate balance sheet financing is typically a method of financing reserved for the largest utilities and developers. That is because the cost of a large nuclear plant — two or three reactors — is quite steep at about $20 billion. Balancing the corporate balance sheet is a difficult task to undertake as it requires a company to carry a large capital commitment over a period of anywhere from five to seven years before the plant starts generating revenue.
  2. French Exceltium model: In France, a number of industrial investors came together with banks to form what was called an “Exceltium,” whose purpose was to help finance new-build plants in exchange for cheaper electricity. WNN states that the “payback to the investors — as opposed to the banks — comes over a period of 24 years through agreements to provide electricity to the industrial investors for a mix of fixed and variable pricing.”
  3. The Finnish Mankala model: The Finnish Mankala model is widely used in the Finnish electricity sector. It operates in such a way that a “limited liability company is run like a zero-profit-making co-operative for the benefit of its shareholders.” WNN notes that Mankala owners are allowed and obliged to purchase electricity from the plants equal to their shareholding at a cost. From there, the electricity can either be used by the buyer or sold on the market.
  4. Vendor equity: Investopedia explains that vendor equity, also known as a seller note, is a debt instrument that is used as a short-term loan agreement, but also provides financing for the buyer. The loan is secured by inventory being sold. As a caveat to vendor equity, WNN notes that technology vendors are limited by their balance sheets, which means that they are more likely to invest in the more advanced projects that are likely to succeed. That gives investors the highest chance at a shorter time for their return on investment.
  5. Export Credit Agency (ECA) debt and financing: ECAs are public agencies that provide government-backed loans, guarantees and insurance to corporations from their home country. WNN explains that ECAs have stepped in to alleviate the pressure caused by the reluctance that commercial banks have in lending money. In this regard, “ECAs have provided the backbone of debt lending to a number of projects in recent years through their direct or guaranteed lending to projects.”
  6. Private financing with government support mechanisms: The final financing method discussed by WNN is private financing with government support mechanisms. That is a method of support that can be crucial to the advancement of nuclear power projects. This type of financing mechanism can come in the form of guarantees to support debt, revenue support mechanisms or in even cash. The method, however, hinges on the country in which the plant is being developed, as it requires a look at a variety of factors such as credit rating, financial reserves and the rights and obligations of generators.

Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.



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