Jul

16

The trade is the first (power producers) but not the second (uranium). I'd caution anyone considering uranium as an investment proxy for nuclear power. Traders may see bumps from news stories, but uranium fundamentals should not and do not track well with bulk power production.

Speculating in bulk power prices is difficult because power is a unique commodity with no [mature] futures market. The first derivative of bulk power might be merchant power plant fleets composed of nuclear, natural gas, and coal-fired power plants. Wind power might be responsive, but solar would be low on my list.

Since this thread is about nuclear energy, commercial nuclear power plants could emerge as profitable assets for the first time in over a decade. Consequently, merchant nuclear power plants would be among the first derivative beneficiaries.

Sticking with the nuclear theme, nuclear fuel would be the second derivative, and uranium would be the third. Therefore, speculating on uranium at the end of nuclear power's value chain would require different considerations. Let me explain.

All commercial nuclear plants operating in the United States are large light water reactors. Unlike military reactors, commercial reactors consume low-enriched uranium (enriched between 3 and 5 percent). This enrichment level is by design and regulation.

Mining is the first of many steps in producing nuclear reactor fuels. Globally, vast reserves of raw uranium, including Virginia, Australia, and many other places, could be available for mining.

The second step in creating nuclear fuel is milling and processing, generally conducted at NRC and EPA-regulated sites near the mine. Processing uranium into yellowcake is the last step in creating a commodity. Because yellowcake is a highly regulated asset, speculating on its pricing is a unique endeavor requiring specialized knowledge.

Regulated carriers ship the yellowcake to enrichment facilities, where the fuel is de-commoditized. The enrichment process and fuel fabrication add the most value. Fuel fabrication creates customized fuel rod assemblies tailored to fit into specific reactors. Because they are customized, those fuel assemblies are, for the most part, not fungible.

Commercial nuclear plants must order their new fuel from approved facilities capable of handling their fuel configurations. They must order far enough in advance to ensure that their place in the facility's queue meets refueling schedules (this queuing problem is why Germany could not extend or restart its retiring nuclear plants after Russia invaded Ukraine; they fell out of the fabricator's queue).

After receiving new fuel, individual nuclear power plants store it onsite and wait for the next refueling. Volumetrically, small amounts of new fuel are needed because most commercial plants run on existing fuel for 24 months before refueling. When they shut down, they do not replace all the old fuel with new fuel; they replace their oldest fuel with new fuel and reconfigure the remaining fuel to achieve specific physics.

In summary, for uranium investors, the critical points are:
Uranium may be a commodity, but nuclear fuel is not.
Nuclear fuel is highly regulated, controlled, and difficult to trade.
Nuclear plants do not consume uranium like legacy plants consume coal.
The elapsed time between mining and consuming is months or years.
Speculating in uranium is complex and requires specialized knowledge.
So, the question remains: how do investors profit from the coming changes in the power markets? For me, it's not speculating in uranium or uranium mines.

I don't provide investment advice. Be cautious, do your additional research, and seek professional advice. Given those disclaimers, consider Constellation Energy (CEG), the owner of the nation's largest fleet of merchant nuclear power plants. They also own other generating assets. They stand to gain if bulk energy transactions sustain elevated prices.

Keep in mind the following facts about merchant nuclear power plants:
Their LCOE is relatively high compared to gas and coal-fired power plants.
Their production costs are relatively low compared to the same plants.
They run 24/7/365, independent of market prices (capture negative prices).
They need constant access to cool water (problem: droughts and warm water).
The market value of nuclear assets is likely below book value ($ is in decommissioning).
Not all US commercial nuclear plants operate as merchant plants.
Nonpartisan federal/state policymakers protect nuclear power assets.

For me, CEG is a long-term investment. But short-term prices may react to the news.


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