Will Uranium Costs Kill Nuclear?

Uranium prices are in for 2012, and costs continue to head higher. The magic molecule's price tag is up over 400% in the past decade and could continue to cut into your dividend stocks' profits in the years ahead. I ran the numbers for some of the top nuclear-producing utilities in the country, and here's what I found out.

It's not us; it's them
In 2012, U.S. nuclear power plant owners and operators purchased 59 million pounds of U3O8 equivalent, roughly the same amount as in 2003 and well below its 2006 demand peak of approximately 65 million.

Source: eia.gov 

But over the same period, prices have skyrocketed. In 2011, 10 bucks would get you a pound of uranium. Now, the same pound costs power companies an average $54.99 per pound.

Source: eia.gov 

Seventeen percent of uranium originates from within the U.S. and comes with a slightly higher $59.44 cost. The remaining 83% comes from foreign sources and costs $54.07 per pound.

With relatively steady demand in the U.S., the spike in uranium prices is out of our control, regardless of whether it results from increased demand abroad or reduced global supply. Either way, that makes U.S. power companies (and your dividend stocks) price takers, not price makers.

Utility costs
Companies like to keep costs and suppliers secret, but I found an easy approximation that begins with one company's bragging rights. According to Exelon (NYSE: EXC  ) , this nuclear-centric power company's 19,000 MW nuclear fleet produces 20% of our nation's nuclear energy.

Working my way back from these two numbers and newly released national statistics, I calculated uranium costs for four of nuclear's heaviest hitters, and the results were fascinating.

Company

Nuclear Generation
(% Total)

Nuclear Generation
(MW)

Total Uranium Cost
($M)

Exelon

55%

19,100

$638

Duke

17%

8,450

$282

Southern Company

16%

6,970

$233

FirstEnergy

20%

3,990

$133

Author's approximations. Sources: investor-relations websites, SEC filings, eia.gov. 

Exelon spent around $638 million on uranium in 2012, more than double Duke Energy's (NYSE: DUK  ) $282 million. Each uranium outlay is directly related to nuclear capacity, so it makes sense that Exelon's expenses would be highest, while FirstEnergy's (NYSE: FE  ) $133 million puts it lowest.

For a pinch of perspective, I also compared uranium costs with each utility's 2012 net profit. While earnings aren't the most reliable metric to judge long-term capital-intensive companies like utilities, it gives us an idea how expenditures added up last year.

Company

2012 Net Profit ($M)

Uranium-to-Earnings Ratio (%)

Exelon

 $1,160

55%

Duke

 $1,768

16%

Southern Company

 $2,415

10%

FirstEnergy

 $770

17%

Author's approximations. Sources: investor-relations websites, SEC filings, eia.gov. 

Exelon dished out 55% of its earnings in uranium expenses, while Southern (NYSE: SO  ) sacrificed just 10% of its $2.4 billion in net profit. FirstEnergy followed with a 17% payout, while Duke doled out 16%.

But while costs today mean something to investors, costs tomorrow are what really matter. If Uranium's 400% increase keeps up over the next decade, Exelon's prices will mushroom accordingly. And even though Southern currently spends more on the magic molecule than FirstEnergy, its 16% capacity reliance gives it the most protection from volatile prices.

The end of nuclear?
Luckily for investors, there's more to power pricing than meets the eye. As an example, Exelon currently contracts with three suppliers for guaranteed supply requirements through 2016. Its enrichment agreements have the company set through 2017, fuel fabrication through 2018, and conversion services through 2020.

And while uranium hedging isn't common practice today, markets have a way of creating themselves for vital goods with volatile prices. Recent natural gas price increases pushed many utilities to take one-time hits for bad hedges, but the companies kept plants powering through thick and thin.

Uranium was a $3.2 billion market in 2012 -- and it could easily hit $15 billion in the next decade. Energy diversity is never a bad thing, and nuclear-centric companies like Exelon have worked around the kryptonite conundrum by sourcing from multiple suppliers. For now, at least, uranium spending is cost that remains relatively under control.

Uranium prices may go up in the future, but Americans are demanding clean energy today. As the nation cuts its carbon addiciton, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. This strength, combined with an increased focus on balance sheet health and its recent merger with Constellation, places Exelon and its resized dividend on a short list of the top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2013, at 5:35 PM, GuestPost wrote:

    >> The high cost of uranium is another reason why nuclear energy doesn't make sense for utility companies or investors.

    >> Maybe that's why Warren Buffett is investing in SOLAR.

    Read this:

    "Solar Scores a Big Win Over Nuclear"

    "The debate over costs is over. Solar power won. Nuclear power lost. If your utility wants to own a new power plant, a utility-grade solar farm is a better deal than a new nuclear power plant. Perhaps that's why Warren Buffett's Berkshire Hathaway (BRK.A) is building the world's largest solar farm and not a new nuclear power plant."

    www.thestreet.com/story/11911544/1/solar-scores-a-big-win-ov...

    >> And to learn more about the dangers of nuclear energy, go to the highly recommended site:

    www.enenews.com

  • Report this Comment On May 19, 2013, at 1:05 PM, sciencedave wrote:

    "Uranium prices may go up in the future, but Americans are demanding clean energy today."

    Nuclear energy is not clean energy. There's that thing about the waste remember. No place to put it.

  • Report this Comment On May 20, 2013, at 3:25 PM, Pilm wrote:

    Well, Japan is basically no longer buying nuclear fuel, nor most of Europe, and the best you'll have in the US is steady demand, though probably slightly falling over the next 10 years, so those will be strong forces working against price increases.

  • Report this Comment On May 20, 2013, at 9:12 PM, southerngreen wrote:

    Not sure if Pilm is joking or just not educated on the topic but Japan is buying nuclear. Their pollution levels have skyrocketed since they have been importing dirty fuels after Fukushima. China is building 65 nuclear reactors as we speak and India and Russia are just others to add to the list currently expanding their nuclear capacity to meet the huge energy needs of their massive populations. Europe is indeed buying nuclear and in fact France gets 75% of it's power from nuclear. Germany promised to phase out nuclear plants so instead it imports NUCLEAR power from other countries. So, luckily for the health of our planet, nuclear is growing at unprecedented rates. If we hadn't been using nuclear to date we would have millions more deaths from air pollution alone. Not one person has died from radiation from Fukushima. The fourth generation nuclear reactors are the safest and most economical we have ever seen and they use all the radioactive material currently sitting in waste, so this will eliminate the issue of waste which worries so many of us. My concern is why are we still using so much coal while our planets temperature soars to levels we may never be able to come back from?

  • Report this Comment On June 07, 2013, at 8:01 PM, dliles wrote:

    Fuel cost are not a significant cost of nuclear power.. The average fuel cost at a nuclear power plant in 2012 was 0.75 cents / kWh (http://www.nei.org/resourcesandstats/nuclear_statistics/cost....

    We need a mixture of energy sources including nuclear and solar. Despite arguments here with no basis, solar has not won. Materials for solar and wind as well as nuclear must be mined (see http://www.idigumining.com/) which most environmentalist don't realize or don't bother telling. The nuclear waste issue is a political one not a scientific one. We have "experts" against nuclear power (and mining) who have no technical background and seem to have instant credibility since most of the U.S. population just pushes the "I believe button" without doing their homework.

    Sorry for the rant.

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