Nuclear power might have a tough time shaking off its label as the uckly duckling of zero-carbon energy, but the industry has proven surprisingly resilient.
Despite a handful of reactor closures in recent years, the United States generated a record amount of electricity from its atomic fleet in 2019. Nuclear power provides roughly 20% of the nation's total electricity and remains the most efficient power source available. The nation's fleet operated at full capacity 93.5% of the time last year -- well ahead of the next-closest major power source, natural gas, which reached peak capacity 56.8% of the time.
There's just one potential problem for American nuclear power: virtually all of the fuel needed to operate reactors is imported. The United States imported an estimated 91% of the fuel consumed in nuclear power plants in 2019, although the reliance on foreign materials is likely to increase. That's because the country produced just 174,000 pounds of uranium concentrate last year -- half the previous all-time low set in 1949 -- but requires over 43 million pounds to keep its fleet running each year.
Should investors be concerned by America's lackluster uranium production?
Geopolitics, geology, and economics dictate uranium output
On the surface, it's not ideal for a major American industry to be overwhelmingly reliant on foreign materials. The United States purchased 91% of the uranium concentrate consumed in 2019, although domestic production amounted to only 0.4% of consumption (there's a lag time between production, assembly, purchase, and consumption -- suggesting the reliance on imports will increase in the 2020s). That means the United States lacks uranium security.
But a little nuance and context is required to get the full picture. The United States produced sufficient uranium throughout the Cold War, both for securing energy production and materials for weapons. When the Soviet Union collapsed, domestic production of uranium concentrate collapsed, too. The United States has been more reliant on imports of uranium concentrate than production since 1990.
In fact, one of the primary reasons for abandoning domestic production was a non-proliferation program called Megatons to Megawatts. Entered in 1993, the agreement had Russia dismantle large stocks of Soviet-era nuclear warheads, reprocess the materials into reactor-ready fuel, and sell it to the Americans for use in nuclear power plants. It was wildly successful: approximately 10% of all electricity generated in the United States during the program's 20-year existence originated from former Soviet nuclear warheads.
Geopolitics isn't the only factor to consider. Geology and economics also play significant roles in American uranium production. The United States has sufficient uranium resources available -- over 1.2 billion pounds -- but most of the material cannot be produced economically at current market prices. Fortunately, insofar as North America is concerned, there's an overwhelming surplus of high-quality, low-cost uranium concentrate available thanks to the envious mineral riches of Canada. That's where investors seeking an opportunity in the uranium insecurity of the United States should turn their attention.
Uranium stocks to consider
Cameco Corporation (NYSE:CCJ) and NexGen Energy (NYSEMKT:NXE), both Canadian companies, are two of the most reputable uranium stocks accessible to individual investors. There are large differences between the two, however.
Cameco is a global leader in uranium production, whereas NexGen Energy is a new company seeking to bring a development-stage asset into operation. The three Canadian mines owned by the duo would have a combined 56 million pounds of peak annual output of uranium concentrate, which is more than enough to supply all of North America's nuclear reactors. The key phrase is "would have" -- and it's not only because of the inclusion of the development-stage Arrow mine owned by NexGen Energy.
In recent years, the global market has been oversupplied, which has had predictable negative effects on pricing. The environment was made possible by a combination of irresponsible production quotas from state-owned producers, the closure of reactors in Western nations, and the closed-loop of China's emerging nuclear industry (putting the expected growth out of reach for market players).
Dismal market conditions have forced Cameco to make difficult decisions. The company suspended operations at McArthur River, which immediately removed 18 million pounds of production from the international market. But the move has begun to show signs of efficacy in the form of higher prices for long-term supply contracts.
Importantly, the business has proven as resilient as the nuclear industry. Cameco ended the first quarter of 2020 with $1.2 billion cash and had another $1 billion available under a credit facility. The company's interests in Cigar Lake (in Canada) and Inkai (in Kazakhstan) produced a combined 17 million pounds of uranium concentrate in 2019. And that doesn't include over 29 million pounds of fuel assemblies produced last year.
The fragile conditions of the uranium market make the timing of NexGen Energy's pitch for a new world-class mine a bit odd, but the business believes it has a case. The development-stage Arrow mine would be the world's largest and lowest-cost uranium concentrate mine, featuring up to 25 million pounds of annual output at costs under $5 per pound.
NexGen Energy expects the asset to be competitive at nearly any price point, especially with global nuclear demand growing faster than pre-Fukushima levels. That's exactly what pre-production mining companies are supposed to say in investor presentations, but a relatively healthy market valuation of $600 million suggests Wall Street is extending the benefit of the doubt to Arrow and the small-cap stock (for now).
American uranium production is next to nothing, but not worrisome
The United States is on track to cease all uranium production at some point in the 2020s. Given the proximity to world-class reserves in Canada and current market conditions, the reliance on foreign inputs for the nation's atomic fleet isn't nearly as concerning as production numbers might suggest. Investors interested in playing the opportunity of America's uranium insecurity can look to Canada's Cameco and NexGen Energy, just be sure to keep expectations in check. The uranium and nuclear industries have proven stubborn to generating reliable investing returns.