Can you start by telling us a bit about Geiger Counter Limited?
Keith Watson: Rob and I manage three closed-end investment trusts of which Geiger counter is certainly the one in vogue at the moment. It’s dedicated towards the nuclear industry, an area that we think is most appropriate to invest in currently.
The raw uranium that goes into nuclear fuel is a small proportion of the overall cost of producing electricity from nuclear power, and, as a result, the demand is very inelastic to changes in the price of the commodity. Things can move quite materially and sustain high levels for a long period of time because of that demand-driven price insensitivity, and it’s one which therefore has very strong leverage to an improved environment.
We invest globally, so for investors, particularly those in the UK, I think it’s very helpful that they can gain access to a fund with a mandate that is unconstrained geographically.
We have projects which tend to be in Tier 1 jurisdictions, alongside some which are slightly higher cost than those Tier 1 assets, which give you some extra operational leverage.
The fund has just raised some money via the embedded rights. It is a little bit disappointing that it trades at such a discount, but therein is another opportunity to play with what appears to be a fundamental sea-change in sentiment, both at the government, consumer, and public opinion level.
With global acceptance of nuclear growing, supply is going to struggle to keep up, especially given the time it takes for uranium projects to come online. What’s your outlook?
Robert Crayfourd: We think it’s a pretty simple story, if you split the two sides into supply and demand, for the demand side, we have a very clear picture, we can see the number of reactors that have been built globally. They generally have long lives, so you have a very stable form. The growth side is largely driven to Asia. China is adding around 10 reactors a year. It is rapidly looking to increase its reactor fleet, and continues to do so. So, that’s the growth side.
Over in the West, we’re seeing the extension of reactor fleet lives, and given global emissions targets set through COP28, 20 nations have signed to virtually triple nuclear power output.
Nuclear power is the only form of zero-carbon baseload power in a world, where grids are becoming more destabilized with increased renewable loading, which is becoming increasingly important. So, on the demand side, you have a clear demand growth picture.
On the supply side, which is where we really focus, the mine supply has been constrained, given that we’re coming off the back of a 10+ year bear market in the mining sector. As a result, there’s been a lack of investment into new supply. If anything, we’ve had major producers curtailing production from their largest projects. These companies are investing in bringing their old brownfield mines back on. Cameco is bringing one of its large mines back on, as is Paladin with a mine restart in Namibia. But, beyond that, there’s very little new growth other than some large projects like NexGen, which has the largest project with the most material.
So, we have growing demand, and we know what additional supply can come through, but ultimately, it’s limited. This points to a clear tightening market, with very little demand elasticity to price, given it’s such a small component of the overall cost. We therefore have a tightening outlook in the general market, and then as you move forward, prices can be very volatile.
When we look towards the back end of the decade, small modular reactors (SMRs) are increasingly becoming a factor that we’re starting to build into assumptions. So, part of these emissions targets set by most major nations do include an aspect of SMRs, and they’re a major component towards trying to meet emissions targets.
What are some of the external forces that impact the uranium space?
Keith Watson: There are two key points to note here. One, we could have a situation where one of the mines is interrupted, such as in 2007, with the flood at Cameco’s Cigar Lake. That can have an impact. That mine alone is 18-20lbs at full capacity and is currently the largest single mine in the world.
Another factor is geopolitics which plays a large part in this. In light of the energy crisis, energy security has risen as one of the major priorities that governments need to address, and security of energy supply is involved very much in the nuclear sector, with Kazakhstan producing some 45% of uranium units from the country, and with Russia responsible for an equivalent amount of enrichment in the supply chain.
The inventory cycle is another factor. Last year was the first in over a decade where utilities acquired more uranium than they consumed on an annual basis. And, as a result of winding down inventories over the last few years, it’s difficult to not imagine that they’re going to keep purchasing at higher rates than they have done historically.
Robert Crayfourd: That supply demand balance has been exacerbated more recently. You’ve had the US ban on Russian material, which was phased in over a period of time, but more recently we’ve seen the Russian suppliers calling for a waiver to restrict those supplies.
Russia has been a major supplier of nuclear material, so whilst only about 6% of global direct uranium mined, so U3O8 production, they have about 30-40% of global enrichment. And when you look at the joint ventures they have within Kazakhstan, that adds about 6-7% of global production which is then Russian controlled as well as a large proportion of Kazakh material heads to Russia.
That geopolitical situation has caused Asia, primarily China, to lock up secure supply, and the West has found itself fairly short. So, we’ve now had this US import ban put in place, but it’s the retaliatory measures that are anticipated from Russia in response to that which could then tighten up the Western market further.
What sort of investment opportunities are you finding in this space, and what criteria do you use to assess what makes a good opportunity for the Geiger Group fund?
Keith Watson: One region which looks like it’s going to be sustained as the most important globally for Western production is the Athabasca Basin in Canada, and one of the better projects that we see there is NexGen’s (TSX: NXE) Arrow project (Rook I). It’s one of the highest-grade deposits, it’s at the lowest end of the cost curve, should produce below US$6/lb, and it’s scalable. Crucially, it’s also the most advanced around the world in terms of its permitting and having its First Nations affairs in place.
It’s now just waiting for that to translate through to the final federal permit, which will give it the ability to commence construction. It is by virtue one of the largest scale projects, at the lowest cost, and we think it has strategic value in being able to supply into an undersupplied market and influence the uranium price itself quite heavily.
It’s acquired some uranium on market, in a very illiquid market, but for that reason, we think it’s very strategic at US$75/lb, it’s probably not even trading at net asset value (NAV) at the moment.
This represents our style of investments. We don’t feel the need to chase only the most liquid sector assets. We would much rather go for projects which have operational leverage and strategic value yet to be reflected.
Another glaring side of the market is the lack of domestic production in the US. It’s typically a higher cost of production, most of them will print something around US$40/lb. That’s probably optimistic – it will be higher than that, but they will also benefit from US government policy, which is trying to encourage domestic production and indeed build up a strategic uranium reserve of fuel to see them through potentially difficult times. And again, these assets are on very low valuation in comparison to the more liquid side of things.
It’s worth reminding investors that as a closed end trust, one of the aspects that lends itself to that structure is that we can invest for the long term in less liquid assets where we see better value.
Robert Crayfourd: It’s that looming Western shortage that leaves us focused on more Tier 1 assets with friendly nations in the West. That’s where we see the best opportunity, because we expect that contracting cycle going forward to be positive because these utilities need to lock up incremental supply.
Hence, we’re focused on names that aren’t heavily contracted and, as a result, you can see we’re heavily underweight on Cameco, but we’re overweight with some of these developers like NexGen. So, we’re a bit more comfortable in taking that kind of permitting risk.
This looming shortage in the West means permitting is likely to be more supported politically. You’re seeing a bit of a shift in the US in that direction, which helps to derisk the pre-production stage projects.
With this strong performance in the uranium sector right now, are you seeing more investors and more interest coming into this space?
Robert Crayfourd: We have definitely had more interest. For the broader market, there’s been an issue with the fact that there isn’t much liquidity or names and options within the underlying sector, and that’s where owning a basket, like this fund, offers a good degree of diversification.
We generally like commodities and sectors where it’s hard to find good names, because it means there isn’t a huge amount of new incremental supply coming through. We think there’s a strong opportunity coming.
When uranium was pushed up to this 106 level, there was a lot of retail flow coming through, and more speculative flows into that. When uranium pulled back off that peak in the mid-90s, that waned slightly.
What’s your stance on the future energy mix as we continue to move away from fossil fuels? So much of the focus at the moment is on the batteries space, but nuclear is currently the only stable, clean fuel available.
Keith Watson: I think the best highlight is actually what happened at COP28, when we had 25 signatories say that nuclear is the only form of zero-carbon base load powerOverall, the best thing that most governments can do is switch from coal to gas, which instantly removes the equivalent carbon emissions of bringing hundreds of millions of vehicles off the road.
The more variable renewal part is batteries. This is something that we like, but it must be cost effective in its own right. We don’t think that lithium is necessarily the answer for large scale storage, as we need quite a lot of it.
The most helpful thing that governments could do is not shut down reactors prematurely. We’ve done that now; we’ve had a bit of a brief contracting period as utilities have gained confidence that the foundation they have isn’t going to be shut down in costly fashion.
The other thing alongside using more gas, is to try and build up some battery technology that would be quite helpful in enabling the more variable power. I think it’s quite telling that we’re now seeing the economics questioned on a number of these sort of special purpose renewable power ventures, not just because interest rates are going up, but because I think there are moves afoot to charge variable pricing on the time of day. For example, solar is available at midday and that is going to pressure some of the growth and roll out of that type of project.
We also see changes in working practices of the big industrial users so that they use shift patterns that optimize the availability of cheap power, either when the wind is blowing, which is probably more difficult to predict than when the sun shines at midday. That type of more holistic approach is there, there’s just no doubt that we’ve had a rational move to keep reactors running as long as they’re able to.
Robert Crayfourd: SMRs are the key potential driver here because the main pushback on nuclear power being the solution to near term issues is the long build time for reactors. But SMRs will have a quicker build time and lower capex than traditional reactors. So, they have a slightly higher opex, but far easier and quicker to turn around.
Clearly nuclear is baseload and it’s the only form of power that could replace all others, and we could run the whole world on.
