Australian Shares, International Shares, Investments

Uranium small caps undervalued

Maple-Brown Abbott uranium small cap investments

The demand for energy security and avoiding blackouts will see small-cap uranium stocks perform better as they return to the limelight.

Australian small-cap companies operating in the uranium sector offer strong future investment potential off the back of concerns about energy security, the transition away from coal and the need for governments to ensure they can supply base-load power to consumers.

Maple-Brown Abbott Australian small companies co-portfolio manager Phillip Hudak acknowledged uranium had fallen off the radar following the power plant accident at Fukushima in 2011, but its current low price and increasing demand meant it was becoming a valuable commodity investment.

“We’ve been attracted to the uranium industry because this commodity has a price which has been selling out below the marginal cost, so eventually it has to mean revert,” Hudak revealed during a recent media briefing in Sydney.

“The other thing that’s interesting about this sector is the fuel buyers are price inelastic and all they want is supply certainty coming through. However, this sector is such a small industry that is responsible for 10 to 15 per cent of base-load power around the world.”

He pointed out this small size meant after the Fukushima accident in Japan, many countries stopped using nuclear power, leading to a glut in uranium products in the market that is only starting to come to an end after more than a decade.

“Utility companies in the US and Europe have only been contracting about 35 to 40 per cent of their uranium needs each year since Fukushima, but last year we saw the replacement rate being contracted at 65 per cent of annual consumption,” he said.

“For this year, after only nine months, utilities have actually contracted the same amount as they did last year, so there’s potential we could see it starting to approach replacement rates.”

According to Hudak the reason for this increased demand in uranium was the reopening of existing nuclear power plants and the construction of new facilities, leading to further investment following a period of under-investment.

“The cherry on top will be the energy transition. The political will has completely changed and physics has trumped the narrative,” he said.

“Look at what’s happening in Germany, where the invasion by Russia into Ukraine means that energy security has been paramount. In the US, the Inflation Reduction Act has been positive for nuclear and the taxonomy in Europe around nuclear has become positive.

“Wind and solar will be the major driver of the transition, but one of the key issues we have found is question marks around the reliability of the base-load level of power. Energy markets are not going to tolerate blackouts and nuclear is going to be part of the solution.”


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