Gas Crisis in Europe Heats Up Uranium Prices
Winter is coming and Russia is threatening for cut off natural gas supplies to Europe. Politicians are panicking. It is a big opportunity for investors.
Gazprom announced last week that it would cut gas flowing to Germany to only 20% of capacity. The Russia-owned company transports natural gas to Europe through the Nord Stream-1 pipeline.
The crisis is a boon for nuclear power, and Cameco Corp. (CCJ).
Russia cutting supply of natural gas to Europe was a likely outcome. President Vladimir Putin began threatening to choke off supply only weeks after the invasion of Ukraine in retaliation for western sanctions. It is the nightmare scenario for Europe. The International Energy Agency notes that 45% of natural gas supplies in 2021 to the continent flowed from Russia. Now Putin is playing his ace card, only months ahead of winter.
The decision could have a big impact in the United States, too.
Global inflationary pressures have finally started to wane. Commodity prices such as lumber, copper, wheat since June have all been in steep decline. However, depleted supplies of natural gas in Europe are causing prices to spike. Those prices cause electricity costs in the United States to surge, where 38% of power plants use the commodity as feedstock.
The Biden Administration has been pressing the Europeans to offset gas shortages with increased nuclear power production. And there has been notable headway.
The European Parliament voted earlier in July to label some nuclear projects as green energy. The move paves the way forward for more nuclear power use on the continent, according to a report in the New York Times. Germany previously planned to phase out all nuclear power by 2022.
Nuclear power has been derided for four decades. The number of plants globally peaked in 1996 when 17.5% of all electric power was generated in those facilities. Since then public opinion has soured and the political will to keep plants open waned badly.
A complete meltdown in 1986 at the Chernobyl nuclear reactor in Russia led to the depopulation of 68,000 people across 1,000 square miles in northern Ukraine. And 154,400 Japanese were evacuated in 2011 when a nuclear plant in Fukushima was damaged following a tsunami.
Nuclear power plants all over the world began to close. Today these facilities generate only 10.3% of the world’s electricity.
Now winter, and Russia, are forcing governments to rethink closures, and consider new investment.
Cameco Corp. is uniquely positioned to take advantage of both the current geopolitical crisis and the inevitable transition back to nuclear power. The Canadian uranium producer holds the world’s largest deposits. Executives at Saskatchewan-based company are strategically removing supply from the market in an effort to maximize the value of those assets.
Without uranium, the fissionable material used in all nuclear facilities, there is no power generation.
During a conference call in February Tim Gitzel, chief executive officer, told analysts that since 2016 Cameco has removed 190 million pounds of uranium from the spot market.
Gitzel notes that the Netherlands, Poland, Estonia, Slovenia and Serbia are now studying their nuclear options. Also, the European Union has labelled nuclear power as a climate-friendly investment, giving ESG funds a green light to begin investing in the sector.
Uranium prices are currently at $49.50 per pound, down from a high in June of $64.50. Despite the weakness, prices in 2022 are still ahead 16%. And the heavy metal has more than doubled since January 2021. Cameco is licensed to produce 53 million pounds annually.
At a price of $25.77, Cameco shares moved out of a downtrend earlier this month. The stock trades at only 25.7x forward earnings and 8.6x sales. The current market capitalization is a modest $10.6 billion.
Prior to the war in Ukraine the prospects for nuclear power seemed dim. Now winter, and a Russian power play to choke off natural gas supplies to Europe are giving the power source new vigor.
Cameco is cornering the market for uranium, the key commodity at the center of the nuclear power rebirth. Longer-term investors should consider buying shares.
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