NexGen Energy Ltd, Best House In A Bad Neighborhood

NexGen Energy Ltd (TSX: NXE)  (OTC: NXGEFis a well known emerging uranium company with assets within and near the border of the world-class Athabasca Basin in northern Saskatchewan, Canada.  I believe NexGen is one of the best ways to articulate a contrarian view in the demand for, and spot price of, uranium.  Instead of rattling off facts about the global nuclear fleet of reactors, those interested in an excellent overview are encouraged to visit the World Nuclear Association website.  This article is not about convincing readers of the need for clean, reliable, base-load electricity generation.  Instead, for readers who believe in nuclear power, I review various ways one can get invested in the theme through uranium companies.

It’s all about supply & demand

Currently, there’s too much uranium supply on the market (and on the sidelines as “shadow inventory”).  Attendees at the World Nuclear Association’s Symposium in London were treated to a grim reckoning.  Traders reported that they expected to see the spot price trade below $20/lb.  Well, we’re now at $20/lb., the price is down ~40% year-to-date, and ~20% since the September symposium.  Yet, the lower the spot price, the more likely greenfield projects and capital-intensive expansions will be delayed or abandoned.  For a company like NexGen, funded for the several years, the spot price might as well be at $10/lb., it makes little difference.  Sometimes NOT being in production is a good thing. 

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On the demand side, things are much more laid back.  Like many, I believe uranium consumption will experience a 3-4% CAGR for the next few decades.  That may not sound like much, but 3.5% growth equates to a doubling in demand by 2036.  Interestingly, it’s been widely reported for years that countries in the Middle East are very interested in nuclear power.  Several are making great strides in the industry.  Just this month the UAE raised $24.4 billion specifically for a nuclear plant, and Saudi Arabia had orders for $67 billion and accepted $17.5 billion in a ground-breaking sovereign bond deal.  Nuclear power could be a beneficiary of cheap debt (low-interest rates) across the globe.  

Where will new supply come from?  The top 10 uranium-producing countries delivered approximately 60,000 metric tons in 2015.  Of that amount, a combined ~47% came from top producing country Kazakhstan, along with Russia & Ukraine.  By comparison, just ~34% came from Canada, Australia & the U.S. 

Kazakhstan, Russia & Ukraine accounted for ~47% of uranium supply in 2015

Tensions between Russia and the West have increased dramatically.  Putin’s sphere of influence over a major portion of the world’s supply (Russia + Kazakhstan + Ukraine) should be of grave concern. Consider this article in which the author points out,

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