CA - Nuclear-Focused Stocks Rally As World Leaders Pledge To Expand Generation Capacity

2023-11-21 11:21:26 ET

Summary

• The United States aims to achieve 100% carbon-free electricity generation by 2035, requiring the construction of new nuclear power plants.
• Nuclear energy stocks and ETFs have been strong performers in 2023, with gains of up to 60%.
• In North America, the well-known nuclear stock Cameco has surged by 94% year-to-date.

By Andrew Prochnow

The United States aims to achieve 100% carbon-free electricity generation by the year 2035. To attain this ambitious goal, the country must undertake the construction and operation of new nuclear power plants.

Ideally those would be fusion-powered plants, because fusion doesn't theoretically produce any type of environmental waste. However, fusion power isn't expected to be successfully commercialized for at least another 5-10 years .

For the time being, that means the country is going to need to increase its reliance on fission-powered nuclear plants.

Nuclear Energy Sector's Performance in 2023

Not surprisingly, increased political support and interest in the nuclear energy sector has catalyzed upward movement in associated stocks and ETFs. And this niche has actually been one of the market's strongest performers in 2023.

For example, the VanEck Uranium+Nuclear Energy ETF (NLR) is up 36% year-to-date. In addition, four other key nuclear/uranium ETFs have also posted impressive gains this year, as highlighted below:

• Sprott Physical Uranium Trust (SRUUF), +60%
• Sprott Uranium Miners ETF (URNM), +56%
• Global X Uranium ETF (URA), +43%
• VanEck Uranium+Nuclear Energy ETF (NLR), +36%
• Sprott Junior Uranium Miners ETF (URNJ), +22%

As expected, the realm of individual stocks has witnessed numerous significant gainers in 2023. In North America, bellwether uranium producer Cameco (CCJ) has surged by 94% year-to-date. Similarly, Centrica plc (CPYYF) from the United Kingdom has registered a 65% increase in 2023. Additionally, E.ON SE (EONGY) in Germany, Engie SA (ENGIY) in France, and Endesa SA (ELE) in Spain have seen gains of 22%, 15%, and 10%, respectively, during the year.

These returns are particularly noteworthy given the overall unpopularity of the utilities sector in the global markets this year. Despite an 18% rally in the S&P 500, the Utilities Select Sector SPDR ETF (XLU) has experienced a decline of approximately 12% in 2023.

The outperformance of nuclear-focused stocks can be attributed primarily to the renewed interest in expanding global nuclear capacity. Another crucial factor is the upward trajectory of uranium prices, which has positively impacted companies involved in the mining and refining of this essential nuclear resource.

In 2023, uranium prices have surged by nearly 50%, reaching approximately $75 per pound. At the beginning of the year, uranium was priced closer to $50 per pound.

Looking further back, uranium was trading as low as $20 per pound at the outset of 2020. The sustained and substantial rally in uranium stands out, especially considering the reversal in the fortunes of many other commodity markets in 2023, such as oil and lumber.

What is Fission?

Fission is the process of splitting an atom's nucleus to produce energy, accompanied by the release of energy. Conversely, fusion relies on the successful merging of two nuclei into a heavier nucleus, resulting in the generation of a significant amount of energy.

The world's first fission-powered nuclear plant commenced operations in December 1957 in Shippingport, Pennsylvania. Currently, the United States operates 92 commercial nuclear reactors, contributing to approximately 19% of the country's annual electricity generation.

While nuclear science is intricate, the process of generating electricity through fission is straightforward. Heat from the nuclear reactor boils water, creating high-pressure steam. This steam is then directed into a turbine, propelling the turbine's blades and generating electrical current.

Crucially, nuclear power plants produce electricity without releasing carbon emissions. In contrast, fossil fuel-dependent plants burning coal or natural gas emit substantial amounts of carbon dioxide and other greenhouse gases.

However, fission-powered plants generate radioactive waste due to the use of uranium-based fuel rods in the reactor core. Disposing of these spent fuel rods is challenging because of their high radioactivity. This challenge underscores the appeal of fusion-based nuclear power, which minimizes environmental impact from these reactions.

Renewed Interest in Expanding the Global Nuclear Capacity

The United States is not the only country with ambitious plans to increase its utilization of nuclear energy. This month, Sweden declared its intention to undergo a substantial expansion of its nuclear capacity. Sweden's commitment to embrace nuclear energy might just be the beginning of a broader trend.

The U.S. is currently spearheading a global pledge to triple the world's nuclear capacity by 2050. And it's been reported that countries such as Finland, France, Japan, South Korea, Sweden and the United Kingdom are in full support of this initiative, and will likely join the U.S. in pledging to achieve the aforementioned 2050 production goal.

That means new global initiatives-like the one out of Sweden last week-will likely be announced in the coming months.

Along those lines, the U.S. recently announced it would be partnering with the Philippines to help the country develop nuclear power. The Philippines does not currently produce energy using nuclear reactors, but did attempt to build a facility back in the 1980s.

Assuming Congress approves the deal, this partnership would involve the transfer of equipment, materials and information to help kick-start the development of nuclear power in the Philippines.

Another key development in the U.S. was the recent advancement of the "Accelerating Deployment of Versatile, Advanced Nuclear for Clean Energy (ADVANCE) Act" out of bipartisan Senate committee.

According to Senator Shelley Capito of West Virginia, the ADVANCE Act has the potential to "reestablish America's preeminence as the global leader in nuclear energy in the twenty-first century." This bill is part of the broader National Defense Authorization Act (NDAA), which could be enacted in the near future.

And according to surveys conducted by Pew , 57% of Americans are now in support of building additional nuclear capacity, as compared to 43% back in 2016.

Short-Term Projection for the Nuclear Fission Sector

The nuclear energy sector is experiencing a revival after years of being overshadowed. This resurgence is driven not only by the future potential of fusion energy but also by the pressing demand for carbon-free power.

Consequently, there is a renewed focus on fission-based nuclear energy. Anticipations for the sector are escalating as new initiatives expand the potential revenues and profits for companies specializing in nuclear and uranium.

Along those lines, the International Atomic Energy Agency (IAEA) now projects that the total installed nuclear fission capacity on earth will more than double by 2050, rising from 369 gigawatts electric to 890 gigawatts electric .

And some of that future potential is already being realized. For instance, the aforementioned uranium mining company-Cameco- currently projects that its 2023 revenues will be 30% higher than they were last year.

Uranium is used to build the fuel rods that are housed in the reactor's core, and are responsible for generating the nuclear reaction which in turn heats up the water and creates the steam necessary to spin the turbines. And judging by the 90%+ rally in the shares of CCJ this year, the outlook for uranium companies is equally bright.

However, one must also recognize that pledging to aggressively expand capacity is one thing, but actually doing it is another. Unfortunately, one of the most promising emerging entrants in the nuclear fission sector- NuScale (SMR)-was recently forced to abandon its effort to build fresh nuclear capacity in the western United States.

NuScale had previously agreed to build six small nuclear reactors in partnership with Utah Associated Municipal Power Systems-the latter of which supplies electricity to public utilities in seven western states. Back when the project was originally agreed upon, the cost of those reactors was estimated at around $5.5 billion.

But due to a variety of factors, those costs recently ballooned to an estimated $9 billion, which made the project economically unfeasible. This setback has weighed significantly on the shares of NuScale, which are down roughly 75% year-to-date.

What's even more concerning is the fact that the NuScale project was part of a broader trend to install smaller nuclear reactors around the country to help reduce the costs associated with traditional large-scale reactors. These systems are referred to as small modular reactors ((SMR)), which by no coincidence are the same letters in NuScale's ticker symbol.

It should be noted that back in 2017 the state of South Carolina also abandoned an effort to build two new nuclear plants due to the astronomical costs associated with the project. In that instance, a total of $9 billion was spent on the project, and it achieved only 40% of completion.

In fact, the only major nuclear project to be completed in the last seven years is the Alvin W. Vogtle Electric Generating Plant in Georgia, which officially went into operation in July of this year. That project involved building two new nuclear reactors to supplement the existing pair of reactors at the facility.

In total, the project cost some $35 billion, which was double the original estimate. The Vogtle facility is now the largest nuclear power facility in the entire country.

These examples help illustrate the unique challenge associated with building nuclear reactors, and how the proposed expansion of the country's nuclear capacity will require additional thinking when it comes to the involvement of the government. As will the method(s) used to actually build out additional capacity, in terms of both technology and financing.

Investment Takeaways

Given the considerations mentioned above, investors and traders should approach investments in single stocks associated with the nuclear energy industry cautiously, especially those pursuing novel fission-based approaches like NuScale.

Year-to-date, prominent ETFs in this sector have demonstrated significant gains, suggesting that nuclear/uranium ETFs could offer a viable investment option compared to individual stocks. Investing in nuclear/uranium ETFs spreads risk across a more diverse range of assets, making them generally less risky than single stocks.

For those inclined towards individual stocks, focusing on companies with extensive histories or larger market capitalizations, such as Cameco, a major publicly traded uranium company and producer, might be prudent.

Additionally, considering large utilities with nuclear investments is an option, though it's essential to note that these companies often align with the broader utilities sector rather than the specific nuclear/uranium niche.

Several examples of such companies include Brookfield Renewable (BEP), Duke Energy (DUK), Entergy (ETR) and Exelon (EXC). And much like the aforementioned utilities ETF (XLU), which is down about -12% this year, shares in BEP, DUK, ETR and EXC are down -6%, -13%, -10% and -10%, respectively, so far in 2023.

Constellation Energy Corporation

One exception is Constellation Energy Corporation (CEG), which was formerly a part of Exelon, but is now a standalone utility that primarily focuses on carbon-free energy. Shares in CEG are up nearly 50% in 2023, which means this particular utility has traded more in-line with the nuclear/uranium sector, as opposed to the broader utilities sector.

Constellation is part of the S&P 500 and also pays a quarterly dividend of about $0.14. That said, one has to consider that shares in Constellation have already rallied considerably in recent months, which may indicate there's limited upside potential in the immediate future. Constellation's market cap currently stands at around $38 billion.

Aside from the aforementioned single stocks and ETFs, investors and traders can also consider the smaller cap uranium miners, many of which have also outperformed in 2023, as highlighted below.

• Uranium Energy (UEC), +69%
• Denison Mines (DNN), +60%
• Centrus Energy (LEU), +57%
• NexGen Energy (NXE), +46%
• Ur-Energy (URG), +45
• IsoEnergy (ISENF), +42%
• Energy Fuels (UUUU), +37%
• Fission Uranium (FCUUF), +23%

However, the risks associated with the stocks listed above are arguably more acute because many of these companies have smaller market capitalizations, which makes them more susceptible to large-magnitude moves.

These companies are also highly levered to the uranium market, which means any significant pullback in uranium prices could weigh heavily on this group in particular.

Trading Bullish

Taken all together, investors and traders bullish on the long-term prospects of the nuclear industry may be better served steering towards companies that have demonstrated sustained success in the industry like Cameco, or larger-capitalized companies that are better insulated from company-specific risk like Constellation.

Another possibility is the aforementioned nuclear/uranium ETFs, which offer increased diversification (e.g. the VanEck Uranium+Nuclear Energy ETF, NLR).

The nuclear/uranium sectors have already rallied considerably in 2023, but if the world remains serious about dramatically increasing fission-based nuclear capacity, there will probably be further upside ahead.

But if fusion energy is commercialized more quickly than expected, or another nuclear disaster unfolds, the relative attractiveness of fission-focused investments (including uranium mining) would undoubtedly be diminished.

Andrew Prochnow has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader. Andrew is a frequent contributor Luckbox Magazine.

For further details see: