Is nuclear energy a good investment?

Nuclear energy has always been the subject of debate around the world. Although recently there has been a resurgence in interest in using this energy. It is logical, with growing geopolitical tensions, countries are looking for alternatives to Russian gas. In addition, the objectives of combating climate change mean that options with low carbon emissions are sought. Precisely one of the characteristics of nuclear energy... So let's take a look at how to take advantage of this investment opportunity in nuclear energy stocks.

Why is nuclear energy a good investment opportunity now?

Nuclear energy has a controversial history and somewhat of a bad reputation, especially after the nuclear disaster in Fukushima in 2011 or that of Chernobyl in 1986. And while it may not be the solution to Europe's gas crisis in the short term, it may be a long-term solution that can effectively reduce dependence on Russian gas. Germany and Belgium have already reversed their decision to suspend their nuclear production, and France, the United States and the United Kingdom have made plans to start building new nuclear reactors. And it's not just about energy independence. Nuclear energy is also important in helping countries meet targets for reducing harmful gas emissions. 

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Panorama of construction of new nuclear plants in Europe. Source: Bloomberg.

Nuclear energy is cleaner than natural gas because it does not produce greenhouse emissions, although it is not as clean as renewable sources such as wind, solar and hydro. In addition, it has a feature in its favor: renewable energy sources are usually dependent on weather conditions, which means that the energy supplied is intermittent and we need to store it for the grid to work efficiently. In contrast, nuclear energy provides a stable supply of electricity, but with a smaller carbon footprint. There are many benefits to using it, so it's no surprise that recent US climate legislation sets aside nearly $30.000 billion in tax credits for nuclear energy suppliers over the next decade.

What are the risks of nuclear energy?

Now we have seen the advantages of using nuclear energy. But let's review the risks of using this energy. One of the biggest known risks of nuclear power is the possibility of an accident. While accidents at other energy production plants tend to be relatively isolated, nuclear energy accidents, such as those at Chernobyl or Fukushima, can have large-scale catastrophic consequences. They can make an entire region uninhabitable, as we have seen with Chernobyl, and negatively affect the environment for a long time. Furthermore, the production of nuclear energy generates radioactive waste produced in the operation of nuclear reactors. And the main problem is finding a sustainable solution to store and eliminate this waste. This fact has canceled the plans of many regions to expand nuclear energy production.

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Uninhabitable area as a result of the Chernobyl disaster. Source: Counting Stars.

Furthermore, the construction of nuclear power plants is not a simple task. It usually takes an average of 5 to 10 years to build them, not counting the large costs they require. Many times they tend to be delayed and end up exceeding the initial budget, an explosive combination for the investors who finance them. These setbacks also mean that investors often want a guarantee of long-term demand and prices high enough to generate a good return on their investment. 

What do you need to know to invest in uranium?

Like any other raw material, the price of uranium moves based on supply and demand. But uranium is not traded on an open market like other commodities. Buyers and sellers negotiate contracts behind closed doors. And since nuclear plants are expensive to build, buyers often prefer that these contracts be long-term, to ensure supply. This means that actual prices are often harder to follow and less volatile.

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Development of the price of uranium since the Fukushima accident. Source: Tradingview.

As we can see in the graph above, uranium prices have seen a huge drop since the Fukushima disaster in 2011. Many countries decided to close their nuclear power plants and stop construction of new ones. With the current situation everything has changed, although the recent price growth is still a third lower than the levels observed a decade ago. Now they are recovering from years of low investment in nuclear energy production, when governments extend the period of operation of the plants, ready to build more if required. 

Are there any investment opportunities in nuclear energy stocks?​

Unfortunately, investing in nuclear energy is not as easy as it seems. For starters, the nuclear energy supply chain is very extensive. It includes uranium miners, power companies, engineering and construction companies, and companies responsible for manufacturing components for nuclear reactors. Many of these companies generate most of their profits in businesses unrelated to nuclear energy. That is to say, we will have a hard time finding a company that bases its operations purely on nuclear energy. But that doesn't mean we don't have the option to make an investment in nuclear energy stocks. We can invest through uranium or mining companies that extract it. Almost all nuclear technology works with uranium, and two of the largest uranium producers are precisely two companies where we can make our investment in shares of nuclear energy producers;  Kazatoprom (0ZQ) Y Cameco (CCJ).

 

However, the difficulty with investing in miners, rather than the raw material itself, is that it takes on additional operational and financial risks for the company. 

And any ETF to gain exposure to uranium?

To make a diversified nuclear energy stock investment, we have several ETFs that we can leverage to gain exposure to this opportunity. We have the nuclear energy ETFs like the VanEck Uranium+Nuclear Energy ETF (NLR) or the Global X Uranium ETF (URA). They are two good options, but it should be noted that it is oriented towards public service companies. We also have to take into account that the demand for uranium will benefit faster from its required use than the companies building new nuclear plants. To invest in uranium itself, we can buy the Sprott Physical Uranium Trust (U.A.).

 

Finally, in the long term, the energy transition also includes energies such as nuclear energy. We can gain exposure to this event by investing in the iShares Global Clean Energy ETF (ICLN) or in the iShares MSCI Europe Energy Sector UCITS ETF  (SEA). 

 

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