What is uranium and why do we need it?

Uranium is a chemical element. As a metal, it is found in a number of different countries around the world. These include the US, Canada, Kazakhstan, and Russia.

In a civilian context, it can be used in nuclear power. Recently, governments have started pursuing alternatives for the production of energy, including nuclear. These policies could have nuclear plants on the grid by the early 2030s, thus I’m looking at uranium stocks as long-term investments.

Indeed, the UK government released its Energy Security Strategy this month, promising £2bn for nuclear power.

Additionally, China gave the green light for the construction of 150 nuclear plants. This will come at a cost of $440bn. 

Uranium stock #1: Yellowcake

The first firm is physical uranium trader Yellowcake (LSE:YCA). Based in Jersey, it buys, sells, and holds uranium. It currently trades at 451.2p.

Between 2020 and 2021, its profit before tax increased from $12.51m to $29.91m. In addition, revenue rose from $15.93m to $33.92m.

Furthermore, in the three months to 31 December 2021, the value of the company’s assets grew by 12%. This is not particularly surprising, considering that the uranium spot price has doubled over the past year. 

During that final quarter of 2021, the firm took the opportunity to purchase a further 8m pounds of uranium. 

In April, it announced a $3m share buyback scheme, showing the strong position in which the company finds itself.

A risk, however, is that events in Russia and Kazakhstan impact its ability to take delivery of physical uranium.

Uranium stock #2: Cameco

The second business is uranium miner Cameco (NYSE:CCJ). It operates three projects in Canada and Australia. It currently trades at $30.22.

Throughout 2021, the company added around 70m pounds of uranium in long-term contracts. Furthermore, it ended the year with a cash balance of $1.3bn. Its long-term debt stood at $996m.

Additionally, it is investing to increase production at its McArthur River and Key Lake operations in Australia and Canada, respectively. This could be completed by 2024. 

One risk may be that the business fails to meet this deadline. Despite this, these two operations should produce around 5m of uranium in 2022.

The Cigar Lake project in Canada may yield around 15m of uranium this year, which would bolster the firm’s production figures. 

The company also recently announced a 50% increase in its dividend to ¢12 per share in 2022. This is another indicator that the business is currently strong.

Overall, I think nuclear power is going to become even more central to our lives. With that in mind, I want to gain exposure through these two uranium stocks. I will be buying shares in both soon and holding until at least 2030, when nuclear power may produce much more of our energy.

The big advantage nuclear energy has over wind farms and the like is energy density. From a relatively small plant, a nuclear reactor can generate many megawatts of energy.

Freetrade analyst Gemma Boothroyd has been examining nuclear energy stocks for possible investment opportunities.

Nuclear shares ahead

Boothroyd says: “With Boris Johnson reportedly now ‘gung ho’ on nuclear energy, we might be on the verge of a grand-scale shift to the power source. The UK is grappling with the best way to keep the lights on for Britons, and simultaneously trying to take a step towards a net-zero future. Nuclear looks like the best way to achieve both.”

The war in Ukraine and our desire to wean ourselves away from Russian oil and gas can only add extra impetus. And we just can’t build the renewable energy capacity that will get us to net zero overnight.

So what nuclear energy shares are there out there? Boothroyd has identified a couple of possibilities.

Uranium supplies

One is Yellow Cake (LSE: YCA). It invests in uranium, which it gets from the world’s largest producer of the stuff. That’s Kazatomprom — and if you think it sounds Russian, don’t worry, it’s in Kazakhstan. Kazatomprom is listed in London, so it is also a way of investing in nuclear energy shares.

The Yellow Cake share price has climbed more than 50% over the past 12 months. And it has more than doubled over five years.

The Freetrade analysis points out that uranium prices hit an 11-year high at $60 per pound in March. But Boothroyd also pointed out one specific risk, saying: “Civil unrest in Kazakhstan, where the firm’s mining sites are located, led Kazatomprom to caution of possible supply chain disruptions in the coming months.“

Yellow Cake is, however, planning to ramp up its uranium stocks so it can profit from what it sees as a likely future supply shortage.

More Uranium

Canadian firm Cameco (NYSE: CCJ) is listed on the US stock market. It also deals in uranium and provides fuel for nuclear reactors. Additionally, it also owns a number of its own mines, so its future is not tied to Kazatomprom.

Boothroyd tells us that “the firm’s strategy is to operate well below capacity. In 2021, Cameco was running at 75% less than its full productive capacity, and by 2024 it estimates that will fall even further, down to 40%.“

The plan, then, is to invest in the future price of uranium, not the current price. The prospects for this nuclear energy stock, it appears, will depend on growing demand.

Cameco’s profit plunged in 2021, as a result of its suspension of operations. But analysts are forecasting a rise in sales and profits by next year.

The Cameco share price, meanwhile, has climbed 75% in the past 12 months. And it’s up 160% over five years.

One exciting development is the creation of small modular reactors. These could be used to build smaller, cheaper nuclear power stations. That could speed up nuclear growth and boost demand for uranium.

I’ve been hunting for uranium shares to add to my portfolio. Here are three I’d consider buying today.

A top uranium producer

For a big uranium producer with an attractive dividend yield, I’d choose mining giant BHP (LSE: BHP). The company’s Olympic Dam mine in Australia is best known for its copper, but also contains a lot of uranium.

BHP produced nearly 2,300 tonnes of uranium concentrate in 2021. I estimate it’s one of the world’s top five producers of the nuclear fuel.

The main downside of BHP as a uranium stock is that much of the group’s profit comes from iron ore and other materials. This means the rising uranium price will only have a limited impact on earnings.

However, BHP shares currently offer a forecast dividend yield of more than 8% and look quite reasonably valued to me. This is a stock I’d be happy to own in my portfolio.

A nuclear fuel business

One uranium stock that should benefit directly from higher prices is US firm Cameco (NYSE: CCJ). This £8bn firm is listed on the New York Stock Exchange, but I’d be able to buy it through my UK share dealing account.

Cameco owns a number of uranium mines and also produces nuclear fuel for use in power stations. Interestingly, the company is keeping some of its mines idle. From what I can tell, management is playing a long game and betting on higher uranium prices in the future.

Cameco looks promising to me as a long-term play on nuclear power. My main concern is that this business has not been very profitable in recent years. Despite higher uranium prices last year, the company reported a $100m loss for 2021.

Broker forecasts suggest that by 2023, sales will rise to $2.1bn while profits will reach $180m. However, that still leaves the stock valued on 36 times forecast earnings, which seems a little pricey to me.

I reckon Cameco has potential as a long-term investment, but I’d prefer to wait for a better buying opportunity.

Pureplay uranium stocks

The world’s biggest uranium producer is Kazakhstan firm Kazatomprom. Although I can buy shares in this company on the London market, Kazatomprom is still 75%-owned by the Kazakh state wealth fund. For me, it’s just too risky.

Instead of buying Kazatomprom shares, I’d consider buying into Yellow Cake (LSE: YCA). This is a uranium trading and investment business with a long-term contract to buy uranium from Kazatomprom.

Yellow Cake’s profits depend on movements in the uranium price. But the company reported a profit of $172m for the six months to 30 September 2021, based on the increased value of its uranium assets.

I’d consider buying Yellow Cake shares to bet on long-term uranium price growth.