Rosenberg Research: Uranium /nuclear Rosenberg Research: Looking for a TSX sector that will outperform? This is it
Nuclear power is solidifying its place as a linchpin of the global clean energy transition, providing a clean, large-scale solution to the rising electricity demand generated by the switch from fossil fuels.
Canada is well-placed to benefit from that trend, with rich uranium reserves, a pro-nuclear policy stance, and a large and growing domestic nuclear power industry. That makes instruments such as the Horizons Global Uranium Index ETF (which includes the major TSX-listed uranium producers) a good place to pick up exposure to this secular theme.
Canada’s uranium companies are looking attractive, as they are set to benefit the most as the demand for uranium outpaces supply in the medium term. Nuclear technology developers and operators in the country will also emerge as winners as domestic investments in nuclear capacity and global demand for reactors pick up. As climate change and energy security become top concerns for policymakers, countries are moving away from fossil fuels and transitioning to clean energy. At the same time, steady population growth and the move away from fossil fuels mean that there will be a massive electricity demand (think charging your EV from your home grid).
The IEA estimates that electricity consumption is on pace to rise 150% by 2050 under the net-zero emission scenario. Policymakers are struggling with the right clean energy strategy — renewable resources all have their drawbacks (wind struggles to scale, and solar is climate dependent and best suited to microgrids).
One already-proven large-scale option is nuclear power. After a pullback in the wake of the Fukushima disaster (Angela Merkel ditched Germany’s nuclear program entirely in the aftermath), the technology is gaining popularity again. Nuclear energy meets the national criteria for low emission levels and energy security, and many countries are increasing their nuclear power supply. 22 nations pledged to triple nuclear energy output by 2050 in last December’s COP 28 conference.
Currently, 60 reactors are under construction globally, and there are plans to build another 110, according to the World Nuclear Association. But to make this promise (tripling nuclear output) a reality, what matters the most is one commodity: uranium. That’s where Canada comes in as a venue for investors to gain exposure to this radioactive theme.
Canada is well positioned in the global shift to nuclear energy. It has a large domestic production capacity (which is set to expand), extensive technological know-how with a robust nuclear infrastructure, large uranium reserves (currently the world’s third-largest), and a pro-nuclear government and public.
The current shortage in uranium supply (projected to be 71% of world demand according to UxC) works in favour of Canada, which stands to benefit from high prices for its uranium exports. The spot uranium price has increased 80% from March 2023 and 200% since the summer of 2021. As the demand for uranium continues to outpace the supply, uranium suppliers in Canada’s TSX Composite are set to emerge as winners.
Beyond the raw materials angle, Canada has the 7th highest capacity of operable nuclear reactors in the world, with 19 reactors in total (18 of them in Ontario). That consumes around 15% of Canada’s uranium production capacity, with the remainder forming a key Canadian commodity export. Canada’s large nuclear grid makes it a technological leader in the industry, too, with the most recognizable product being the CANDU reactor, which Canada has sold to markets in Asia and South America. India alone operates 20 CANDU-derivative nuclear reactors.
In light of that combination of natural endowment and industrial capacity, the Canadian government has taken a firmly pro-nuclear stance, incentivizing nuclear power development with a 15% investment tax credit. To name a few recent developments, the Canadian federal government announced C$50 million in funding for Bruce Power’s predevelopment work to increase nuclear capacity in Ontario, and the provincial government confirmed the refurbishment plans of the Pickering nuclear plant near Toronto, which is estimated to extend its operations by at least another 30 years. Ontario is expected to build three SMRs (small modular reactors) at the Darlington nuclear site, and Westinghouse is looking to deploy four AP1000 reactors in the province. Furthermore, AtkinsRealis plans to contribute significantly to Canada’s nuclear capacity by deploying a new version of the CANDU reactor (by about 2035).
The spot uranium price has been on a tear over the past few years as the critical role of nuclear power in energy transition has become clear. Nuclear energy and uranium have strong immunity against business cycle fluctuations. In other words, they are not very responsive to whether nonfarm payrolls are above consensus or if real GDP growth has come in negative. So they are a good hedge against elevated uncertainty in the world’s economic outlook.
In the S&P/TSX Composite, there are four companies supplying uranium - Cameco Corp. , Energy Fuels Inc. , NexGen Energy Ltd. , and Denison Mines Corp. - and the earnings outlook for the market-cap weighted index of these companies is quite constructive. It is expected to see earnings growth of +16.1% YoY in 2024, +60.7% in 2025, and +37.1% in 2026. This compares to the TSX’s earnings growth estimate of +4.1% YoY in 2024, +11.6% in 2025, and +4.9% in 2026.
While the TSX Composite has increased 36% over the past five years (since March 2019) — the cap-weighted index of the four uranium suppliers has soared by +225%. Even if the absolute forward P/E ratios of these four companies look high, when adjusted for growth using the PEG ratio (forward P/E to earnings growth), their risk-reward profiles look favourable. These companies have a PEG ratio of 1.7x (reasonable) vs. the TSX at 2.1x (expensive). But they remain undervalued.
Given the positive domestic and international outlook, we think that makes a compelling investment case. Beyond the uranium miners, investors can also consider two engineering and construction conglomerates that are involved in the design and building of nuclear reactors: AtkinsRealis and TC Power. For investors who want to gain exposure to uranium and nuclear energy, Horizons Global Uranium Index ETF has a decent number of Canadian uranium companies (and also physical uranium), with Cameco comprising 20% of the index, Nexgen 8%, and Denison Mines 3.3%. We think this or a similar index should be part of a well-diversified portfolio, offering both strategic exposure to the climate transition theme, cyclical exposure to an undervalued corner of the Canadian equity market, and low correlations to the broader market.
Atakan Bakiskan is an economist at Rosenberg Research and Dylan Smith is a senior economist with the firm.