UEC - Sprott Physical Uranium: Seizing Opportunities In The Uranium Bull Market

2023-09-15 11:44:48 ET

Summary

• Sprott Physical Uranium Trust actively accumulates physical uranium from various sources sequestering uranium.
• Investors can gain exposure to the uranium market without physically handling the commodity by purchasing units or shares in the trust.
• The trust's investment strategy offers potential exposure to uranium market price movements, but investors should also be mindful of the drawbacks.

Investment Thesis

Sprott Physical Uranium Trust ( SRUUF ) (also known as "SPUT") is well-placed to participate in the new uranium bull market.

Here I explain why to invest in uranium, why to specifically consider Sprott, and what are the drawbacks of investing in Sprott.

Why Investing in Uranium?

Uranium plays a significant role in supplementing the energy transition toward achieving net-zero emissions due to 5 attributes:

• Reliable
• Cheap
• Flexible
• Scalable
• And best of all? It's carbon-free.

Nuclear power plants, fueled by uranium, produce electricity without emitting greenhouse gases during operation, making them a crucial component of a cleaner energy mix. Making nuclear energy superior to fossil fuels.

Further, the appeal of nuclear energy is that, unlike renewable energy, nuclear energy offers a consistent and stable source of power, capable of supplying base-load electricity, which is essential to meet the energy demands of modern societies.

Moreover, nuclear power's reliability ensures a consistent energy supply, reducing the need for renewable energy backup generation and helping to stabilize the grid. As countries seek to reduce their carbon footprint and transition to net-zero emissions, incorporating uranium-based nuclear energy into their energy portfolios can contribute significantly to achieving these environmental goals while maintaining a secure and dependable energy supply.

Why Sprott? Why Now?

Sprott Physical Uranium Trust is a financial entity dedicated to the acquisition of physical uranium.

Firstly, it actively accumulates uranium. These acquisitions come from various sources, including uranium producers, spot markets, traders, and government stockpiles.

Once acquired, they take secure storage of the physical uranium. This is called sequestration. And that's part of its appeal.

As an investment vehicle, the trust offers the opportunity for investors to gain exposure to the uranium market without the complexities of physically handling the commodity. Interested individuals can purchase units in the trust and seek exposure to the physical uranium holdings. Again, the key here is that this is exposure to the physical uranium. I'll explain soon why this matters in the investment thesis.

Next, by accumulating and safeguarding physical uranium, the trust provides investors with liquidity. They can easily trade their units of Sprott, offering flexibility and accessibility to those interested in taking positions in the uranium market.

What Are the Drawbacks of Investing in Sprott Physical Uranium Trust?

Now, we get to the crux of the investment thesis. See if you see a rough overlap between the two following graphs?

Above, that's the Sprott price. And what follows is the uranium price.

As you can see, they largely follow each other.

But what makes Sprott interesting is that when Sprott units trade at a premium to their Net Asset Value (''NAV''), Sprott takes advantage of this premium by issuing new units to the market. These newly issued units essentially represent additional shares of the trust, and investors purchasing them provide fresh capital.

The funds raised from the sale of these new units serve a specific purpose – they are used to acquire more physical uranium for the trust's portfolio . This strategic move allows SPUT to expand its holdings of physical uranium, increasing its overall exposure of the trust to this commodity.

This approach benefits both existing and new unit holders. Existing unit holders may see the Net Asset Value of their units rise over time as the trust accumulates more uranium. It's a responsive strategy influenced by market dynamics and investor demand, as Sprott carefully monitors the premium or discount at which Sprott units are trading to determine the opportune timing for raising additional capital.

In essence, when Sprott units trade at a premium, it offers an efficient means for the trust to gather funds and further invest in physical uranium assets, ultimately aiming to enhance returns for its unit holders.

And what you see above is that Sprott ended yesterday trading at a tiny premium. And you may ask, so what? It's such a small premium! But consider the context.

Since March of this year, Sprott has been consistently trading at a large discount to NAV. But now, since the start of July, its units have been consistently moving closer to NAV and have now finally gone into positive territory.

And now, what's the drawback? The drawback is that Sprott doesn't benefit from operating leverage in the same way as a Cameco ( CCJ ) or Uranium Energy Corporation ( UEC ) gets. As a way of disclosure, I'm long UEC.

With Sprott, if uranium prices increase by 20%, that's what Sprott will to a large extent increase by. And with CCJ and to a much greater extent the fully unhedged Uranium Energy Corporation, small increases in uranium prices up or down, can have a massive impact on its revenues on the way up or down.

The Bottom Line

Sprott Physical Uranium Trust, also known as SPUT, presents an attractive opportunity to participate in the emerging uranium bull market.

Sprott, as a dedicated entity for acquiring physical uranium, provides an avenue for investors to gain exposure to this promising market.

However, investing in Sprott Physical Uranium Trust comes with certain considerations. While Sprott offers exposure to uranium's price movements, it may not amplify gains or losses to the same degree as uranium producers, which could be a consideration for investors looking for potential higher returns in a rising uranium market.

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