COM - URA: Betting On Uranium Demand When Global Supply Is In Peril

2024-01-13 00:17:34 ET

Summary

• URA is a diversified basket of companies involved in uranium mining, production of nuclear components, extraction, refining, exploration, or manufacturing of equipment for the uranium and nuclear industries.
• Global supply of uranium is currently not meeting existing and future demand.
• URA is one of the best in its class as it offers a diversified portfolio, outside of just uranium miners.

A tale as old as time: demand exceeding supply. That's the bottom line for the expected conditions in the uranium business. And that makes Global X Uranium ETF (URA) a long-term buy, even if it is a short-term tossup. This highly-volatile ETF is the cream of the crop in its niche, but unless one take a multi-year outlook, the fits and starts in this one risk driving an investor to the sideline prematurely. I know because it has happened to me a few times over the years.

The demand side

The uranium industry is poised for a huge run due to supply issues and increasing demand for clean energy. More and more global policymakers are proposing nuclear energy as a component of their energy mix, some even reversing their prior anti-nuclear stances. The efficiency and eco cleanliness provided by nuclear power are undeniable and the world is beginning to embrace that reality.

See below the equivalent one of one pellet of uranium to amounts of other energy sources.

Governments worldwide are taking action to encourage the transition to nuclear power production. The United States recently signed into law the Inflation Reduction Act. This legislation awards tax credits for existing nuclear power plants and incentivizes advanced nuclear power deployment. Obviously, we are a long way from the "No Nukes" era, in which Nuclear Energy was a most popular villain for liberal political advocates.

In the EU, the further adoption of nuclear power has been positioned as a "transition activity" under EU Green Taxonomy. In March 2023, the EU agreed that nuclear power could help achieve its challenging climate objective.

And China is pouring funds into clean energy production. By 2060, that county's nuclear fleet should total 400 gigawatts, or around 18% of the nation's total electricity generation. For comparison purposes, that is more than the present fleet of nuclear power plants in the world. China is joined by other developing countries like India and Russia whose pro-nuclear sentiment is the strongest.

The realization of the benefits of nuclear energy is being compounded by the Russian invasion of Ukraine. Amidst this event, world leaders are becoming increasingly reticent to rely on Russia for power, particularly Russian gas. Say hello to uranium and nuclear power!

The supply side

But as demand is rising, supply continues to diminish. Kazakhstan is currently the largest supplier of global uranium. However, recent events have changed the scenario. A key supplier has committed production to its long-term contract customer book and there is no player as large or significant to take its place.

See the chart below that outlines global supply and demand for uranium.

Source: World Nuclear Association

URA's strategy

URA aims to invest a minimum of 80% of AUM in securities of companies that are active in some aspect of the uranium industry. These include mining, refining, exploration, manufacturing of equipment for the uranium industry, as well as related technologies. Also included, in lesser part, are ancillary companies that aren't pure play uranium players but generate a significant amount of revenues from the uranium business. URA tracks the Solactive Global Uranium & Nuclear Components Total Return Index.

Concentrated by stocks, diversified by country

With AUM of $2.4 billion, URA is a mid-cap ETF and its stock holdings are globally distributed, as evidenced by close to 90% of holdings being outside of the U.S.. However, about 50% of its holdings are located in Canada and 14% are in Australia. That being said, the basket is relatively diversified as no other geographical location represents more than 12%.

Below is a list of the top ten stock names in the portfolio.

As Cameco Corp (CCJ) represents a whopping 25% of the ETF and the top ten stocks make up around 70% of AUM, URA has my kind of focus. I do not subscribe to the standard diversification stance of most ETF analysts. Frankly but respectfully, I think they completely miss the point. When I own a volatile asset like URA, it is maybe 5% of a portfolio, perhaps up to 10% if I'm being very aggressive. So even the giant CCJ position is only 2.5% of the total portfolio. And, a 20% drop in CCJ's price would thus impact my total portfolio by 0.50%. That's not much in the big picture. I'd rather own a focused basket, not diversify away upside.

CCJ is a fully integrated uranium provider and one of the leading suppliers in the world, not exactly the worst choice for a top holding. Also, CCJ has experienced some recent price inflation which could have some bearing on the current weighting.

Below is an illustration of URA's sector breakdown.

This ETF is predominantly invested in pure-play uranium miners, rounded out by other companies involved in some capacity, either directly or indirectly, with uranium production. The heaviest allocation to miners is where the ETF is delivering value. Investing in uranium directly can be done three ways, none of which are very efficient: An investor can own the actual commodity, which does not trade on the spot market so must be purchased through a trust or some other method; Buy options and futures on uranium, which is risky as prices can be subject to contango when futures prices become higher than spot prices; Or buy shares of a uranium mining company, which represents a leveraged play on uranium prices due to the high fixed costs of extracting the asset. Investing in URA avoids all of the noise and gives the investor simple access and exposure to the commodity through a diversified basket of stocks.

But nuclear energy still scares people…

Nuclear energy has always been a political hot button. For example, Germany recently shut down all of their nuclear reactors.

According to the German Federal Ministry for the Environment, Nature Conversation, Nuclear Safety and Consumer Protection:

"The nuclear phase-out makes Germany safer and avoids additional high-level radioactive waste. The risks of nuclear power are ultimately unmanageable. No insurance in the world covers the potentially catastrophic extent of damage from a nuclear accident,"

There are other voices in power who are opposed to this type of energy that, albeit clean and efficient, could potentially create disastrous consequences should the execution go wrong. No one forgets Chernobyl or Fukushima.

We can't stop the demand for uranium

The global movement towards adoption of nuclear power is not weakening. The headlines about threats to our climate, whether people believe it or not, are not going away. This fact of life is going to dictate that governments increase their financial and political support of clean energy, nuclear power being a fundamental part of that.

Add to this burgeoning demand the uranium supply problem and the sector has a long runway of growth. The only question is which companies are going to benefit the most.

URA: a lot to like, but the volatility is a bug and a feature

URA is one of the leading performers in its peer group, it carries an expense ratio of 0.69%, which is right in the middle of the pack of its competitors, and the shares are very liquid. For this reason, I give it a very high quality rating and would recommend it above all other ETFs for a portfolio's uranium allocation.

The only thing holding me back from buying this ETF right now is the price. URA is currently trading at over $29, and well above its 200-day moving average. That's not a great reward/risk tradeoff and that's what I am all about. I have had success in other volatile market areas in recent months, but this one got away and at a potential double top (same area as in late 2021), I'm not chasing, just continuing to follow it.

I really like URA. Uranium is the place to be right now as an industry, and URA is the best investment in that space. But not at any price. It gets hold for now.

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