WNDY - URA ETF: Wait For A Pullback To Participate In This Alluring Story

2023-11-16 13:20:14 ET

Summary

• The Global X Uranium ETF offers exposure to 46 companies involved in the uranium mining and nuclear value chain.
• URA has a relatively lower volatility profile compared to its largest peer, but investors should be aware of the high valuations and lack of ample earnings growth.
• We touch upon various sub-plots that have raised the allure of investing in the uranium/nuclear space.
• We would advise investors to wait for a pullback as URA has reached a terrain where we previously witnessed additional supply, and in the short term, uranium stocks also look overbought vs. other mining offerings.

ETF Profile

This year, uranium prices have been on a tear, hitting their highest levels since 2008. Investors may choose to exploit this momentum via futures, but the rolling fees associated with it, the relatively low trading volumes on exchanges, and the inherent uncertainty of the uranium/nuclear space make this a sub-optimal bet.

Rather, we think the more preferred route could be via uranium and nuclear-themed ETFs, such as the Global X Uranium ETF (URA). When you get involved with miners, you also open yourself up to benefit from the greater operating leverage that could flow through by way of higher prices.

With $2.3bn in AUM, URA is the largest ETF in this space, offering access to 46 companies that are involved across the uranium mining and nuclear value chain. These companies are typically involved in a whole host of activities, including uranium exploration, extraction, and refining. URA incidentally also covers companies that supply equipment to the nuclear and uranium industries.

As noted previously, uranium has inherently been characterized by a lot of uncertainty and even for a diversified vehicle such as URA this comes through by way of a relatively higher volatility profile. Just for context, if you consider some of the other competing clean energy offerings from Global X, such as the wind energy ETF ( WNDY ) or the renewable energy ETF ( RNRG ) you can see how much lower the volatility profiles of their monthly returns have been. Where URA offers some solace, is in context to its largest peer- The Sprott Uranium Miners ETF ( URNM ); here our focused ETF's volatility profile is a good 1800bps lower than URNM's.

URA's relatively lower volatility profile can perhaps be explained by its greater exposure to large-and-mid-caps, as opposed to URNM which tilts more towards the riskier small and micro-cap universe. With small and micro-cap uranium stocks, you could argue that the information deficit is a little wider, and as this gets bridged over time URNM could perhaps be set up to offer you more outsized returns, although at the cost of a greater threshold of volatility.

Getting focused access to a niche space such as uranium/nuclear isn't easy, and this is reflected in a relatively higher expense ratio of 0.69%, but crucially note that it's a good 14bps cheaper than URNM's corresponding figure.

On the flip side, investors should also note that a lot of these uranium/nuclear stocks don't generate ample earnings, and as a result, valuations can come across as rather pricey. Data from AltraVista Research shows that URA's P/E multiples are very high at over 40x, and rather than witnessing a contraction in the forward P/E over time, we're seeing an expansion. This suggests that EPS growth is non-existent or quite minimal, and rather, the premium quotient that investors are prepared to pay for the future potential just keeps growing.

Uranium & Nuclear- A Story Which Has Legs

Nuclear may currently only account for a tenth of total world electricity production, but we've seen the emergence of quite a few tailwinds that should see nuclear take on an even larger share of the overall mix over time.

Firstly, in recent years, we've seen a broad thrust by authorities across the world to transition towards a low-carbon landscape, and nuclear can certainly help stimulate that shift. When in operation, nuclear power plants don't produce any greenhouse gases, and crucially, the low level of carbon dioxide emissions generated, per unit of electricity, is very heartening to note, particularly in comparison with most other alternatives.

To beef up its energy security, and to cope with increasing environmental hazards, it's also rather poignant to note that China is currently leading the line, and is in the midst of constructing 21 nuclear reactors that could generate 21.6GW of electricity.

Note that nuclear energy's growing clout isn't linked to just a spurt in environmental-driven agendas. It is also just an inherently more reliable source than wind and solar power providing consistently high base loads. Crucially, as utilities are increasingly struggling to absorb higher fuel costs , there will only be greater demand for fuel sources with greater energy density or those that provide better bang for the buck. The image below helps provide some context on the superior heat value that could be generated when the nucleus of uranium-235 undergoes fission.

Given these qualities, it is no surprise to discover that utilities have been stepping on the pedal and getting into a great chunk of long-term purchasing agreements for uranium. Incidentally contracting volumes this year look set to once again trump last year's 10-year high of 107MM lbs. of U3O8e. Some of the step-ups in utility contracting could also be attributed to growing energy security concerns triggered by geo-political tensions across the world.

If spot prices continue to trend up, you could have a spiral with utilities rushing to lock in contracts at higher rates or at least implementing contracts with higher price floors.

It isn't just the traditional utility angle that could tilt the supply/demand balance. Given the low upfront costs, and the ability to be factory-fitted and then transported to difficult terrains, small modular reactors (SMRs) or those with a power capacity of less than 300MW(e) per unit could likely gain favor in the years ahead. The IAEA estimates that there are currently around 80 commercial SMR designs that are being developed around the world.

The market imbalance is also getting impacted by financial buyers like the Sprott Physical Uranium Trust, which recently announced an at-the-market equity program that will see the firm issue up to US$125 million in trust units to acquire even more physical uranium.

With all these cogs weighing on the supply side, it would be asking for a lot to expect the inventory surplus of Uranium secondary supplies to linger. Note that secondary supplies predominantly come from decommissioned nuclear weapon stockpiles, and there's only so much of it that can be leveraged before we run out of options.

Closing Thoughts- Technical Considerations

URA is currently in a good way and with good reason; this year whilst the diversified metals and mining ETF ( XME ) has gone nowhere, URA has ended up delivering +28% returns. The growing interest in URA is also validated in the manner of fund flows all through H2. In H2 so far, we've noticed that in four out of the last five months fund flows have been positive, aggregating to almost $300m for the entire period.

So far so good, but we think prospective investors of URA would be better served by waiting for a pullback.

We say this because firstly, in the short-term, uranium/nuclear miners look like one of the most overbought counters within the global metal and mining universe. The chart below highlights how URA's relative strength ratio versus the PICK ETF is around 23% off the mid-point of its long-term range, and reaching levels from where we've previously seen a pivot.

Then on URA's own chart, we've been enthused to see the developments over the last five years or so. Firstly for three years, we saw the ETF form a solid base between 2018-2021, followed by an uptrend. Then in the latter half of 2021, we saw URA struggle to move above the $27 level. It looked like URA could be heading lower, but since June this year, we've seen renewed momentum in the ETF, so much so it looks like URA could be now forming something akin to the bullish cup-and-handle pattern

Whilst we like the uranium story, we feel the more sensible option would be to not rush in and buy at this stage, but rather wait for URA to undergo a pullback, particularly as we've previously also seen that this is a terrain that tends to witness additional supply, which caps further gains (notice the long wicks in the blue highlighted area). It wouldn't hurt to show some prudence here. URA is a HOLD at these levels.

For further details see: