URA - URA: Ignore Fusion Headlines Commercialization Still Years Away

Summary

• The URA ETF provides exposure to a basket of uranium producers, physical holdings, and developers.
• Recent weakness in URA is due to its outsized Cameco exposure.
• Although nuclear fusion breakthroughs are scientifically significant, the technology is still years away from commercialization.

It has been a few months since I last wrote about the Global X Uranium ETF ( URA ). In my prior article, I highlighted Japan's plans to return to nuclear power as a bullish catalyst for the nuclear sector.

Unfortunately, the Japan spark proved short-lived, as uranium equities continued to languish, despite the obviously positive fundamentals. What happened and has my outlook changed?

While scientifically significant, the recent nuclear fusion breakthroughs are still years away from commercialization and should not affect the medium-term investment outlook for uranium equities and the URA ETF.

With energy demand forecast to grow by 50% in the coming decades, the world will need every joule of non carbon-based energy it can get, whether it is from nuclear fission-based uranium reactors or yet-to-be-commercialized fusion reactors.

Brief Fund Overview

First, a brief review of the URA ETF for those not familiar. The URA ETF tracks the Solactive Global Uranium & Nuclear Components Total Return Index ("Index"). The index focuses on the extraction, refining, exploration and manufacturing of equipment for the uranium and nuclear industries. The URA ETF has $1.5 billion in AUM and is one of the larger commodity-focused ETFs on the market.

Readers interested in learning more about the URA ETF can read my initiating article , which goes over the fund's composition in more detail.

Cameco Has Been A Drag On Performance

One of the key risks I had highlighted in my previous articles is that the URA ETF is highly concentrated, with the top 10 holdings comprising 61% of assets, including over 20% invested in Cameco Corp. ( CCJ ) (Figure 1).

Unfortunately, URA's Cameco exposure has been a big drag on performance in the past few months, as the company announced a surprise move to acquire a 49% stake in Westinghouse Electric Company ("WEC") and vertically integrate downstream into nuclear reactor technologies. Cameco's stock fell 14% on the news.

While Cameco's management defended the deal as a move to 'capitalize on the full nuclear supply chain, rather than only being a source of the base fuel', investors were likely spooked by the poor financial history of WEC, which had to file Chapter 11 bankruptcy in 2017 due to a string of massive cost overruns in building new reactors in the U.S.

Despite equity markets rebounding in October and November, Cameco's stock has remained largely unchanged since the Westinghouse transaction, dragging on URA's performance (Figure 2).

Nuclear Demand Fundamentals Continue To Improve

Although Cameco has been a big disappointment to my bullish URA thesis, the fundamentals for nuclear energy continued to improve in the past few months with Germany recently announcing plans to extend the life of its nuclear fleet to mid-2023.

In the U.S., the Diablo Canyon nuclear power plant, the last operating nuclear power plant in California scheduled to be decommissioned by 2025, also received additional funding from the Department of Energy ("DOE"), hinting at a possible extension to its operating life.

Overall, governments across the world continue to shift their stance on nuclear energy, as the need to ensure energy security trumps environmental fears.

How Big Of A Deal Is Fusion?

On December 12, I woke up to multiple news sources claiming U.S. scientists at the Lawrence Livermore National Laboratory in California have made key breakthroughs in nuclear fusion research.

Importantly, while commercial nuclear technologies (including those Cameco bought from Westinghouse) are built on nuclear fission, the splitting of heavy elements like uranium to produce heat and electricity, nuclear fusion is the reaction that powers the sun and promises practically unlimited amounts of carbon-free energy without radioactive wastes.

After reading through many news articles, my understanding is that this would be the first time a laboratory-controlled nuclear fusion reaction produced a 'net energy gain', i.e. the nuclear reaction produced more energy than was put in.

However, before investors rush out and dump their uranium investments (since commercial nuclear fusion reactors would make nuclear fission-based uranium reactors obsolete), they should understand that while this nuclear fusion news is a great scientific breakthrough, the technology is still years, if not decades, away from commercialization.

First, as pointed out by Bloomberg columnist Javier Blas , even if the actual reaction produced a net energy gain from 2.1 megajoules of input to 2.5 MJ of output, the lasers themselves are terribly inefficient and requires ~330 MJ to charge. Second, according to a Washington Post article on the topic, building commercial reactors at scale will require materials that are extraordinarily difficult to produce currently. Finally, the fusion reaction was so powerful that it damaged the equipment in the process.

Nuclear Fusion Will Join Stable Of Energy Sources To Satisfy Surging Demand

According to the EIA, by 2050, global energy use will grow by nearly 50% from current levels, fueled by non-OECD demand growth (Figure 3).

Even if nuclear fusion can be successfully commercialized in the next decade, it will simply be joining a stable of renewables and liquid fuels that will be required to satisfy the world's ravenous demand for energy (Figure 4).

For the world's sake, we better hope commercial nuclear fusion reactors arrive sooner rather than later.

Technicals Still Treading Water

Technically, URA remains stuck in a sideways consolidation zone, with important support around $18.50 (Figure 5).

Risks

Another black swan nuclear accident like Fukushima could derail many nuclear reactor restart plans. In fact, Russia's continued attacks on Ukraine's energy infrastructure could lead to such an accident.

Furthermore, as I have highlighted in my prior articles, URA contains significant exposures to uranium developers which requires well-functioning capital markets. If capital markets suffer large drawdowns, the URA ETF will also suffer.

Finally, as was shown in recent months, URA's 20% exposure in Cameco exposes the ETF to significant single company risk, either positive or negative.

Conclusion

While scientifically significant, the recent nuclear fusion breakthroughs are still years away from commercialization and should not affect the medium-term investment outlook for uranium equities, as represented by the URA ETF. In fact, with energy demand forecast to grow by 50% in the coming decades, the world needs every joule of non carbon-based energy it can get, whether it is from nuclear fission-based uranium reactors or yet-to-be-commercialized fusion reactors. I remain bullish on the URA ETF.

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