URNM - Uranium Equities Once Again Likely To Outperform
2023-06-04 08:53:51 ET
Summary
- We have over the last few years seen uranium equities and the spot price of uranium trade a bit out of sync with each other.
- Which means the equities are at this point once more likely to catch up and outperform the spot price, which has been climbing lately.
- The fundamentals for the uranium industry continue to improve, where the sentiment for the nuclear industry has turned very positive compared to how it was viewed a few years ago.
Investment Thesis
The Sprott Uranium Miners ETF (URNM) and the Sprott Junior Uranium Miners ETF (URNJ) have so far in 2023 underperformed the overall market, even if the Junior Uranium Miners ETF was launched in the beginning of February first.
The underperformance is despite improving fundamentals, where we continue to see both people and governments become more positive about the nuclear industry.
Countries like France, the UK, South Korea, and Japan have done a 180 degree turn over the last few years. They were all discussing phasing out nuclear energy not so long ago and are now looking to build new reactors or restart idle ones.
More recently, we have also had countries like Sweden, Belgium, Italy, Taiwan, and even Denmark talk more positively about nuclear energy. So, my expectation is that we will see more countries come to the realization that nuclear will be a vital component in developed markets' focus to decarbonize. The growth of nuclear energy in emerging markets continues to be strong, which is where most of the reactors under construction can be found.
Figure 2 - Source: Data from Nuclear Performance Report 2022
Both the uranium spot and long-term contract prices have continued to tick higher during 2023. So, the weakness in uranium equities has more to do with the sentiment for mining companies and liquidity than fundamentals. Please note that the long-term contract prices in the chart below is typically the lowest bid, even if the contract was signed at a higher price. So, the fundamentals are even more positive as we know some contract prices have been signed above $60/lb in the last year.
Figure 3 - Source: Cameco & Numerco
Performance of Uranium & Uranium Equities
The uranium miners ETF did during the first quarter of 2020 dramatically underperform the price of uranium, which was increasing during that period. This led uranium equities to trade at some very depressed levels, once liquidity came back to the industry, the outperformance over the following 18 months was extremely impressive.
Figure 4 - Source: Koyfin Figure 5 - Source: Koyfin
During the first half of 2022, we saw something similar, where uranium equities were once again selling off due to a broad market decline, despite the spot price of uranium ticking higher. From mid-2022, we yet again had an outperformance by the uranium equities during the following 7 months, while the spot price of uranium was about flat.
Figure 6 - Source: Koyfin Figure 7 - Source: Koyfin
From the end of January in 2023, we are once more looking at something similar. The spot price of uranium continues to climb higher, but uranium equities have underperformed due to poor sentiment and low liquidity, even if we have seen a slight rebound during the last week. This certainly has a déjà vu feeling to it, where at least I feel confident we will see uranium equities outperforming once more, even if the exact timing is never certain.
ETFs & Conclusion
The North Shore Global Uranium Mining ETF was launched in the end of 2019, it was acquired by Sprott during 2022, and the name was consequently changed to the Sprott Uranium Miners ETF. Total net asset value is about $900M, where the ETF is comprised of most publicly listed uranium equities of a decent size.
It is worth noting that about 50% of the ETF is comprised of the two largest uranium producers in the world and the two largest investment vehicles, where the latter two are passive investment vehicles with indirect exposure to the uranium spot price.
Figure 9 - Source: Sprott.com - Sprott Uranium Miners ETF - Largest Holdings
The Sprott Junior Uranium Miners ETF was launched in February this year with $2M in net asset value. It has lately grown to $28M , where all of it has come from investment flows. The percentage growth in NAV is impressive even if it is still a very small ETF.
The big difference compared to the Uranium Miners ETF is that the Junior Uranium Miners ETF does not contain the largest producers in the industry nor the passive uranium investment vehicles.
Figure 10 - Source: Sprott.com - Sprott Junior Uranium Miners ETF - Largest Holdings
I do think both ETFs are excellent alternatives for anyone looking for exposure to the uranium industry and not interested in picking individual stocks. At this point in time, I suspect the Junior Uranium Miners ETF is the slightly more attractive ETF among the two.
However, I would highlight that URNM is a volatile ETF, and URNJ is even more extreme. The below chart illustrates the 1-month volatility from the beginning of last year compared to the S&P 500. So, be prepared for wild swings in both ETFs, but especially the Junior Uranium Miners ETF.
I am long individual stocks in the uranium industry, which are discussed in more detail on my investment group, but my uranium segment does now look more like the URNJ than URNM, even if that is likely to change over time.
Having scaled in and out of the investment vehicles and some good stock selections among the miners, has allowed me to outperform the URNM over the last few years.
Figure 12 - Source: Composition of my Uranium Segment Figure 13 - Source: Performance of my Uranium Segment
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Uranium Equities Once Again Likely To Outperform