CA - URNJ: 2024 Is A Year For The Junior Uranium Miners To Outperform

2024-01-10 13:03:29 ET

Summary

• The Sprott Junior Uranium Miners ETF has underperformed the larger uranium mining ETFs due to the absence of top-performing stocks like Yellow Cake, Uranium Trust, Cameco, and Kazatomprom.
• URNJ recently underwent a messy rebalancing, with Kazatomprom being temporarily added and then removed from the ETF.
• Historical behavior suggests that small and mid-size uranium miners are likely to catch up and outperform in the near future, especially with potential catalysts like a Senate vote to ban Russian uranium imports.

Overview

The Sprott Junior Uranium Miners ETF ( URNJ ) was launched a little less than a year ago and it is up 25% since inception. While that is a good performance in a short period, it has underperformed the two larger uranium mining ETFs, Sprott Uranium Miners ETF ( URNM ) and Global X Uranium ETF ( URA ).

The reason for the underperformance is because the uranium investment vehicles Yellow Cake ( OTCQX:YLLXF ) and the Uranium Trust ( OTCPK:SRUUF ), together with the larger producer Cameco ( CCJ ) and Kazatomprom are not in URNJ. Those stocks have outperformed significantly lately, and they have substantial weights in the two larger ETFs.

Based on the historical behavior in both the uranium industry and natural resource industries in general, I expect the small and mid-size uranium miners to now catch up.

Recent Rebalancing

The Junior Uranium Miners ETF had its semi-annual rebalancing , which turned out to be rather messy. The world's largest uranium miner Kazatomprom was temporarily added to the ETF due to a limited free float and relatively low valuation. This was corrected by modifying the rules for the index the ETF is set to track a few days later. Kazatomprom was consequently only in the ETF during a few days as the figure below illustrates.

Among the other changes, we can see that Uranium Energy Corp. ( UEC ), Energy Fuels ( UUUU ), and IsoEnergy ( ISO:CA ) saw their respective weights decrease in the ETF as a consequence of the rebalancing. The weight for Denison Mines ( DNN ) increased substantially and I had never quite understood why Denison's weight was so low to begin with, given its market cap and good liquidity.

Historical Behavior

Over the long term, we can see in the chart below that the uranium miners have behaved similarly to the spot price of uranium, where I have used the URA ETF as a proxy for the miners due to the extended history of that ETF.

During the most recent bear market in uranium, the spot price of uranium bottomed in late 2016. We then saw both the miners and the spot price recover from the lows, but the miners started to diverge and underperform the spot price in 2018-2019.

In 2020-2021, we saw the opposite behavior where the miners substantially outperformed the spot price of uranium, where I also included the URNM ETF in the chart below.

From the end of 2021, it has once again been the spot price which has been outperforming the miners in general, even if there have been some exceptions with miners also performing well.

Conclusion

I am not claiming the miners/spot price divergence goes on a 2-year cycle, just that once the spot price has outperformed as significantly as we have seen over the last two years, the miners are due to catch up. That is the behavior we have seen historically in the uranium industry.

We often see a similar behavior in most natural resource industries, even if the uranium market is somewhat unique in its opaqueness and limited liquidity, which is why the divergence can be larger in the uranium market than many other natural resource industries. That does not mean a decoupling as some might claim, but simply that a greater level of patience is required in the uranium industry.

The URNJ ETF is the best industry ETF if we see the miners now starting to outperform. Yesterday, the ETF did close just below the high that was achieved in December last year and based on how uranium equities have traded in Australia and Europe today, URNJ is likely to make another high during the day.

We do have a U.S. Senate vote coming up in the near future as the House passed a vote to ban Russian uranium imports in the U.S., which has the potential to be a substantial catalyst for the entire industry.

I don’t own the URNJ directly, but my uranium portfolio now has about 80% exposure to the miners compared to the investment vehicles, which is well above my historical average.

For further details see: