CA - URNM: The Uranium Bull Thesis Is Getting Stronger

2023-07-19 21:28:53 ET

Summary

• Uranium is proving to be an exception to the struggling commodities market due to its primary use in electricity generation and increasing public support for nuclear energy.
• The uranium market is in a deficit due to increased demand and a lack of new supply, which could lead to a significant price increase.
• The Sprott Uranium Miners ETF offers diversified exposure to uranium equities in a single instrument and is expected to benefit substantially in a bull market.

Since the beginning of H2’22, most commodities are struggling. Fears of a global economic slowdown are making investors nervous and they are leaving the sector. This could be best observed by looking at the meltdown in AUM of the Invesco DB Commodity Index Tracking Fund ETF ( DBC ), which is currently nearly 60% off its peak at US$2B.

However, not all commodities are the same in terms of sensitivity to the economic cycle. One notorious exception is uranium. The yellow metal’s primary use is electricity generation, which is mostly done by government backed utilities, where bankruptcy risk is very low. What’s more, the actual price of uranium is a fraction of electricity costs, so demand is fairly inelastic. With public opinion around the world warming up towards nuclear energy and its net-zero characteristics, demand should increase substantially in the following decades. On the supply side, things are not rosy and the market is in a deficit. Such an environment should cause considerable increase in the price of uranium and equities of miners could benefit even more. As I previously wrote , in my opinion the Sprott Uranium Miners ETF (URNM) seems like the best option for diversified uranium equity exposure in a single instrument.

Merits of nuclear energy

The energy crisis in Europe in 2022 highlighted the need for cheap and reliable energy. At the same time, developed countries are trying to lead the way towards decarbonization of the world economy through reducing reliance on carbon intensive sources of energy like fossil fuels. However, the most touted alternatives by the mainstream media and certain politicians – solar and wind could hardly be an all-rounded solution. Both of them are at the mercy of the weather – if it’s cloudy and the wind is not blowing, then power generation approaches zero. Contrary, when it’s sunny and the windy, supply is booming, sometimes even leading to negative electricity prices.

Storing the energy from these volatile sources is a challenge , which is yet to reach a desirable solution. So baseload sources are essential for the stability of the electric grid. When it comes to baseload, nuclear energy is the clear winner with over 90% capacity factor. What’s more, when it comes to decarbonization goals, nuclear is also a leader, having a lower footprint then the usual suspects – solar and wind.

Public opinion is warming

Despite its indisputable qualities, nuclear plants, if mismanaged could lead to devastating consequences like the Chernobyl disaster from 1986 and the Fukushima accident from 2011. However, it has to be noted that those accidents were a matter of mismanagement. According to research, even the Fukushima accident, which happened as a result of a tsunami was preventable . Still, the horrifying images and media reports have swayed the public opinion against nuclear and some politicians were quick to react with the most notorious example being Germany, which shortly after the accident in Japan, announced plan to phase out its nuclear fleet.

As time passed, the public’s favourable view on nuclear energy began climbing. Recent poll showed that in 2023 the support amongst for nuclear was at its highest in more than a decade. Even in Japan, the majority of citizens support reactor restarts. Meanwhile, emerging economies like China and India are building dozens of new reactors in order to meet the needs of their massive populations.

Uranium market outlook

In light of nuclear energy gaining wider support and dozens of reactors being built or being planned for construction, uranium demand is expected to rise. Additionally, there’s the Sprott Physical Uranium Trust ( OTCPK:SRUUF ), which scoops pound out of the market, leading to a bigger deficit. On the other hand, following the price slump, after the Fukushima accident, many mines closed as it was uneconomical for them to operate at such low prices. As a result, the uranium market is in a deficit, which is projected to be persistent.

Bringing new primary supply to the market is challenging. Most exploration/development projects are not economical even at current prices, especially following cost inflation from the last few years and may need prices as high as US$80s/lbs in order to be viable. So it’s logical to expect the rise in uranium prices to continue.

Why URNM?

The thesis of higher uranium prices could be played in a few ways. One will be exposure to the material itself through the Sprott Physical Uranium Trust. This will eliminate the risks that come with equities of miners such as cost inflation, operational risks, exploration risk, permitting and so on. However, history indicates that in bull markets, equities are doing substantially better. So those with higher risk appetite may want to look into equities.

The problem with equities is that there are only a few producers with the biggest and lower cost one – Kazatomprom (KAP: LSE) not being listed on US or Canadian exchange. Most companies, involved in uranium are in exploration/development stage, which comes with a lot of risks on its own such as permitting, delay, exploration/construction risks. So diversification is highly desirable. Thankfully, there’s a single instrument, which offers a diversified portfolio of uranium equities – the Sprott Uranium Miners ETF (URNM). Of course, there’s also the alternative Global X Uranium ETF ( URA ), but I prefer the former as explained here .

Looking at URNM’s portfolio, it’s heavily tilted towards equities with 83.23% weight, while physical uranium fills the remaining 16.77%. While it includes 37 companies, most of which are still developers/explorers, in terms of weightings, the majors Cameco ( CCJ ) and Kazatomprom occupy the top 2 spots with respective weights of 17.09% and 12.77% as of 18 July. This brings balance to URNM’s portfolio, giving it considerable exposure to producers, while diversifying the exposure to exploration/development with many constituents.

Since the beginning of the year, URNM has outperformed the price of uranium, represented by SRUUF, which is normal in times when the price of the yellow metal appreciates. As I think the uranium uptrend will continue, URNM should continue to outperform SRUUF. I have to note, that as of now my exposure to uranium is entirely through Kazatomprom as I have access to the London Stock Exchange and I’m willing to stomach the political risk that comes with investing in Kazakhstan. However, so far Kazatomprom has been underperforming and I may look into diversifying away into URNM or other uranium equities.

Conclusion

The nuclear renaissance is here and uranium demand is set to pick up. However, bringing new primary supply takes time and is challenging in the current price environment. As a result, the uranium market is in a deficit, which is expected to persist in the following years. All these factors are pointing towards continuing price appreciation of uranium. In such times, equities are generally doing better than the commodity itself. URNM offers diversified exposure to uranium equities in a single instrument and should benefit substantially in a bull market.

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