CA - URNM: Your Stepping Stone To Uranium Mining

2023-10-03 09:00:28 ET

Summary

• URNM provides exposure to U.S.-listed uranium miners, with a focus on Cameco.
• Nuclear energy offers cost-effective, reliable, flexible, and scalable baseload power.
• Unlike renewables, nuclear power is not weather-dependent, ensuring continuous energy generation.

Investment Thesis

Sprott Uranium Miners ETF (URNM) is exposed to U.S.-listed uranium miners. Here I discuss some of the advantages and disadvantages of investing in this space. I also discuss the key drivers behind URNM and how investors should think about the sectors' tailwinds.

Why Invest in the Uranium Space?

Uranium serves as the crucial fuel for nuclear energy, playing a pivotal role in supporting our transition towards a net-zero carbon future. Nuclear energy possesses a distinct advantage in providing a cost-effective, dependable, flexible, and scalable source of baseload power.

Unlike renewable sources like wind and solar, nuclear power generation does not rely on favorable weather conditions, making it highly reliable and available around the clock and during different seasons.

Furthermore, its scalability ensures that we can meet increasing energy demands without the need for extensive grid modifications or costly energy storage solutions like lithium batteries. By leveraging uranium as a fuel for nuclear reactors, we can effectively supplement our energy transition efforts, reducing carbon emissions while maintaining a stable and resilient energy supply.

Investors who understand the need for uranium but don't want to figure out how to invest in this space may consider investing in an ETF, like the Sprott Uranium Miners ETF.

Why Invest in Sprott Uranium Miners ETF?

URNM is a U.S.-listed uranium ETF focused on uranium miners and physical uranium. Below you'll see its top holding by weight.

What should jump out to you is that this ETF is significantly weighted towards Cameco (CCJ) with 17% of its total weight. That being said, it also includes a range of other miners.

And this brings me to another consideration. As investors in this space, you may be aware that this ETF is not the only ETF offering similar exposure. Indeed, the Global X Uranium ETF (URA) is for the most part quite similar. There are some minor differences, such as substantially more concentration, for instance, Cameco makes up a quarter of the URA ETF rather than less than 20% with URNM, but I don't believe that's a real game-changer.

I know that this may irk some readers, who may point out that URA has more liquidity or an ever-so-slightly lower expense ratio, but I believe this is overthinking the uranium thesis.

I contend that the uranium thesis is either going to work or it's not. And that's tied, for the most part, to uranium prices.

And if it does, one ETF may be slightly less volatile, meaning the URNM will probably be slightly less volatile given it is less concentrated at the top, but overall they are tied to the same idea, which is indirectly the uranium price, see below.

If the underlying commodity, uranium, does well, the whole sector will move higher.

Furthermore, readers should also know that the Sprott Uranium Miners ETF is not the only way to seek exposure.

What Are Other Considerations?

In my opinion, the drawback of investing in URNM or URA is the cyclical nature of the uranium industry. As you know, the uranium mining industry is cyclical. When uranium prices are high, mining companies can thrive, but this will bring on excess uranium supply, which will dampen uranium prices.

That being said, I would counter that notion by asserting that in the next couple of years, there appears to be a shortfall between uranium supply and demand estimates.

As you can see above, there are close to 200 million pounds of uranium in demand right now, with around 150 million in production. Meanwhile, even now, despite more attention towards this sector, it remains quite a small space, see below.

And opening a new uranium mine can take many years, requiring capital and favorable regulation.

Are There Any Alternatives?

Yes. I believe that if one is right on the thesis, one may consider investing in a uranium producer, such as Uranium Energy Corp. (UEC) (disclosure: I'm long UEC). Investors don't need to only consider UEC; indeed, there are several other uranium producers in North America that are also worthwhile considering.

The significant advantage of investing in the producers, rather than an ETF, is that individual producers will benefit from operating leverage. However, the drawback will be the volatility of the underlying stock.

The Bottom Line

Investing in the Sprott Uranium Miners ETF offers exposure to U.S.-listed uranium miners, which is essential given uranium's critical role in supporting the transition to a net-zero carbon future through nuclear energy.

This energy source boasts cost-effectiveness, reliability, flexibility, and scalability, providing a stable baseload power supply that isn't dependent on weather conditions, unlike renewables like wind and solar. URNM, although slightly less concentrated compared to other similar ETFs, presents an opportunity for investors to tap into this sector.

However, it's important to understand that the uranium industry is cyclical, with potential fluctuations in uranium prices. Yet, with a current demand-supply gap, uranium producers like Uranium Energy Corp. offer a more leveraged investment option, albeit with higher volatility.

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