Is uranium still worth looking into? Is uranium still the contrarian investment? How would I invest in uranium if I were starting today? This and more in this week’s Neglected Neighbourhoods, a blog series focusing on underinvested and unloved sectors.
With the ongoing turmoil in the markets over the last couple of weeks, our conviction in the uranium thesis has been tested. Now looks to be as good a time as any to go over the uranium market and take stock of the thesis and its validity. In addition, I will go over considerations I have for my positions in regards to a possible recession compared to a general bull market.
Uranium supply and demand imbalance
The supply and demand situation is a big part of the reasoning behind why many of us investing in the uranium sector.
Every two years the WNA (World Nuclear Association) publishes a report on the outlook for nuclear power and nuclear fuels. In this report, they try to map out the expected supply of uranium from different sources of supply, with the expected requirements from current and future nuclear reactors.
It is the increasing gap with “Unspecified supply” from the mid-2020s onwards that has made many take a closer look at the uranium sector. With the long, complicated, and challenging permitting processes for getting new uranium mines online, and a fuel cycle that can take up to two years for U308 in the ground to become fabricated fuel ready for the reactor, the mid-2020s are not as far away as one thinks at first glance.
In addition to the reference scenario, the WNA also has an upper and lower scenario for supply and demand for uranium. Let’s have a look.
In the upper case scenario (shown below), we have everything of idled-, planned-, mines under development, and prospective mines coming online during the next 20 years.
In the lower scenario (shown below), no new prospected mines – or mines under development – come online. Just some idled capacity coming back online and a few of the mines under development getting into production.
Which scenario you believe will become reality decides if you should only invest in producers, or if the developers and explorers fit your risk appetite as well. It might also help you figure out how much to invest.
If there is one criticism of the WNA report, then that, historically, it has been very optimistic about the growth of nuclear power.
Most of the uranium producers, developers, and explorers have all – at some point in their lives – used the projections of the WNA in their investor presentations in order to drum up interest in the sector to help raise capital, but that doesn’t take away from the fact that the ramifications of the Fukushima nuclear disaster in 2011 were underestimated, and demand during the following decade did not pick up as projected.
Supply was, therefore, a lot higher than demand for several years which led to the price of uranium dropping and making production uneconomic for most except for a few producers.
At least now, with countries in the West committing to nuclear power to reach climate goals, and China planning to build 150 new reactors in the next 15 years, it looks like these scenarios are more realistic than previously. If China moves forward with its construction plans, I think we might have to start using the upper scenario as the reference scenario in the future.
What will really get the increase in production going is the long-term contracting cycle. This is when nuclear fuel buyers start signing contracts with uranium producers for the long-term delivery of “yellow cake“.
A mine can not get financing from banks if they plan to only sell into the spot market. Financiers want to see that the company has secured a buyer for its products for a long period of time. The utilities also like to have certainty of supply. They have historically gotten this certainty through long-term contracts, as buying on the spot market is unpredictable and unstable. A reactor owner cannot afford instability, given that every day a nuclear power plan doesn’t produce electricity, it costs them $1M is potential revenue.
From the last bull market, at the beginning of the early 2000s, we saw that there was a tremendous amount of under contracting, with utilities not contracting their annual consumption needs.
The chart below comes from one of Kazatomprom´s presentations and shows historical annual spot and term contracting volumes (under the assumption that the yearly demand from the nuclear power plants in the world amounts to about 180 million pounds per year).
Until 2005, the total contracting volumes were a lot lower than the annual demand. This was again followed by several years where contracting volume was much higher than the yearly requirements. Supply shocks with mine floodings, and a narrative of increasing demand from planned nuclear plants around the world, was the reason for this increased contracting. This led to much higher prices for the underlying commodity, and the underlying equities.
After 2011, we have seen a similar period of under contracting. We have seen utilities working off their inventories of U3O8 and fabricated fuel, less renewing of long-term contracts, and instead relying more on the spot market and carry trade purchases.
As we’ve seen, having similar fundamentals like the last bull market – or even better – is not enough to increase the price of uranium by itself. We always need the contracting cycle. We need something to trigger fuel buyers to express their concerns with their dollars and to start bidding up the price of uranium – both the spot and the long-term price.
Good news is we’ve had two factors that I will consider triggers for term contracting the last twelve months.
The first one was the launch of the Sprott Physical Uranium Trust (SPUT) in August 2021. This is a fund – run by the most-experienced people in the uranium investment business – that purchases physical uranium on behave of its shareholder, from the spot market, and stores. That’s it. They don’t sell it nor trade it. SPUT can be looked at as an end user of U308. This is – permanently – removing supply from the spot market. Some people have referred to it as “squeezing” the spot market.
While SPUT is more of a demand factor, the second factor is a supply shock as a result of the Russian invasion of Ukraine. The threat of sanctioning the Russian supply of uranium (and conversion and enrichment services) has led to self-sanctioning. This made the price of conversion and enrichment shoot upwards. Experts suggest that the increased demand (and prices) for SWU will “spill over” down the nuclear fuel cycle, all the way to U3O8, in a couple of months.
Here is a slide from one of the uranium producers, Cameco, that shows how important Russia really is to the uranium market. Russia houses 14% of global uranium supply, 27% of global uranium conversion capacity, and 39% of global uranium enrichment capacity. If the world can’t access that, all of it results in supply disruptions and thus a supply-demand imbalance which will likely be favorable to the uranium price.
Although the uranium contracting cycle is not in full power mode yet, I suspect that we may be looking back at Q4 of 2021 in the future and calling that the beginning of the long-term contracting cycle. That’s because we had Cameco adding 40 million pounds to their long-term contract book during Q1 2022. That’s about a third more than they did for all of 2021, where they contracted 30 million pounds for the whole year.
Grant Isaac (right), CFO at Cameco, recently said this during a presentation for Bank of America on 18 May 2022:
“We’re talking about being in the early innings of a contracting cycle and we’ve never launched a contracting cycle from a base of these stronger prices before.”
With increased uncertainty of supply, I expect contracting to continue to accelerate during the next couple of years. Reliable producers like Cameco and Kazatomprom will supply a good chunk of this, but they will not be able to meet the projected demand even if both of them ramp up to their full production capacity. There will be a need for a lot of the developers to help with the uncovered demand we are facing.
Dealing with investments during uncertain times
Going over the thesis for the uranium sector is all nice and well by itself, but we are not investing in a vacuum. External factors have an effect on our investments no matter how well the fundamentals look by themselves. The threat of a recession – or worse; depression – should make any investor take a second look at his or her portfolio and see what is fragile against the macro backdrop.
For my part, I see the demand for uranium being among the more inelastic ones I can find. The basics of food, energy, and shelter are not the last things we cut back on if we hit on hard times.
“All good then, let’s go to the moon”, you might think. Maybe, but not necessarily.
I always come back to the thought that even though the commodity can do great by itself, the equities might still suffer.
How you capitalize on your conviction can decide a lot of what you are left with in terms of realized returns after you have exited the trade. That, again, leads to the question; how should you position your portfolio? There are always factors that can make the outcome you expect not materialize.
First off, one should decide what amount to invest in the stock market versus what you want to keep in cash and other assets. Hopefully, during these last few weeks of violent moves to the up and downside, you’ve had the opportunity to go over and see if you are too heavily exposed to the stock market or not. If you were overly excited on the moves up and half-depressed on the moves down, that might be a sign.
Besides figuring out how much you want in the stock market, you should also go over your allocation to the different sectors you are invested in, and see if the allocation matches your conviction.
My highest conviction for the next year is still uranium, but I also have convictions in some of the other sectors I follow (oil, tin, precious metals, and shipping, among others). This means now would be the time to change the allocation, if I’d feel over or underexposed to one of those sectors. Changing this during a drawdown makes the probability of taking emotional decisions higher.
Lastly, we have the allocation within the uranium sector.
What I’m investing in
How I allocate among producers, developers and explorers depends a lot on if I think we are in a recession or not.
In a recession, I think investors will look to producers with positive cash flow and maybe some of the developers that seem to be close to production. These are not the companies with the highest upside potential because they have been de-risked, compared to the more speculative options. This does not mean producers are a risk-free investment. For example, look at Kazatomprom’s stock performance in the month of January, 2022. The stock plummeted during the unrest in Kazakhstan. The rest of the companies run a lot higher risk in this scenario but also have a higher potential return in an emotionally-driven market.
Among the developers, there is no doubt that several of the companies hope to be acquired. Many are also saying they will get into production, but do not have personnel with mining capabilities to bring the project online. Getting the right staff can be another issue for those companies.
For my own portfolio, I am sticking to developers that have cash flow (or a path to cash flow within a year) for my biggest positions.
If you are investing in developers, I would recommend that you spend the most time on your biggest positions and try to see if they are actually doing what they have promised over the last couple of years. If your biggest position has not moved along as they have promised, you might want to reconsider your weighting.
Which uranium stocks would I consider buying if I started from zero today, with the current uncertainty in the markets?
- Sprott Physical Uranium Trust (ticker U-UN.TO/SRUUF)
If you want to get exposure to the price of uranium and avoid the company-specific and geographic risks the Sprott Physical Uranium Trust (SPUT) is your best option.
SPUT is the biggest and most liquid of the physical uranium vehicles. Most people believe that we will see at least a spot price of $80-90 to get the marginal developers into production. That means close to 100% upside from below $50 spot price, and we almost never see the commodity price get to the incentive price without overshooting, so there is even potential for more.
Still, this is a risky product as any. The trust can get stuck at a discount to NAV for longer periods of time, and if liquidity dries up you might have to sell during such a time. The bigger funds are looking at the trading volumes and liquidity in the vehicle with this in mind. If they put on a sizable position in the trust they will not be able to get out quickly if the liquidity in the vehicle is low.
2. Sprott Uranium Miners ETF (ticker URNM)
The best alternative, if you want a diversified uranium portfolio geographically among producers, developers, and explorers, is to buy a basket of them. This ETF offers a great basket of uranium stocks.
URNM is your best alternative in that case. Compared to URA, it is less liquid (at least at the moment), but it offers 100% exposure to the uranium sector compared to 70% for URA.
URNM is weighted heavily towards the two biggest producers Kazatomprom and Cameco with 32%, with the rest going to physical uranium, developers, and even some explorers.
URNM is one of the best options if you want exposure to the whole uranium sector.
3. Global Atomic (GLO.TO GLATF)
If I am to take company-specific (and jurisdictional) risk with any of the uranium companies, I will go for Global Atomic.
They have not been waiting for the price of uranium to recover to get up and running like many of the other companies. They are moving forward on the Dasa project; a large, high-grade uranium deposit in Niger. The company is expected to begin producing uranium by the end of 2024.
In addition, GLO already has a positive cash flow from a zinc operation in Turkey that minimizes dilution risks for the company. This means they can expand their operations without having to raise money in the volatile uranium market.
Global Atomics has checked off milestone after milestone in the last couple of years. When they get into production I expect valuations in the billions, compared to the sub $500 million market cap the company has today.
Thank you for reading, and don’t hesitate to correct me in the comments if you think I’m wrong.
– Gjermund Groven
Gjermund Groven is not an investment advisor. Gjermund Groven has a high risk appetite. Gjermund Groven might own, buy, and/or sell shares of companies discussed herein without prior notice. Resource Talks is not responsible for the quality nor accuracy of information provided herein. Resource Talks is not receiving financial compensation from any company for the publication of this article nor discussing any company. Gjermund Groven is receiving financial compensation from Resource Talks for the production of this article. The information provided in this publication – and all other publications by Resource Talks – is impersonal in nature and meant for general information and opinion-sharing purposes only. Before taking any action on any investment, it is imperative that you consult with multiple licensed, experienced, and qualified investment advisors. Get numerous opinions before taking your own decision in the end. The minimum risk on any investment mentioned in this publication is 100% loss of capital.
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One of my recent interviews