October 1st, 2021
Uranium prices have been rising. Is the controversial metal a buy?
Dear Rebel Investor,
After a 14-year bear market, the uranium meltdown is showing signs it could be over. Uranium prices peaked at US$140 per pound in 2007 before sliding down as low as US$16 per pound in 2016. Since these lows the price has been trending arduously higher, between $20-30 per pound, but with no real catalysts to increase investor sentiment and spur a significant breakout.
Recently though, a kinetic force has launched uranium prices out of the doldrums, potentially setting the stage for a new bull run. On July 19, Sprott Asset Management completed a plan of arrangement with Uranium Participation Corporation (UPC) to convert UPC into a closed-end trust and manage the assets of UPC under the Sprott Physical Uranium Trust (TSX Canada: U.UN; America: U.U). The objective of the trust is simple: buy physical uranium. This allows individuals to invest directly in uranium – and it is the only direct uranium trust in the world.
Uranium prices get a boost
Shortly after the arrangement was completed on August 16, Sprott announced an at-the-market offering (ATM) of US$300,000,000 whereby they would issue new units to investors incrementally on the Toronto Stock Exchange. When the trust issues the new units, Sprott will buy physical uranium with the funds received. On that same date, August 16, uranium was trading at just under $30 per pound – but by September 13, the day Sprott announced that they would issue an additional US$1 billion worth of units under an amended ATM, the price surged to over $40 per pound (see chart).
The entry of Sprott into the physical uranium market has caused stocks and ETFs to soar. North Shore Global Uranium Mining ETF (NYSE: URNM), a fund that holds a basket of uranium stocks, doubled in price less than a month after the announcement of the original Sprott ATM. It also had three straight weeks of record-breaking weekly volume (see chart).
As you can see from the chart, the uranium ETF has had an epic run since mid-August.
Is this a short-lived phenomenon? The price of uranium has declined more than it has increased over the last 14 years. During that stretch there was the Fukushima disaster in 2011, and Germany’s subsequent reaction, which was to phase out nuclear power by 2022.
Many countries are still keen on nuclear
Germany is considered a world leader in the green energy sector and a model country for the transition to renewable energy. Germany now mostly relies on solar power, wind and natural gas (from Vladimir Putin’s cronies – but that’s another story) for its energy needs.
In fact, Germany pays the highest energy costs in the world at a whopping US$0.37 per kilowatt hour. The United States pays US$0.15 per kilowatt hour. It also doesn’t help that the wind has apparently stopped blowing in Europe and that there is a natural gas shortage, which has led to prices doubling since the beginning of 2021.
Germany’s decision to phase out nuclear power has not deterred other countries from continuing to operate nuclear power plants and build new ones. Even though Germany is phasing out nuclear power, the number of reactors worldwide is still increasing.
According to International Atomic Energy Agency (IAEA) there are currently 444 nuclear reactors in operation and 50 reactors under construction in 19 different countries, most of them in Asia and the Middle East. Moreover, there are about 30 different countries considering planning or starting their own nuclear power programs. This will of course lead to an increase in demand for uranium and provide a catalyst to develop new mining projects.
Low uranium prices have had an impact on the supply of uranium too, as depressed prices lead to mines being shut down and stalls the development of new projects. In 2018, Cameco had to suspend its MacArthur River Project, the world’s largest high-grade uranium mine, because of low uranium prices.
The government’s meddling in uranium mining
Government policy has also hampered the development of projects. Virginia Energy Resources Inc (TSXV: VUI) has the largest undeveloped uranium deposit in the USA, valued at around $6 billion dollars. The state of Virginia, however, has had a ban on uranium mining since 1982 and a challenge to moratorium in 2019 was upheld by the Supreme Court. Policies like this make it very challenging to put new uranium mines into production.
The challenges on the supply side are going to have an impact on new production and force higher prices as demand is expected to continue to grow. Higher uranium prices are going to be required to incentivize new investment and start up new mines. It is generally accepted that a price between US$50-$60 per pound is required to incentivize new production.
Is uranium a buy?
An indicative sign that uranium could be in a new bull market will be if utility companies start locking in long-term contracts to purchase uranium at these higher prices. Also, if other investment funds follow Sprott’s lead and decide to get in on the action of buying physical uranium in the spot market, we could see even higher uranium prices as more supply could be taken off the market.
It is still early innings, but it looks as though Sprott is changing the game for uranium. It will be interesting to see how quickly the additional $1 billion added to the ATM will be sold. Investors should be following Sprott’s uranium trust closely.
So what to do as an investor? In the short-term there will likely be significant volatility in uranium prices and uranium stocks – this is great if you like day-trading. If you think the demand for nuclear energy will continue to rise, then a long-term approach to uranium stocks is appropriate, and gaining some type of exposure is a definite must in a metals and mining portfolio.
If you want direct exposure to the commodity then Sprott’s Uranium Trust (TSX: U.UN; U.U) mentioned earlier is a good option. For ETF exposure, there is URNM, which was also mentioned. Do be aware that FOMO (fear of missing out) is causing a lot of stocks to get ahead of themselves currently. Pullbacks do happen, so watch closely for good opportunities to gain exposure to uranium.
Options are fantastic for volatile markets like we’re experiencing today
Here’s an even simpler contrarian strategy for you
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