Over the past two years I have been writing several posts regarding the uranium sector and the asymmetrical opportunity that presents itself within this asset class. There has been a lot of volatility over that period of time, but one thing that hasn’t changed is how rock solid the investment thesis behind the uranium sector is. If anything, it has only gotten more bullish over the course of the past year. There are various reasons for this, but the three most prominent ones are:
· The Sprott physical uranium trust entered into the market to purchase millions upon millions of pounds of uranium, with them now holding a massive 55 million pounds of the yellow metal and having a net asset value of just around $3 billion dollars at the time of writing. They have played a significant part in the unwinding of the carry trade and thinning out of the physical market and with over $100 million of cash in the coffers right now, there is plenty more stacking that can be done by them and others such as various financial entities, companies and the ANU fund to name a few. As daily liquidity picks up and more investors get positioned into this vehicle, it will allow for bigger capital to come in. Sprott asset management CEO John Ciampaglia, whom I have spoken to on several occasions, has confirmed that some very large funds are waiting for the $50 million of daily liquidity before being able to position. There is a lot of capital on the sidelines and once it is able to come in, the impact is poised to be profound for the sector.
· Utilities have come back into the term market to secure long term contracts, some of those including dates that range all the way into the 2030’s and with increasing volumes as well. This is a great sign, as the majority of activity and price discovery happens in the term market as opposed to the spot market. We can expect this to continue as the year progresses, especially now that the rest of the fuel cycle is moving up strongly in the light of the current conflict in Ukraine. To put this into some context, every previous uranium price cycle has always preceded a strong rise in the price of UF6 and SWU (which are further up the fuel cycle), so it’s very much a matter of if and not when this translates into the price of physical uranium. On top of new term contracts, there will also likely be plenty of inventory replenishment as utilities secure supply for the years ahead.
· There is a renaissance happening in the nuclear power sector right now. An industry that many believed to be in critical decline over the past decade, is actually on the rise and countries around the world are once again looking to nuclear power in the current energy and climate crisis. France and the UK are committing to their nuclear fleet, China plans to build 150 new reactors over the next 15 years, South-Korea aims to focus on nuclear power again with its news president, Belgium is delaying the phase-out of part of its fleet, the US has recently saved the Byron and Dresden plants and is making funds available to keep more in operation the coming years. There are several more examples, but one thing is clear and that is that uranium demand is on a strong growth trajectory, all while supply is nowhere near sufficient to meet this growing demand. What will fix this gap? A much higher uranium price, with an equilibrium price level likely being around $70-80 right now due to inflation and supply chain issues, as opposed to the $55-60 it was before. That means we have a long way to go before we see those prices being met and uranium being a commodity in a bull market, an overshoot will more than likely happen.
Now that the bullish uranium picture is hopefully clear, let’s briefly discuss the second part of the title of this post. The US seeks $4.3 billion for enriched uranium to wean off Russia supply. This is by all accounts a massive statement of intent from the US and one that caused a spike in equities across the board on Tuesday. The plan is to buy this directly from domestic producers and energy department officials have met with key congressional staff, where they said such funding is urgently needed according to the report by Bloomberg. While there are most definitely more details that will need to be cleared up and nothing is ever a certainty when it comes to new legislation, one thing is clear and that is that there is definitely a focus on security of supply for uranium. For some context, that $4.3 billion represents over 10% of the total publicly traded market cap of the entire uranium sector. While for some it may seem like a small number, it is massive for the uranium space and it has made an already very strong investment case even stronger.
All in all it is clear to me that the price of uranium, and as an extension the underlying equities, are poised to go on a strong run over the course of the next 12-18 months and potentially as soon as the second half of this year depending on prevailing circumstances. To respect the rules of this subreddit, I won’t be talking about any individual equities. The sector is very volatile and I am aware that it is not for everyone, but in my opinion uranium presents one of the best opportunities in the market right now. I hope that this post has painted a clear picture, but as always please make sure to do your own due diligence and if you have any questions, feel free to send me a message. I hope that you have a good and healthy rest of your day and thanks for reading.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.