Investment Thesis
I wrote a bullish article focused on the Sprott Uranium Miners ETF (NYSEARCA:URNM) and the Sprott Junior Uranium Miners ETF (NASDAQ:URNJ) a few months ago. Since that time, uranium equities have started to recover nicely, where URNM has now outperformed the S&P 500 this year, although very marginally. The URNJ has lagged slightly, but it is important to remember that it was first launched in early February 2023.
Figure 1 – Source: Koyfin
If we zoom out over the last two years, we can see that the Sprott Physical Uranium Trust (OTCPK:SRUUF), which is effectively just a tracker of the uranium price, has still outperformed the Mining ETFs by quite a bit. Now, it is fair to say that some uranium equities were rather extended towards the back half of 2021, but I still view the current underperformance by the mining stocks compared to the uranium price as a sign that the bull market has yet to begin in earnest.
Figure 2 – Source: Koyfin
ETF Growth
The URNM ETF started the year with $826M in assets under management (“AUM”), which has since grown to $1,057M, where about one-third of that growth has come from inflows, and the remaining portion is from the positive performance.
The URNJ ETF is much smaller. It was launched in February of this year with only $2M in AUM and has since grown to $52M. While it is still a small ETF in terms of AUM, that is an impressive growth rate in just over six months. I do think this impressive growth rate is an indication of the strong investment appetite, which is likely to grow further.
The two ETFs have a lot of overlap, where the biggest difference between them is that the two largest uranium producing companies, Cameco (CCJ) and Kazatomprom, and the two uranium investment vehicles, the Sprott Physical Uranium Trust and Yellow Cake (OTCQX:YLLXF), are only in the larger of the two ETFs.
Figure 3 – Source: Sprott Uranium Miners ETF
Figure 4 – Source: Sprott Junior Uranium Miners ETF
Uranium Price
Uranium has been one of the best performing commodities over the last five years, as illustrated by the chart below.
Figure 5 – Source: Data from Koyfin
The spot price of the commodity has continued to tick higher this year, during a period when the return for other commodities has been more mixed. The latest spot price is close to $59/lb, a little bit dependent on which source we use, where the price at the time of this writing is $58.86/lb according to Numerco.
Figure 6 – Source: TradingView
The very recent strength is likely a combination of the uncertainty in Niger together with the launch of more physical uranium funds. However, if we zoom out a bit and turn to monthly data, we can see that both the spot price and the long-term contract price have been climbing relatively consistently over the last few years.
Figure 7 – Source: Data from Cameco & TradingView
I have mentioned this in the past, but it is important to remember that the long-term contract price data does not fully reflect reality, as what the chart displays is often the lowest bid. We do know that fixed rate contracts were signed in the low $60s/lb last year and I suspect western producers should be able to get closer to $70/lb for any fixed rate contracts being signed today.
A uranium price of $59/lb is naturally much better than what we have seen over the last few years, but we are probably still 15-30% from a price point which would be sufficient to bring more marginal producers online, following the level of inflation we have seen over the last few years. Also, anyone that has invested in the natural resource industry for a while knows that it is prone to overcorrect, both to the upside and the downside. So, I do think the likelihood is quite good for the price of uranium to reach $70+/lb in the not-too-distant future.
Conclusion
The bear market for the uranium industry following Fukushima was brutal, which left very few producing uranium miners. We are now seeing somewhere around 5-10 companies looking to restart operations over the next couple of years. There are no doubt more greenfield projects in the global uranium pipeline as well, but it could take quite some time for those to start producing uranium.
Most nuclear reactors under construction are currently in Asia, but the planned and proposed reactors are growing all over the world. So, the long-term demand for uranium looks extremely strong.
Figure 8 – Source: Yellow Cake Presentation
We are presently seeing positive sentiment for uranium equities, the spot price of uranium is climbing daily, and the long-term demand looks extremely strong. So, there is very little to dislike now.
Having said that, no investment is without risk and over the last few years uranium equities have been very sensitive to overall market sentiment. So, a possibly risk would still be a more forceful sell-off in the overall market, which I doubt the uranium equities can withstand. Also, any nuclear accident has the potential to impact the sentiment, at least in the near term, even if such an event has a low probability.
All-in-all, I view the risk-reward for uranium equities as very positive at this point in time. I own a basket of uranium equities, which are discussed in my investment group, but it is fair to say my uranium segment today looks more like the URNJ than URNM. My allocation to miners over the investment vehicles is now very high compared to what it has been over the last few years.
Figure 9 – Source: My Uranium Allocation Over Time
Figure 10 – Source: My Uranium Performance Over Time
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