The uranium sector tends to fly under the radar of many investors and few have exposure to uranium stocks. Uranium does not trade on an open market like other commodities, is more difficult to track, and is less often reported in financial media. Buyers and sellers typically negotiate contracts privately. I believe this presents an opportunity for investors to buy uranium mining stocks that still remain undervalued.
Since the Fukushima nuclear disaster in Japan, the U3O8 spot price faced huge headwinds, falling from over $60 per pound in March 2011 to $18 in November 2017. The price then bounced around $20 to $30 per pound for years, much too low for uranium miners to generate a profit.
Nuclear Power and the Bullish Case for Uranium Stocks
The current investment case for uranium revolves around the view that nuclear energy is a clean and efficient power source that is gaining favor among policymakers worldwide who are trying to reach carbon-reduction targets. Nuclear is a zero-emission clean energy source. It generates power through fission, which is the process of splitting uranium atoms to produce energy. The heat released by fission is used to create steam that spins a turbine to generate electricity without the harmful byproducts emitted by fossil fuels.
While some people mistakenly think they are seeing smoke, this is actually steam that you see coming from the tower, not a harmful emission.
The biggest challenge is dealing with nuclear waste and ensuring it is not released into the atmosphere. But all of the used nuclear fuel produced by the U.S. nuclear energy industry over the last 60 years could fit on a football field at a depth of less than 10 yards!
That waste can also be reprocessed and recycled. Used fuel has only exhausted part of the potential energy in the uranium pellets after five years in a reactor. Some countries like France reprocess and recycle nuclear fuel, extracting elements still capable of generating energy for use in new fuel and encasing the radioactive byproducts in solid glass logs for permanent disposal.
The hope is that with investment into enrichment technologies, we can significantly reduce the amount of waste that is produced, the amount of time it remains radioactive, and the safety of storage facilities.
With the war in Ukraine and bans on purchasing Russian energy, the interest in uranium as an alternative has only increased. Strong demand from utilities worldwide has now coincided with low inventories and threats to supply. Volatile fossil fuel prices, uncertain oil supply, and decarbonization objectives from the world’s largest economies continued to drive governments to invest in nuclear power production.
In addition, China is expected to build another 32 nuclear reactors by the end of the decade and Japan is now expected to restart multiple plants and build new facilities. The World Nuclear Association recently made an upward revision for global nuclear power production.
The developments coincide with renewed concerns about supply with Canada’s Cameco (CCJ), the world’s second-largest uranium miner, reducing its production guidance for the current year. Political turmoil in Niger has also led to the suspension of operations in the country and talks of a ban on exports. Niger provides about 5% of world mining output from Africa’s highest-grade uranium ores.
One uranium fuel pellet – weighing less than ten grams – replaces one ton of coal or 149 gallons of oil or 17,000 cubic feet of natural gas, as stated by the Nuclear Energy Institute.
The uranium price got some wind under its sails in March and April of 2020, quickly bouncing from $20 to $30, a move of 50% in under two months. The Covid-19 pandemic and persistently low prices have led to several miners needing to shut down operations. Cameco temporarily shut down the world’s largest operating uranium mine at Cigar Lake. This led to a decline in new supply that resulted in Cameco needing to increase the amount it bought in the open market to satisfy existing delivery contracts.
After this Covid-related spike in 2020, the uranium price then declined and consolidated for over a year around the $30 price level. But in August and September of 2021, the price once again spiked higher from $30 to $50. This price spike was driven by significant buying from the Sprott Physical Uranium Trust (SRUUF). The fund purchased a massive 28 million pounds from mid-August to mid-September, following its inception in July. Sprott’s purchases have helped diminish the global uranium glut that slowly accumulated after the 2011 Fukushima disaster in Japan.
The world’s biggest producer, the Kazakh state-backed miner Kazatomprom, also listed its own uranium fund in partnership with Kazakhstan’s central bank and Genchi Global Ltd. These funds were smart to accumulate and stockpile supplies of uranium while prices were low.
Yet another spike in the uranium price occurred in March/April of 2022 when uranium hit $64.50 per pound. This increase in the price was driven by the war in Ukraine rattling supply chains and continued physical purchasing from funds. Uranium prices then corrected back to around $50 and consolidated around this level for nearly a year.
Fast forward to the current year and the price of uranium has once again rocketed higher, climbing from $50 in March to $70 as of today, September 27th. Other price estimates put uranium at hitting $73/pound today, which is the highest price since early 2008!
This latest advance is driven by Germany announcing it will keep two of its last nuclear plants in a reserve until April to help limit the threat of winter blackouts. The German government has been under pressure to delay a previously planned nuclear power phaseout after the war in Ukraine, sabotage of the Nord Stream pipeline and Western bans on Russian energy have triggered a surge in energy prices. Investor speculation is also contributing to the rising price for uranium in 2023.
By 2040, the World Nuclear Association estimated that uranium’s demand could reach 130,000 tonnes each year, roughly double the current demand. At Nicoya Research, we believe the uranium price could easily top $100 over the next 12 months and hit new highs above $140 during 2025. Nick Lawson, chief executive of Ocean Wall, predicts that uranium prices could reach $200 per pound by 2025.
While we have covered rising demand and the key drivers, the supply side of the equation is also increasingly bullish. While there are a few mines that could be put back into production in the near term, it can take more than a decade to get a new uranium mine online. In addition, most of the existing large mines are not meeting production guidance because of equipment reliability issues, supply chain delays, lack of trained personnel and rapidly rising costs.
Put simply, the uranium market has gone from being oversupplied to severely undersupplied with very little new supply coming online anytime soon. This is the perfect storm for higher uranium prices, with demand rising sharply and supply reduced significantly.
Today Forbes announced that Russia’s Rosatom was banning uranium exports to the United States, allegedly due to lack of insurance coverage. Rosatom is a Russian state corporation headquartered in Moscow that specializes in nuclear energy. This is significant as the Russia is the #1 exporter of uranium to the United States and losing this supply would have serious implications to domestic energy production and security. Put simply, the United States is heavily dependent on Russian uranium to run much of the grid.
This news helped to push the price toward $73 per pound. Later in the day, Forbes updated the article after Rosatom denied that it was halting shipments to the US, saying that it will fulfill its contract obligations, But Rosatom did not deny that it can’t ship uranium out of St. Petersburg due to insurance issues. Rosatom is saying that it will find other means to ensure deliveries are made to the US.
It was recently reported that Rosatom was seeking to buy uranium in the western market, something never seen before. This is likely Rosatom’s fallback action plan to purchase uranium held at Converdyn site in the US that could then be delivered to Centrus to fulfill its contract obligations, if they can find a willing seller. This has put even more strain on the western uranium supply that pushed spot price to new 15-year highs today.
I would not be surprised to see Russia ban the export of uranium to the United States as retaliation for the U.S. government freezing Russian assets, while supplying weapons, money and intelligence to Ukraine. Either way, the United States needs external supplies of uranium and may struggle to find them in a world that is turning against Western governments. We have seen a similar occurrence whereby the uranium-rich nation of Niger has kicked out French diplomats and threatened to stop shipping cheap uranium to power France’s reactors.
It is also worth noting that the United States and the EU have threatened to ban imports of Russian uranium, but after careful consideration, decided against it. Uranium fuels America’s nuclear power plants, and about 20% of that comes from Russia, while close to another 30% is imported from the Russian allies of Kazakhstan and Uzbekistan. The European Union is also a major importer of Russian uranium.
Uranium Stocks and ETFs: Profit from the Rising Price of Uranium
Investors can get direct exposure to uranium price movements through the Sprott Physical Uranium Trust (SRUUF). The Trust primarily invests in and stores its assets in the form of U3O8 uranium in storage facilities located in the US, Canada, and France. SRUUF is up 26% in the past month and 51% year-to-date, tracking the uranium price.
Another option is Yellow Cake plc (YLLXF) is a British uranium trading company established in 2017. The company’s core business revolves around purchasing and storing physical uranium (U3O8) as an investment. Currently, Yellow Cake has acquired approximately 20.1 million pounds of U3O8 – unchanged since April – which are held in storage accounts at Cameco in Canada (CCJ) and Orano in France. The share price is up 20% in the past month and 50% year-to-date, slightly underperforming versus the Sprott fund.
Investors may prefer to own shares in companies that mine uranium or an ETF that holds a diversified basket of uranium miners. The two largest ones to consider are the Global X Uranium ETF (URA) and the Sprott Uranium Miners ETF (URNM). URA has a market cap of $2.1 billion, is up 18% in the past month and 36% YTD. URNM has outperformed, up 28% in the past month and 49% year to date.
There is quite a bit of overlap between the top two uranium mining stock ETFs. Cameco is the top holding in each fund, with Sprott Physical Uranium Trust and National Atomic Co Kazatomprom JSC in the top three holdings of each. Kazatomprom is the single largest uranium producer globally.
Uranium miners are about to see a huge increase to revenues and spike higher in profit margins, with the best-run companies likely to outperform the price gains of uranium itself. There are also a handful of uranium companies sitting on significant high-grade reserves that can be put into production profitably.
In fact, one uranium stock that we track has an Internal Rate of Return (IRR) of more than 100% and NPV of nearly 3x their enterprise value. An IRR above 20% is typically economic enough to move a project into production and it is very rare to see a feasibility study return an IRR of over 100%. Likewise, while it is typical for mining exploration companies to have market caps lower than their project NPVs, it usually is not as low as 1/3 of the NPV value.
There are risks that the price has shot too high and will need to correct. We could see a period of profit-taking with the price pulling back and consolidating. Physical supplies in storage could hit the market, Russia could find insurance to continue exports, and new mines could come online in 2024 and 2025 faster than anticipated. Another nuclear disaster could also reduce public appetite for new nuclear power plants.
But our view is that the supply/demand fundamentals are likely to remain favorable for uranium throughout the remainder of 2023 and over the next few years. The price still needs to double to return to 2007 highs and some analysts are anticipating uranium at $200 per pound or higher. While a near-term pullback is possible, I think the general price trend will continue to the upside over the next several months.
Ready to Start Profiting?
At Nicoya Research, we have been anticipating this move higher in the uranium prices and have benefited from long positions in uranium stocks established when the price was under $30. We also increased exposure in our Gold Stock Bull portfolio roughly a month ago and have captured additional profits from this latest move. We are currently analyzing a basket of top uranium stocks that we believe are undervalued and are likely to provide leveraged gains for investors moving forward.
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