Nuclear Powered Returns

Uranium is being removed from the open market by Sprott Uranium Trust at a stunning rate. The trust purchased 17M pounds of uranium in 2022 alone in an already short supplied global market. With the annual supply of uranium estimated to be 150M pounds, Sprott’s Uranium Trust effectively purchased 11% of the annual float in a few months this year. This purchasing trend is not showing signs of stopping either. Uranium stocks have gained traction again with global investors, and the public is slowly starting to take notice of the uranium supply issues after the Russian invasion of Ukraine.

So why are investors beginning to talk about uranium, and why does the commodity have such a short supply? To answer these questions, we need to dive into the fundamentals of the uranium market.

Understanding Uranium:

Nuclear energy is a reliable and clean source of energy for our world. It is a very efficient source of energy as well. According to studies done by Goehring & Rozencwajg, the Energy Return on Energy Investment (EROEI) is 100:1 for uranium, where the next best alternative the globe has is the oil and gas space, which has a EROEI closer to 30:1. A 3x differential for the return on investment should be enough to grab the attention of world leaders. Add on the push for global economies to go green in the next 10-15 years, and you can quickly see the need to utilize nuclear energy long-term when the other alternatives are low efficiency solar and wind energy. This ideology has been reflected recently in major developed and developing countries as they extend the life of nuclear reactors or propose more infrastructure investments for the building of nuclear power plants.

I wrote in June this year about how the world is facing the beginning stages of an oil shortage. To hedge against this risk, our economy will need an alternative energy source that meets or exceeds the energy efficiency we currently have with oil to maintain our forward progress as a civilization. The use of uranium has the potential to drastically reduce society’s need for carbon energy when utilized at scale across the globe. Nuclear power plants are able to run 24/7 and efficiently once the project is complete. Without a better technology, the infrastructure across the world will need to rely on nuclear power plants for energy in the years to come, causing an increase in the need for uranium.

Uranium Supply Issues:

Uranium prices are sensitive to supply chain shocks and political regime changes. The effects of both can be seen in Chart 1 below when the price of uranium jumped 40% following the invasion of Ukraine in early 2022:

Chart 1: Price of Uranium in 2022 (Source: Tradingview)

According to the World Nuclear Association, the uranium market has an annual demand above what is supplied in normal mining operations each year. This supply gap is filled by stockpiles of uranium built up over time. The reason this supply gap occurs is it takes time for uranium mines to come back online when the mining operations are paused or for new mines to be created from scratch. This timeline is not months or years, but close to a decade once the proper permitting and ground work is complete. The nuclear fuel cycle is one of the most scrutinized processes in the world and for good reason. Mistakes with nuclear reactors are catastrophic. However, the research done into nuclear reactors over the last decade has made significant improvements into the safety and security of nuclear reactors.

A large reason for the uranium supply constraints have to do with mining operations. Uranium mining companies have shut down or stalled operations for several years now. Many believe the cost to produce a pound of uranium is around $50-60, and the spot market for uranium has hovered around $20-30 for years. Therefore, uranium suppliers find it more profitable to go out and buy spot Uranium at a cheaper rate and deliver it to the electric companies (or any other demand site). This process works when uranium prices do not move above $40, and the price has been range bound at $40 for almost a decade until the start of 2022 shown in the chart below:

Chart 2: Price of Uranium from 2008-2022 (Source: Tradingview)

As you can see in Chart 2, there was a major bull run ending in 2008 followed by a decade of declining prices from $140 to sub $20. Now we are starting to see uranium prices pick back up in 2022 due to energy shocks across the globe and entities like Sprott coming into the market to purchase uranium for speculation. The inter-workings of a massive short squeeze are underway here. Uranium has a low float of supply followed by a major necessity for energy companies across the globe to utilize uranium. If financial funds and speculators buy up the float, the energy companies and miners are going to be bidding for a limited supply of uranium causing prices to soar like we saw back in 2007-2008.

Even though uranium prices are just getting back to break-even levels for miners ($50-60), we have a serious problem unfolding long-term. As uranium stockpiles deteriorate with increasing global demand, uranium prices are set to increase dramatically causing a bull run in uranium as under-invested producers cannot get enough supply out to the market. This bull run should benefit the uranium stocks short-term and investors getting in early for years to come.

Uranium Use Case:

Uranium is purchased by utility companies from uranium producers to create electricity. In the early 2000’s, uranium contracts for utility companies lasted up to 15 years, and the price was locked in for the duration of the contract. This trend for utility companies changed in the 2010’s when uranium prices were hovering around $20 per pound. The low price environment caused utility contracts to be significantly shortened because uranium prices were so low that the utility industry did not believe prices would increase a material amount to cause issues. If anything, after five years of price reductions in uranium, consumers foresaw prices going down even more. It is interesting to see how market participants are quick to forget major events from the recent past.

We find ourselves in a situation today where utility companies and uranium suppliers both are short uranium, and the price of uranium has increased 3x in two years. The previous utility contracts are expiring, and utility companies are getting a harsh new reality with an increased price. However, the price of uranium is only a small portion of the total utility provider’s expense, so utility companies will continue to buy uranium due to price insensitivity. Utility suppliers on the other hand will have to start buying uranium in size on the open market because they have not been investing in new supply channels themselves during the last decade. This aggressive buying will cause a floor for uranium prices as the suppliers are short uranium as well. This same trend happened in 2008, and speculators were the ones with the strong position as they bought when uranium prices were climbing, and they sold to desperate buyers at the end of the bull run. It is very possible we are in the early innings of this same cycle from 15 years ago when the price of uranium went up 10x over four years.

Chart 3: Price of Uranium from 2002-2007 (Source: Koyfin)

Potential Risks To The Investment Thesis

The major risks to this investment thesis are two fold:

1)      Regulators may step in to stop the climb of uranium’s price. This is a possible scenario, but it would likely happen well above the current price of $50 since mining companies are barely breaking even at the current spot price. This should leave plenty of upside still for uranium investments at these levels.

2)      The uranium related stocks and Sprott Uranium Trust are not mainstream investment products causing a smaller group of people to focus on these trades. This could delay or stifle the price increase potential even when the macro trend is fully underway. Patience is a virtue in investing though. Remember: GameStop was not a mainstream investment prior to 2020 either, but short squeezes grab the attention of the masses.

Investments Being Analyzed:

There are several different methods to gain exposure to the uranium sector in an investment portfolio. The two most straightforward ways are via the Sprott Physical Uranium Trust (SRUUF) or uranium mining company stocks. The uranium mining company stocks can be purchased individually or through Exchange-Traded Funds (ETFs). Two of the well known ETFs are Global X Funds - Global X Uranium ETF (URA) and Sprott Funds Trust - Sprott Uranium Miners ETF (URNM). Both of these ETFs have exposure to Sprott Physical Uranium Trust as well.

As investors begin to see the long-term trend of uranium supply shortages and increased uranium demand, the investments mentioned above should only benefit from this global movement. The risk reward is very compelling in the uranium space, especially after this year’s bear market. Once the market sorts out the fundamental drivers of uranium assets, there should be a major repricing to reflect this long-term macro trend.

Disclosure: Funds I control are long a basket of uranium investments at the time of this writing.

Note: This post consists of high level commentary on research conducted by Tetelestai Capital, LLC into uranium related investments. Though compelling, your own research should always be done before investing into any security. The risks mentioned in this post are not all encompassing either. This post should not be viewed as investment advice. Tetelestai Capital is not associated with any of the investment companies or products mentioned in this post. If you have any questions about the research Tetelestai Capital conducts, please reach out through the website for more information.