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Uranium stocks are basking in a warm glow these days.
The spot price for uranium – a metal that goes through several industrial processes to become fuel for nuclear power plants – has started to recover after a decade-long bear market triggered by Japan’s Fukushima nuclear disaster in 2011.
That accident led Japan, Germany, and other nations to scale back on nuclear power usage amid public fears of radioactivity risks. An oversupply of uranium weighed heavily on the commodity price, while miners reduced or shut down production.
But uranium’s spot price has been rising, fluctuating in the low US$50-a-pound range recently – up from US$28 in April 2021. That’s still a far cry from a record high of US$138 per pound in 2007 during the commodity supercycle.
“The market fundamentals have improved enormously over the past 15 months,” says John Ciampaglia, chief executive officer of Toronto-based Sprott Asset Management LP. “We’re more bullish than ever on uranium.”
Optimism on a rising commodity price has been growing since the spring of 2021, when it became apparent that a growing supply deficit in uranium could not continue without eventually sparking a crisis, Mr. Ciampaglia says.
Last year, nuclear power operators globally needed 180-million pounds of uranium, but mines were only producing around 130-million pounds “so there was a 50-million-pound deficit,” he says.
The price of uranium started to firm up, stocks started to take off, and miners were issuing equity, he says. “Capital was finally coming back into the sector, which is a healthy sign. Nobody was raising capital in a bear market.”
That’s when Sprott acquired Uranium Participation Corp. to form Sprott Physical Uranium Trust, a closed-end fund that began trading on the Toronto Stock Exchange (TSX) in the summer of 2021. It buys and stores physical uranium.
The trust, which has attracted US$1.9-billion from mainly institutional investors, has also helped propel the spot price higher through its uranium purchases, he acknowledges. “It is very fair to say that the trust has helped to reset the market.”
A rising commodity price is now prompting utilities to start negotiating to buy uranium, and miners to restart production, he says. For example, Saskatoon-based Cameco Inc. CCO-T is slowly ramping up its McArthur River mine this year to reach 60 per cent of capacity by 2024. The company had halted production at that mine in 2018.
A key catalyst for uranium came last autumn at the United Nations Climate Change Conference (COP26), when governments indicated they could not reach greenhouse-gas emission targets without including carbon-free electricity generated by nuclear power in the mix, he says. Wind and solar power are intermittent, while large battery-storage systems are not yet available.
Russia’s invasion of Ukraine was another catalyst, he says. It caused worries about energy security given that Russia dominates the conversion and enriching services needed to turn uranium into fuel for nuclear reactors.
These events sparked “what I call U-turns” in the space, Mr. Ciampaglia says. The U.S. launched a US$6-billion program to revive its troubled nuclear power industry. It also recently passed the Inflation Reduction Act [IRA], which offers production tax credits for nuclear power plants.
The European Union approved a role for nuclear in its taxonomy, a rulebook deeming what economic activities can be labelled sustainable investments. South Korea announced plans to restart construction on two nuclear reactors, while Germany has temporarily halted phasing out two reactors. And Japan now plans to restart idled nuclear plants and is considering developing next-generation reactors.
The growing positive outlook for uranium prompted Sprott to acquire a U.S.-listed uranium mining exchange-traded fund (ETF) in April. It was rebranded Sprott Uranium Miners ETF URNM-A and is a pure-play on uranium miners and physical uranium. Other funds, whose holdings can differ widely, include U.S.-listed Global X Uranium ETF URA-A and VanEck Uranium & Nuclear ETF NLR-A, as well as TSX-listed Horizons Global Uranium ETF HURA-T.
Because the uranium sector is small relative to other commodities, its stocks “can really take off in price” when many investors chase them, he says. However, a “black-swan event,” such as another major nuclear accident, is always a risk.
Still, Canaccord Genuity Corp. analysts, who are upbeat on the sector, said in a recent report that Japan’s softening stance on nuclear energy “is clearly positive for nuclear power and our outlook for uranium.”
The firm now has speculative-buy ratings on NexGen Energy Ltd. NXE-T with a target of $10.75 and Denison Mines Corp. DML-T with a target of $3 a share. In Australia, it prefers Paladin Energy Ltd. In Britain, it favours Yellow Cake PLC, an investment firm that holds physical uranium.
Uranium equities are also attracting managers of climate-related investment funds.
Jeremy Lin, portfolio manager at Toronto-based Purpose Investments Inc., says he’s “bullish on the sector in terms of supply and demand” because the uranium inventory among the existing fleet of nuclear power plants globally looks really low over the next three to four years.
The ETF he manages, Purpose Global Climate Opportunities Fund CLMT-T, is 6.5 per cent invested in the uranium sector with Cameco, the world’s largest publicly traded uranium miner, among his top 10 holdings.
Cameco will benefit indirectly from the IRA’s production tax credit offered to existing U.S. nuclear power plants, Mr. Lin says. California, he adds, has also just approved a five-year extension on the life of its only nuclear power plant to 2030.
Uranium miners with production today will be the first to benefit from rising demand for the commodity, but they’re also holding out for higher prices in long-term contracts because today’s spot price is still too low for them, he says.
Kazakhstan-based Kazatomprom, the world’s largest uranium miner, recently mentioned that it’s looking at US$80-per-pound, and if that becomes the market price, then Cameco will not be far from that figure in its contracts too, he says. “A supply deficit in uranium is going to remain until more production comes online, such as from NexGen Energy in 2027.”
Mr. Lin also has a small position in U.S.-listed NuScale Power Corp. SMR-N, which designs and markets small modular reactors. It has the first small reactor design to be approved by the U.S. Nuclear Regulatory Commission, but its first module is not expected to go online until at least 2029, he says.
It’s still early days, but NuScale, which went public in May, is well funded now because it has US$380-million in cash, he adds. “By being the first mover, it’s going to have a lot of advantages in terms of sourcing customers.”
The World Nuclear Association, which is holding a conference in London, England this week, could also be a positive catalyst for the space if nuclear industry leaders provide some forward-looking information, he adds. “Any strategic long-term view is helpful to investors in the uranium space.”
Although Mr. Lin is pro-nuclear, there are money managers who will not invest in the sector and are debating whether nuclear is renewable or not.
“I feel that misses the mark, and why the energy crisis is exacerbated today,” he says. “Nuclear power is a very important part of the equation for the next couple of decades as part of the energy transition.”
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