Uranium prices are ripe for a re-rating to the upside.
They have been for years now. But the impact of COVID-19 on the industry, coupled with a renewed acceptance of nuclear as “clean”, has kicked off events that have already seen the uranium spot price and related equities begin to inch higher.
Currently, the price of uranium is right at $30 per pound.
Over the next ten years, the world will need ~200 million pounds of uranium annually. But there is only about 140 million pounds per year globally with an all-in sustaining costs (AISC) below US$50 per pound — and 20% or more of that is offline because of COVID.
At today’s spot price, only about 100 million pounds of supply per year is economic. Or only about half what the world needs.
A price of well over $50 per pound will be needed — and is expected — over the next few years.
This would trigger a new bull market in uranium stocks.
A Flood of Gains
Uranium’s last bull market kicked off in 2006 when Cameco’s Cigar Lake flooded while it was being built, prompting a run on uranium that sent the spot price up to US$137 per pound.
It sent uranium stocks significantly higher in percentage terms, with some like UEX Energy, Energy Fuels, Laramide Resources, and International Enexco delivering a few thousand to +100,000% returns.
The commodities sector is known for the stocks within it offering leverage to the underlying price of the commodity. The uranium sub-sector epitomizes this.
Cigar Lake provides ~7% of the world’s annual supply of uranium.
It has once again been taken offline. And while the idling in 2020/2021 was due to the virus and not a flood, it may yet again cause a flood of gains.
The fundamentals have long been in place for a uranium bull market. COVID may have kicked it off.
Small World, Big Leverage
The uranium market is tiny.
Kazakhstan alone produces ~40% of global supply. It does this through Kazatomprom, its national uranium company, which listed 25% of its shares on the London Stock Exchange in 2018. Those shares had a market capitalization of US$4.75 billion in early 2021.
The next largest public pure play is Cameco, which produces ~10% of annual global supply and had a market capitalization of US$5.1 billion in early 2021
In other words, half of the world’s uranium production is represented by less than US$25 billion in market cap.
From there the pure plays get small very quickly. The “largest” uranium producer in the U.S., for example, is Energy Fuels. Largest is in quotes given it only produced around 200,000 pounds in the last year. Its market cap is around a half billion dollars, but has mostly been below that for years.
Yet, if you were to look up the top holdings of the Global X Uranium ETF (NYSE: URA), you would see that these three companies make up three of the top five holdings.
The other two are Nexgen Energy, with its world-class but undeveloped Arrow project in Saskatchewan and Denison, with its large but also undeveloped Wheeler River project on the other side of the basin as well as the McClean Lake Mill, which toll process ore from Cigar Lake.
Those five companies make up over 50% of the sector ETF.
So the uranium world is very small. Which is why even small new inflows into the sector create such stark leverage reflected in the equities.
Over a Barrel
Unlike precious metals and platinum group elements (PGEs), you can’t buy and store uranium to benefit from its price appreciation.
Not only is it highly regulated as a radioactive material, but the market for it is also very opaque. Much buying and selling is done via long-term contracts, and the spot market is closely guarded, making getting pricing info tough.
The way investors typically “got access” to physical uranium was through Uranium Participation Corp. Its stated objective is “to provide investors with ‘pure’ leverage to the uranium price without taking on mining or resource risk” and “to let investors speculate on future changes in the uranium price by way of trading the shares of UPC.”
It owned 16.1 million pounds of U3O8 and 0.4 million KgU of UF6 at the end of Q3 2020 with a fair market value of C$698 (US$550) million.
Shares of Uranium Participation performed incredibly well in the last bull market. However, there are new entrants into the uranium storage and uranium royalty game since 2007 that give investors and funds a way into uranium.
In precious metals, it is the royalty group of stocks that outperformed in the last bull market for all the reasons that are now becoming common knowledge:
- No commodity risk
- Sustainable dividends
- No cost risk
But uranium investors had no such option the last go-round, leaving them over a barrel to invest via the model that has performed so well with precious metals.
The entry of Uranium Royalty Corp. into the market changes that.