Volatile share prices for uranium equities should not distract from fundamental market changes

New ETFs in Europe, billions of dollars raised and spent on physical uranium by Sprott, aggressive reactor construction programs, mine restarts, rising contract pricing, positive turns in public sentiment: Driven by powerful geopolitical and climate related trends, nuclear energy has finally moved out from the shadow cast by Fukushima and is bringing fundamental change to the uranium sector.

The steady flow of positive news for the uranium sector also highlights its greatest peculiarity: uranium equities typically rise and fall based on the spot price, despite most uranium being bought and sold via term contracts that pay little attention to spot pricing. To compound matters, the spot price can be volatile because the sector is small and also opaque in many respects, since the main consumers are utility companies that are loathe to share details on stockpiles and purchasing plans.

So, while the term price has trended upwards, the spot price has at times surged to levels not seen in over a decade, only to be hit by significant dips with no relation to the overall sentiment or fundamentals. Share prices across the board have followed suit in both directions.

At what point are equities going to reflect the underlying growth trends, either by decoupling from the spot price or experiencing stronger, less erratic spot pricing? It’s a difficult question to answer but to begin with, it’s worth examining the increase in spot volatility.

Firstly, this is an issue that was predicted by leading nuclear market research and analysis firm, UxC. The main catalyst has been the Sprott Physical Uranium Trust (SPUT) which took over Uranium Trading Corp. in 2021 and put in an at-the-market (ATM) funding mechanism. The ATM allows SPUT to sell stock into the market every single day from the Treasury, receive the funds and immediately purchase uranium. They have been highly active, raising and spending over $1.1 billion to date. Such action, in the famously thin spot market, has meant the trust has sucked up much of the loose supply and, as Sprott AM chief executive, John Ciampaglia, said: “We don’t sell any of it. It is a stockpiling fund.”

However, SPUT can only use its ATM facility when its stock price is trading at its net asset value (NAV) and when that price is below — as it has been for several weeks at time of writing in early June— it cannot purchase. This has left the spot market particularly sensitive to traders, including one financial player that unloaded its 1.3 million lb. uranium inventory over a two-day period in May, pushing down prices aggressively.

In contrast, term pricing has risen slowly but steadily. In February of 2020, just before the US$24.80 per lb. spot price began to leap forwards, the term price sat at US$32.50 per lb. At the end of April 2022, the term price was sitting at US$50 per lb. and experienced almost no negative price movement on the way to that level. Such is the confidence that this trend will continue, one of the world’s largest uranium miners, Cameco (TSX: CCO; NYSE: CCJ), will be restarting production at its McArthur River mine and Key Lake processing plant later this year. This is both more technically complex and more costly than many investors will realize, so it’s not a decision the company will have made lightly. More tellingly, Cameco and Orano Mining have recently partnered in order to increase their ownership of Cigar Lake, the world’s largest high-grade uranium mine, with a $187-million purchase of Idemitsu’s stake.

On the financial side, money has also poured into two uranium ETFs launched this year in Europe. Research conducted and published by the Financial Times in May, shows global nuclear and uranium-focused funds are now sitting on more than US$3 billion in assets, six times more than in 2020.

Underlying drivers

All this growth is being driven by powerful trends. Climate change has given rise to rapidly growing decarbonization efforts by governments and corporations around the world. Several countries, including the United Kingdom, France, New Zealand, and Sweden, have already gone as far as to enshrine decarbonization targets in law. These nations, together with many others, have reviewed their options for weaning off fossil fuels and the conclusion is clear: decarbonization is not possible in the required timeframe without expanding nuclear energy.

Thus we have the European Union including nuclear in its green energy taxonomy despite opposition from Germany — the only anti-nuclear European nation; France announcing the overhaul and growth of its huge nuclear reactor fleet after years of political paralysis; and the U.K. recently announcing nuclear will be the backbone of its new energy policy. Even countries like Poland are planning to begin a multi-reactor program that will directly replace coal power, and in the U.S., the government has provided a US$6 billion fund to assist its reactor fleet. And let’s not forget that China’s nuclear program is so big that it will soon overtake the U.S. as the No. 1 generator of nuclear energy, and consumer of nuclear fuel.

Of course, nuclear power stations do not get built overnight. These are high-capex, multi-year endeavors — factors that have long been a roadblock to wide-scale rollouts. This is why the recent milestones in small modular reactors (SMR) are so important.

As the name suggests, SMRs are small reactors that are produced by factories as modular components for delivery and assembly onsite. They have remarkable, built-in safety features, can be mass produced and are ideal for powering remote and small to mid-sized communities or large industrial installations. Most importantly for uranium investors, SMRs have the potential to send the nuclear energy sector into a realm of growth that is not yet fully appreciated.

Granted, we do not yet have any mass rollout programs in place, nor indeed are there any completed factories capable of supplying such rollouts. However, several facts suggest this changing fast. Billions have been poured into SMR development over the last two years alone across countries including the U.S., China, U.K., and Canada. In January, China connected its first commercial SMR to the grid to “lay the foundation for the construction of industrialization and mass production.” More recently, another SMR front runner, U.S.-based NuScale, announced a partnership with South Korea’s Doosan Enerbility to begin manufacturing equipment this year for full-scale production of SMRs. And it looks like there won’t be a shortage of early customers, including the U.K., where the Prime Minister Boris Johnson, has boasted that the U.K. intends to build one nuclear plant every year. This would be inconceivable without SMR technology.

Geopolitics and the danger of low stockpiles

The knowledge that nuclear power is critical for the success of clean energy programs is now combined with a similarly powerful revelation: security of supply can no longer be ignored by nuclear utilities. The entire world knows that Russia is a major supplier of oil and gas, but it is also a big player when it comes to nuclear fuel. In addition, the world’s largest uranium producer is Kazakhstan, which sits firmly within the Russian sphere of influence.

Russia and its opponents have already shown their willingness and ability to weaponize energy supplies. The focus may currently be on oil and gas, but an extended uranium and processed nuclear fuel embargo is by no means off the table. In fact, a number of U.S. lawmakers are pushing the administration to implement just such an embargo. If that embargo, or a similar one initiated by Moscow, included Kazakhstan’s uranium, it would send a shockwave throughout the sector, particularly considering the current state of known utility stockpiles. Indeed, the International Atomic Energy Agency (IAEA), warned inventories held by U.S. and EU nuclear utilities were averaging at 16 and 24 months respectively, an incredibly vulnerable position to be in considering the rise of geopolitics.

Utilities at risk after years of low uranium prices

The underinvestment in uranium exploration and development over the past decade plus means any disruption to production is going to have a major effect on available supplies. Although there are advanced, well-funded projects in development with impressive economics – notably those owned by NexGen Energy (TSX: NXE) and Fission Uranium (TSX: FCU; US-OTC: FCUUF) in Saskatchewan – they have not yet begun construction and will not be delivering material anytime soon. Additionally, although Cameco’s McArthur River is coming back online, analysts at UxC have stated that established mines around the world are facing dwindling reserves and falling grades — so much so that the cost of production for most existing uranium miners will rise within the next three years.

Nuclear energy looks set for robust, long-term growth, and it will take the uranium sector with it. For the near term, with the global economy and political landscape in such flux, there is increased potential for major supply disruption and extra volatility in the spot price. Past that, it is likely to be heavily influenced by new reactor build programs that could be greatly accelerated as SMR factories commence production, and new, primary supply — most likely from mines located in stable jurisdictions. A bumpy ride for utilities but a potentially exciting one for investors.

—Anthony Milewski is the co-founder of The Oregon Group research house and a director of International Consolidated Uranium (TSXV:CUR), which has optioned five uranium projects in Australia, Canada and Argentina.