Will a supply deficit push uranium prices higher?

Despite an uncertain macroenvironment in the near term, a deficit in uranium supply could see speculators competing with utilities and energy providers for the resource. This might help the spot price to rally further.

• Uranium prices are glowing as the US looks to develop its domestic supply chain.
• Uranium bull market appears bright, according to Sprott Asset Management.
• How to invest in uranium: the Global X Uranium ETF is up 11.7% in the past six months.

Uranium is glowing right now as near-term supply concerns fade and long-term demand prospects look brighter. The spot price for the radioactive metal is currently at its highest level in over a year.

The uranium sector received a boost when the US managed to avert a debt ceiling crisis — thanks to the Fiscal Responsibility Act of 2023 — which could have jeopardised the provisions laid out in the Inflation Reduction Act (IRA).

The IRA assigned $700m towards the development of a domestic high-assay low-enriched uranium (HALEU) supply chain.

HALEU “is urgently needed to support the deployment of advanced reactors”, wrote the Office of Nuclear Energy last September. According to the US government department, domestic HALEU development would eliminate reliance on Russia, which currently covers approximately a fifth of enrichment and conversion services.

On the topic of Russia, a bill banning uranium imports from the country from 2027 passed a US House subcommittee in May.

The US is “dangerously reliant upon Russia's supply of nuclear fuels for our existing nuclear power plant fleet”, said committee chair Cathy McMorris Rodgers, adding that the vote in favour of the bill “sends a strong signal to the market that will help restore American nuclear leadership and fuel infrastructure”.

The Cameco [CCJ] share price is up 7.8% in the past month through 9 June, while the Uranium Energy Corp [UEC] share price has gained 12.3% in the same period. Uranium explorer Denison Mines [DNN] has seen its share price rise 6.1%.

Not all miners will be able to mine profitably

While the outlook on the uranium sector appears to be bright, the Uranium Energy share price has been under pressure in recent months and has tumbled 20.1% year-to-date.

This comes after Kerrisdale Capital published a short report at the end of March accusing Uranium Energy of failing to take advantage of high prices during previous bull markets.  

“While we’re presently optimistic on uranium prices and believe that they need to rise to meet continued demand growth, we don't expect UEC — or its shareholders — to be any more successful this time around,” Kerrisdale wrote.

The short seller added that of the approximately 140 million pounds of uranium resources in the US, none of it can be mined profitably.

“Only about a quarter of the resources will be economically viable even at the much higher uranium prices,” it added.

Uranium Energy didn’t issue a response to the report.

Cameco to double uranium extraction this year

Higher realised prices on uranium are a key growth driver for the industry. This explains why Cameco plans to extract 20.3 million pounds in 2023, up from 10.4 million pounds in 2022.

“The world is recognising the benefits of clean-air nuclear energy and the critical tool it can be in the fight against climate change and in providing energy security,” commented Cameco CEO and president Tim Gitzel in the company’s first quarter (Q1) 2023 earnings release.

“I am not sure there’s ever been a better time to be a pure-play investment in the growing demand for nuclear energy.”

Cameco’s joint venture with Silex Systems Limited [SLX.AX], namely North Carolina-based Global Laser Enrichment, has developed technology that it expects to play a major role in helping the US to commercialise HALEU.

Bull market should remain bright

Back in April, Cameco announced the extension of a long-standing arrangement with Bruce Power, Canada’s only private sector nuclear generator, to supply fuel through 2040.

According to Jacob White, ETF product manager at Sprott Asset Management, the Cameco deal is an indication that there’s plenty of uranium supply being earmarked for future contract deliveries. This will help to prop up the uranium spot price in the long-term, which, in turn, should support uranium miners.

“We believe the uranium bull market remains intact despite the uncertain macroeconomic environment,” wrote White in Sprott’s most recent report on the uranium market, published in early May.

Uranium’s next move is likely to be both “particularly strong and chaotic”, argued Leigh Goehring and Adam Rozencwajg of New York fund manager Goehring & Rozencwajg in their Q1 2023 commentary on natural resources, published on 31 May.

Utilities to compete with speculators for volumes

Goehring and Rozencwajg explained that the market for physical uranium is in deficit and spot volumes are becoming scarce. As a result, the Sprott Physical Uranium Trust [UU.TO] could be used to push prices higher. The fund launched in 2021 to buy up uranium on the spot, taking it out of circulation.

“Financial players will be a huge force in global uranium markets, and the Sprott Physical Uranium Trust will become their preferred speculative vehicle,” wrote Goehring and Rozencwajg.

When the fund trades at a premium relative to its net asset value, it can issue new shares and then use the proceeds to purchase uranium. When it trades at a discount, however, this option is not available.

“Speculators will eventually realise they can bull the Sprott Physical Uranium Trust, force a premium, have the trust issue shares, and permanently sequester physical material,” Goehring and Rozencwajg added.

This investment strategy wouldn’t be successful if there was no supply deficit, but it would push prices up in the current market because the energy and utilities industries would have to compete for volumes.

How to invest in uranium stocks

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

Funds in focus: Global X Uranium ETF

For investors looking to gain exposure to the uranium theme through ETFs, there are a few options.

The Global X Uranium ETF [URA], which has allocated 23.67% of its portfolio to Cameco as of 9 June, is weighted in favour of the energy sector (54.8%), followed by industrials (23.8%) and materials (18.9%). The fund is down 1.4% in the past year through 9 June, but up 12% in the past six months.

The Sprott Uranium Miners ETF [URNM] is a pure-play on the companies involved in mining, exploration, development and production of uranium — Cameco is the top holding with 16.17% of the portfolio as of 9 June. The fund is down 3.1% in the past year, but up 9.7% in the past six months.

The Horizons Global Uranium Index ETF [HURA.TO] is another pure-play, which tracks the Solactive Global Uranium Pure-Play Index — again, Cameco is the top holding. The fund is up 4.1% in the past year and up 8.4% in the past six months.