Investors are starting to position themselves for the coming uranium bull market. Cash is now actively flowing into a sector that has been unloved for almost a decade.
Uranium’s recent rally has started to gain momentum and analysts are now starting to turn their eyes towards the resource. However, with no new mines coming online inventory is slowly disappearing.
This article looks at the uranium bull market in detail and how to get exposure and take advantage of the cycle.
Are we in a uranium bull market?
The price of uranium has steadily been rallying over the last few months moving from multi-year lows.
However, the game completely changed a few weeks ago when Sprott Physical Uranium Trust (SPUT) entered the market and started buying up uranium.
There is a current deficit as the demand for uranium is much bigger than supply. This is exacerbated by the fact that SPUT is gobbling up loose supply like Pacman (SPUT is a physical uranium trust where the money it receives buys up physical uranium).
Uranium is needed for energy and likely going to be a big player in helping the transition to cleaner energy. This means that utility companies will need to guarantee supply and to do that they’ll lock in large contracts to get this delivered.
At the moment, the price of uranium isn’t high enough to bring existing assets out of production.
Even Cameco (the world’s largest publicly traded uranium company) is satisfying demand by buying up uranium in the spot market rather than producing from its own mines at low levels.
Therefore, with demand increasing, and supply diminishing, the price of uranium should go up.
I won’t say “will” because nothing is ever guaranteed (a Fukushima-esque black swan event could de-rail nuclear), but imo it has to because if not, then:
- eventually there is no supply left
- that means no nuclear energy left
- that means the lights start going out?
It’s more likely that the price of uranium rises as demand increases rather than the lights going out, so I am bullish on uranium.
I think we’re at the start of a new cycle. Prices usually follow demand.
What uranium charts show
Uranium is a thinly traded commodity and used to be priced on a monthly basis.
Cameco (one of the largest uranium producers) offers a pricing chart on its website.
We can see in the chart the uranium price spike in 2007 and also the Fukushima event in the price from 2011.
Fast forward ten years later, and only now are we starting to see the spot price of uranium move up.
Let’s look closer.
Prices hit a monthly low at the end of 2016 and have more than doubled since that period.
The uranium spot price set an eight-year high in September 2021 going above $40 for the first time since 2013.
Why are uranium stocks going up?
Uranium stocks are going up because of the rising uranium prices. A better question to ask is why are uranium prices rising?
Uranium prices are rising because it is becoming increasingly clear that the transition to clean energy requires a dependable and available energy supply. Renewables aren’t reliable and as we’re seeing with rising gas and coal prices there needs to be something to bridge the switchover.
Nuclear energy doesn’t emit carbon and is also always on.
It’s taken more than ten years for the supply to be worked through and the sentiment for nuclear is turning positive. Even Greta Thunberg has accepted that nuclear power can play a part in helping countries become carbon-free.
Now that supply is steadily getting churned. the market was 30Mlbs undersupplied in 2020.
There’s no incentive for new mines to open at these prices. It’s just not economical.
The price to profitably extract uranium out of the ground is at least $45 for most companies.
That means that at these levels the uranium supplies will eventually be depleted.
And what happens when everyone wants to buy something scarce? It’s economics 101. When demand overwhelms supply, prices rise.
That said, there is a risk that when uranium goes through $50 then some uranium producers will look to restart unprofitable mines.
But those companies will want to be sure the price is stable.
Nobody wants to go through the time and money investment to bring a mine back online if the price is going to go below the price of profitable production.
Therefore, if prices do rise to be profitable, those companies will have no wish to flood the market.
Sprott believes that demand is only going to rise, too.
China’s new five-year plan means there will be a 40% increase in nuclear capacity by 2025, and grid problems in the US and Japan show that a reliable and low carbon source of power is needed.
In fact, US utilities have around 200Mlbs of unfilled requirement through to 2028.
In a tight market where supply is getting reduced on a daily basis (remember Cameco are buying in the spot market to fulfil their long-term contracts rather than producing in themselves!), any increase in demand will put a squeeze on the price.
It’s also worth remembering that the Reddit crew from WallStreetBets was a key reason for stock price surges in AMC and GameStop. They’re also able to buy SPUT. SPUT then has to legally go out and buy uranium with that money.
Could it happen? Maybe. Is it unlikely? Probably.
But I’ve been around long enough to know that anything can happen.
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What a uranium bull market means for traders
A uranium bull market essentially means that cash inflows come into the sector and prices rise.
That’s great for traders as they can take advantage of these higher prices trends and added volatility.
You can’t make money in dead stocks and uranium is a volatile beast. There is the opportunity to make plenty of money if you’re on the right side of the trade.
In September, London listed Aura Energy (AURA) moved from 5.75p to 22.5p before falling back to 11p.
Explorers will likely see the most volatility but producers will also see price increases should the price of uranium go up.
Uranium bull market history
Uranium is a commodity and therefore like all commodity stocks it’s cyclical. That means there are booms and busts as uranium comes in and out of favour.
The last bull market in uranium was more than a decade ago, and to understand this coming bull market we need to know what happened last time around.
Why did the last uranium bull market end?
The last uranium bull market started when flooding at Cameco’s Cigar Lake mine caused a fear of a supply deficit in 2006.
The flooding hampered production and prices exploded from the low $30 levels to over $140.
This turned many unprofitable miners into hugely cash generative companies and as a result a huge wave of speculative capital rushed into the sector.
But like all good things – it eventually came to an end.
Prices in uranium were already starting to come off and it was Fukushima that put the boot into the last uranium bull market.
What did the Fukushima nuclear disaster mean for the uranium bull market?
The earthquake at Fukushima caused the nuclear reactor accident at the Fukushima Daiichi Nuclear Power Plant. It was caused by a tsunami which then flooded the power station.
The disaster smashed confidence in nuclear energy and Japan abandoned its nuclear energy strategy almost overnight. This caused a glut of supply in the global uranium market and Japan wasn’t the only one – Germany announced the decommissioning of its nuclear plants by 2022.
As supply increased prices went lower, and the money tap that had funded exploration and production in uranium was switched off.
For a whole decade, the uranium market has been working off this excess supply. However, those lbs are now starting to be depleted.
How to play the uranium bull market in 2021
Retail investors wanting to prepare for the bull run have various global options to gain exposure to uranium. Climate change is going to be the key driver for nuclear power generation and the opening of new uranium mines.
There are lots of uranium stocks listed in Canada, for example, Sprott Asset Management’s SPUT vehicle.
Paladin Energy is a large uranium miner and exploration company listed in on the Australia Stock Exchange (ASX).
Kazatomprom is the national operator of the Republic of Kazakhstan for both the import and export of uranium and is listed in London.
For smaller companies, there are several options in London:
- Yellow Cake (YCA)
- Aura Energy (AURA)
- Berkeley Energia (BKY)
- Geiger Counter (GCL)
All of these companies have advantages and disadvantages…
Yellow Cake buys and stores physical uranium (U3O8) and so can be considered an investment fund correlated to the price of uranium.
It doesn’t hold any exploration or production risk that is inherent to companies with uranium projects and agrees the purchase of uranium before it’s announced to the market which sees shareholders enjoy any uplift in the price.
Aura Energy is a pre-production uranium miner with a uranium asset in Mauritania. It has been increasingly volatile since August 2021.
Berkeley Energia has a uranium asset in Spain that has been denied a permit to mine. This essentially makes the shares worthless because a mine that cannot be mined is of no use to anyone.
However, there is increasing pressure for this physical commodity and the Spanish government has already given many approvals and support for this project.
Therefore, if you think this project will be mined then the valuation could be attractive.
Geiger Counter Ltd is a closed-end investment company. The goal of this company is to deliver returns to shareholders by investing in uranium exploration and production stocks.
Nothing is ever guaranteed but I believe the risk/reward in the uranium sector is incredibly attractive. Supply is continuously being churned and unless prices rise then no new mines will come online.
Eventually, something will need to give and I think this will be the uranium price that starts to get squeezed.
Utilities that don’t have their nuclear requirements covered are in a way short uranium and they’ll need to source their supply from somewhere before it runs out.
You should consider the risk/reward in every individual asset before making an investment decision.
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