TLDR: Uranium is setting itself up to be on the best performing investment asset classes over the coming years. There are various catalysts that are in place right now and on the horizon, with the price of uranium in my view going much higher in 2022 and beyond as the market gets tighter and the thesis unfolds on the back of a new contracting cycle and financial player influence. The underlying equities present a great opportunity to play this bull market for those who can handle the volatility. The fundamental underpinning is unlike anything I have seen in the broad equities market.
This post is for all the new uranium investors or those still contemplating whether or not to invest, I hope it helps put things in perspective. Since I first started sharing the uranium investment thesis some 2 years ago, we have seen a massive rally for the underlying equities across the board. The URNM etf, the largest pure play etf in the uranium space and in my view the first stop for new investors in the space, is up over 150% since Q4 2020 and that is after it corrected nearly 30% from last year’s highs. After this big run up and big correction, with plenty of volatility in between, a lot of people are wondering what is next for the price of this critical energy commodity.
When looking ahead over the course of this year, there are a lot of things to look forward to and I think that the biggest move for the price of physical uranium is still ahead. Let’s start with the incredible amount of support that we have seen for nuclear power across the world. We have seen life extensions for existing nuclear power plants in for example France and the US, keeping that demand for uranium in place for years to come. We have also seen a commitment to building new power plants in the east, with China being the largest contributor to uranium demand with their commitment to build 150 new reactors over the coming 15 years. Contrary to popular belief, nuclear power is a growth industry and uranium is the material that is needed to power that growth. The original thesis that I shared noted that we would need a price of $60-65 to incentivize enough new production to meet growing demand, but we are still not there yet as uranium is currently still trading in the low $50’s. This $60-65 equilibrium price target level has changed in the light of inflation and supply chain problems in my view, we are likely going to need a much higher price and I believe that to be closer to $75-80 before we can talk about really reaching an equilibrium price level. The thing with commodities however, is that they are inherently cyclical and that means that they don’t just stop after reaching said equilibrium price levels, they often overshoot. That is what I fully expect to happen this year and I wouldn’t be surprised at all if we see a triple digit spot price being quoted within the next 12-18 months.
The two main drivers for this expected price action, besides geopolitical support for nuclear power and the supply/demand fundamentals that are in place for uranium, will be the initiation of a new long term contracting cycle as well as the involvement of financial players. Starting with that contracting cycle, uranium is usually secured by utilities via long term contracts that can run for as long as a decade. A lot of contracts were signed between 2007 and 2011, before Fukushima crushed the market and contracting levels fell far below replacement rates for the following decade. That is changing now, with uranium bellwether Cameco indicating that utilities are coming back into the market and that the term contracting cycle has entered the early innings once again. As this cycle heats up, we will see a lot of utilities come back into the market and that will cause some serious price discovery for uranium. With energy security being the name of the game all over the world and demand growing, there will be plenty of competition for available pounds of uranium. To quote the largest uranium producer in the world, Kazatomprom: “Given both conventional and unconventional demand, there might not be enough guaranteed supply for everybody”. The marginal buyer will pay what they have to in order to keep the reactor running and I wouldn’t be surprised to see term contracting happening far above current price levels sooner than people think.
As for the financial players I mentioned above, they will undoubtedly play a substantial role as well. In the last bull market, we saw a combination of market specific catalysts as well as financial players come in and drive the spot price of uranium to roughly $140 per pound. Sprott and their physical uranium trust has been the biggest player in that regard, securing an absolutely massive 31 million pounds of uranium over the past months and they don’t look like slowing down anytime soon. There is a lot that could be said here about financial players, Sprott or how tight the market is getting right now, but to keep it short the one thing to look forward to this year is the potential NYSE listing for this uranium vehicle. If Sprott secures that, it will allow massive capital to come in and take a position due to it being present as a US listing and an increase in liquidity. Once that capital comes in to position for this bull market, the vehicle will reach its full potential and the subsequent stacking of uranium and price action will be a sight to behold. How high can we go? Nobody knows, but the setup is there for a generational bull market to unfold over the coming years.
There are several ways one can play this bull market, with the aforementioned URNM etf being one of those and the Sprott physical uranium trust (tickers TSE: U.UN / OTCMKTS: SRUUF) being another. Cameco and Kazatomprom are the two bellwethers in the space and besides that there are roughly 70/80 companies that are involved in the uranium business. It is paramount that you look for real quality by critically looking at the asset, management team and the plan that is in place, in order to separate the wheat from the chaff and get the most out of the coming upward price trajectory in uranium. The sector is still tiny, with a total publicly traded market cap of roughly $40 billion. It topped out at around $150 billion last cycle and I think we go way beyond that this time, as there are even better fundamentals in place and far more capital floating around looking for opportunities.
I hope this post proves to be helpful and informative, please make sure to do your own research as well. The uranium market is volatile and conviction is crucial to not be shaken out. If you have any questions, please feel free to send me a message. Best of luck out there in the markets and I hope you all have a good and healthy rest of your day.
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