Uranium Miners Monthly Report | July

Uranium ETF Monthly Report: Key Takeaways

June was characterized by rising interest rates, persistently high inflation, and plummeting market depth and trading liquidity. These negative market conditions pushed equity, bond and commodity markets lower. Despite the broad-based sell-off, the U3O8 uranium spot price rose from $47.73 to $50.40 lb., increasing 5.59% in June.[1] Although uranium outperformed other industrial metals which largely sold off during the month, uranium equities fell precipitously and in line with the equities of miners of other commodities. The Sprott Uranium Miners UCITS ETF fell -16.19% for the month of June. The negative returns experienced by uranium mining equities does not reflect a deterioration in sector or company fundamentals but rather general market risk aversion and uncertainty.

Uranium prices and equities both had a strong rally in the beginning of the month, when on June 7th the U.S. Department of Energy announced a $4.3 billion plan to buy enriched uranium directly from domestic producers in an effort to reduce its reliance on Russian imports of the nuclear-reactor fuel.[2] Russia only accounted for approximately 5.9% of mined uranium production in 2021 per UxC,[3] but it is a major player in both the conversion and enrichment of that uranium. This enriched Russian uranium represents a significant supply risk to Western utilities. For example, on June 24th the supply chain risks were highlighted when a Canadian vessel contracted for the transportation of Russian enriched uranium product to three U.S. utilities was put on hold.[4] The Government of Canada’s recent amendment to Special Economic Measures on Russia would put the carrier of the vessel under violation of Canadian law if they were to transport the enriched uranium. We believe these developments exerted positive price pressure for both uranium prices and the uranium miners but were still overshadowed by the broader market sell-off.

Cameco and Kazatomprom, the fund’s two largest holdings as of month end are by far the largest uranium producers and are both affected, although differently, by the aforementioned sanctions. Kazatomprom’s Chief Commerical Officer Askar Batyrbayev stated earlier this year that just under 50% of their attributable production is shipped to western convertors, mostly via St Petersburg.[5] As such, the recent sanctions may create transportation issues for the company. However, for Cameco it may prove to be a competitive advantage given its Canadian-based operations.

Number three position in the ETF, the Sprott Physical Uranium Trust (SPUT), holds approximately 56.8 million pounds of physical U3O8 uranium as of month end. Since August 2021, SPUT has been an active participant in the uranium spot market helping to enhance liquidity and price discovery. SPUT purchased approximately 1,200,000 lbs. of U3O8 uranium in June. [6]

Exploration-focused and smaller-cap uranium miners were responsible for a larger drag on ETF performance in June compared to holdings in the uranium producers and physical uranium holdings. In general, uranium miners benefit (or are disadvantaged) from a higher (lower) uranium price because of their inherent operating leverage. A strengthening uranium price helps to increase profit margins for producers. Further, smaller-capitalization uranium miners are more sensitive than producers to market sentiment given these companies are at earlier stages of development and often require additional capital, permitting, etc. to progress their projects.

UEX Corporation (UEX) was the one bright spot amongst uranium miners with significant positive performance over the month of June. This was due to Uranium Energy Corp’s announcement on June 13th that it will acquire UEX to create the largest diversified North American focused uranium company. [7]

Please remember that past performance is not an indicator of future performance.

Macro Outlook

Uranium miners performance has recently been negatively impacted by broader market conditions and not underlying sector fundamentals which we believe remain attractive. Over the month of June the U3O8, conversion, and enriched uranium prices increased for both short and long term purchase contracts whereas the uranium miners share prices fell.[8] To highlight this performance divergence, uranium miner share prices are now down to March 2021 levels whereas the uranium spot price has climbed significantly since then. Current demand for conversion and enrichment coupled with a shift away from Russian suppliers support an increase in the U3O8 uranium spot price which may bolster the uranium miners.

Government policies are also likely to increase the demand for uranium going forward. In June, the new government in South Korea stated that it will expand the role of nuclear energy in order to meet climate targets.[9] Japan’s Prime Minister also called for ’maximum’ nuclear power use in June.[10] Further, governments are looking at increasing domestic supply and/or reducing dependency on Russian nuclear fuel which will also create demand for uranium. In addition to the previously mentioned plan from the U.S. to buy $4.3 billion in enriched uranium from domestic sources, the following came from the June G7 meeting “We will further reduce reliance on civil nuclear and related goods from Russia, including working to assist countries seeking to diversity their supplies."[11] Overall, uranium is crucial to the world's energy needs and even more so in the turmoil of these current events.

Although it may be in a short-term pause, we believe a new uranium bull market is underway that is likely to continue to benefit uranium miners. Over the long term, increased demand and decreased uranium supply are supportive of a sustained bull market. Uranium miners have exhibited a low/moderate correlation to major asset classes, providing diversification potential.

We believe that uranium miners are well positioned to take share within the energy sector as energy security and decarbonization take center stage globally. With the number of nuclear reactors planned to increase by 35%, governments are signaling the need to embrace the reliable, efficient, clean, and safe energy produced by nuclear power plants to meet ambitious decarbonization goals.[12] At the same time, a uranium supply deficit is looming on the horizon, and uranium miners may be the beneficiaries of increased investment. Uranium and nuclear energy may be critical to the clean energy transition and help countries achieve energy security — reliable and affordable electricity.

Please remember that when you invest in ETFs, your capital is at risk.

Sprott Global Uranium Miners UCITS ETF (URNM) Performance Table (As of 30.06.22)

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