Latest Uranium Miners ETF Monthly Report | HANetf

Uranium ETF Key Takeaways | Septemeber

The U3O8 uranium spot price gained 7.85% in August, increasing from US$56.21 to $60.63 per pound for the month. The uranium market's stellar August performance is in stark contrast to the drawdowns in most other commodity markets which were dragged down by USD strength and China’s weakening economy. Decade-high uranium contracting levels by utilities, coupled with supply disruptions and risks, are helping to create robust demand market.

The Uranium Miners ETF returned 11.27% in August. We believe the strong performance of uranium miners reflects the sector’s increasingly bullish fundamentals and the growing reality that future uranium supplies will have to come from mines restarting operations and new mines in development.

Over the longer term, uranium has demonstrated even greater outperformance among various commodities. For the five years ended August 31, 2023, U3O8 spot price appreciated a cumulative 132.39% compared to 26.62% for the BCOM.

Uranium’s price breakout puts it at a critical point where it is now testing the $63.77 high made in 2022 shortly after the Russian invasion of Ukraine. We believe that uranium is currently in its third bull market, with world primary mine supply persistently below the world’s reactor uranium requirements, giving it more room to run.

On the demand side, there has been an unprecedented number of announcements for nuclear power plant restarts, life extensions and new builds that will likely create incremental demand for uranium. Consequently, utilities are accelerating their purchases under long-term agreements – on track to exceed last year’s 10-year high at 107MM lbs. U3O8e YTD.  Notably, increasing contracting from utilities, as opposed to financial entities, has been the primary driver for the rise in the uranium price year-to-date.

Primary mine supply is considerably lagging behind demand, with a cumulative forecasted supply gap of ~1.5 billion pounds to 2040.3 The industry has recognized this need for more uranium mining. For example, historically anti-nuclear Sweden has announced plans to lift its ban on uranium mining and to increase its nuclear generation dramatically, but despite announcements like these, the industry is experiencing significant supply issues. 

The restarts of uranium mines that had been shut down and put into care and maintenance due to an extended period of low uranium prices is a natural place to start to “mind the gap”. A major restart in 2023 was Cameco Corp.’s (Cameco) McArthur River mine, which restarted in late 2022. The mine originally had guidance to produce 15 million pounds of uranium for 2023 but recently announced that this will fall to 14 million pounds.   Cameco’s challenges have also extended to its Cigar Lake mine, for which it expects to produce another 1.7 million pounds less than previously forecasted. This type of supply disruption is not isolated. Peninsula Energy Ltd. was also hurt after Uranium Energy Corp. (UEC) terminated a processing agreement. As a result, they announced a “significant” delay in the restart of the Lance project.   

Geopolitical risks have been a constraint on the supply of uranium. Most recently, the coup d’état in Niger has drawn international sanctions against the military junta that has hampered logistics in the country and forced Orano SA (Orano) to halt uranium treatment.   This follows Global Atomic Corp.’s announcement that the situation in Niger may delay its new build, the Dasa Project, by 6 to 12 months.   Per the World Nuclear Association, Niger accounts for 4% of the world’s uranium production. The instability of this supply exacerbates the vulnerabilities in the uranium supply chain due to its high geographical concentration. Compounding the uranium supply’s geopolitical risks is the question of Russian supply. Western utilities have been self-sanctioning, albeit taking deliveries of uranium under existing contracts while not signing any new contracts. Further, legislation to re-shore the U.S. nuclear supply chain away from Russia has been advancing, such as the Nuclear Security Act, which started the current rally in uranium on July 31.

Given the recent challenges experienced by some of the miners, the security of supply is critical, and inventory importance is increasing. Utilities always have uranium on hand, whether in uranium concentrate (U3O8), natural UF6, enriched UF6 or fabricated fuel (not inserted into a reactor). The high energy density of uranium helps utilities to store years’ worth of uranium. This results in a situation that is opposite to just-in-time inventory and ensures that the utilities are able to run their nuclear power plants almost continuously. Further, these inventories have been critical to balance supply and demand as supply has been disrupted. Primary mine supply has not met the world’s uranium reactor requirements for many years. Commercial secondary inventories held by utilities and suppliers have been one of the predominant sources of alleviating this mismatch. We believe that after years of inventory overhang, this secondary supply source has peaked and that we are no longer in the complacent stage regarding uranium inventories or purchase strategies.

Other secondary sources of supply for uranium used historically are also depleting. Long gone is the “Megatons for Megawatts” program for which the U.S. and Russia committed to convert nuclear weapons into fuel for electricity production and ultimately supplied a total of 177,000 t U3O8 (or about 2.5 times annual world demand) over the 20 years ended in 2013.   Another secondary source of supply has been underfeeding in the uranium enrichment process. Given the previous markets where enrichers had excess capacity, they can “feed” a smaller amount of uranium into the enrichment centrifuges for a longer period. This is called underfeeding. In this way, they can input less uranium than they would otherwise. Underfeeding depends on enrichment capacity, for which Russia has 39% per the World Nuclear Association. Potential sanctions on Russian enrichment services or Russia limiting enrichment access itself have increased the demand for Western enrichment services. This may spark a reversal in the underfeeding trend to overfeeding, where more uranium is fed into the enrichment centrifuges. This industry shift from underfeeding to overfeeding would imply greater uranium consumption, shifting it from supply to demand.

Source of all performance data: Bloomberg / HANetf as of 31.08.2023. Additional sources available upon request. All performance figures are showing net data. Past performance is not indicative of future performance and when you invest in ETFs your capital is at risk.

Macro Outlook

Looking beyond the short-term performance, we believe the uranium bull market still has a long way to run. Conversion and enrichment capacities of uranium have been a key bottleneck in the supply chain. The recent restart of the ConverDyn conversion facility in Illinois and increased enrichment capacity announcements, such as Urenco and Orano’s recent announcements, have helped address this. As a result of these developments, we believe that conversion and enrichment services price increases have finally cascaded to the uranium spot price. Over the long term, increased demand in the face of an uncertain uranium supply may likely support a sustained bull market.

Nuclear energy and uranium’s critical role in energy security may likely be paramount going forward. Russia’s invasion of Ukraine sparked a global energy crisis that forced many countries to reimagine their energy supply chains. In past years, Western countries’ energy policies have predominantly favored renewable energy to reduce reliance on fossil fuels. However, renewables often suffer from intermittency and low capacity and require offsets with baseload energy sources, such as coal, natural gas or nuclear power plants. As the world continues to add renewable capacity to the grids, nuclear energy will have an important role to play, providing the highest capacity factor. 

We believe the uranium bull market remains intact despite the uncertain macroeconomic environment. There has been an unprecedented number of announcements for nuclear power plant restarts, life extensions and new builds that are likely to create incremental demand for uranium. However, the current uranium price still remains below incentive levels to restart tier 2 production, let alone greenfield development.

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Uranium ETF Performance
 As of 31/08/2023

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/08/2023

Performance before inception is based on back-tested data. Backtesting is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such a strategy would have been. Back-tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. When you invest in ETFs and ETCs, your capital is at risk.