Uranium ETF Key Takeaways | November
The U3O8 uranium spot price gained 1.51% in October, increasing from US$73.38 to $74.48 per pound as of October 31, 2023. Uranium has posted a stellar 54.16% year-to-date return as of October 31, 2023, and continued to show strength and diversification relative to other commodities, which declined -7.26% (as measured by the BCOM Index).
While other commodities suffered in October largely due to China’s economic weakness, a persistently strong USD and other macro factors, uranium continues to demonstrate its lower economic sensitivity. U3O8 contracting by utilities in 2023 are largely not dependent on general inflation, rising rates, etc. In this way, uranium may provide uncorrelated performance to major asset classes and enhance diversification.
Over the longer term, physical uranium and uranium equities have demonstrated significant outperformance against broad asset classes, particularly other commodities. For the five years ended October 31, 2023, the U3O8 spot price has risen a cumulative 162.28% compared to 25.76% for the broader commodities index (BCOM).
Entering into October, uranium had just appreciated significantly, with September its most impressive month since September 2021, and the uranium price pushed to a high it had not been at since before the Fukushima Daiichi power plant disaster in 2011 when it was $73 per pound. In October, though there was intramonth volatility, it ended up posting a rise to hit $74.48.
The U3O8 spot price is well supported in holding levels not seen in over a decade. Perceptions of future uranium demand continue to evolve and increase as the implications of the World Nuclear Association’s (WNA) biennial Nuclear Fuel Report are recognized. Where the WNA’s report noted that world reactor requirements are forecasted to nearly double by 2040, from 171 to 338 MM U3O8e lbs.
Uranium demand of late has been primarily driven by increasing utility contracting, which we believe gives support and sustainability to the price increases. As the end users have acquiesced to paying higher prices for their uranium rather than it being primarily driven by financial entities.
Utilities and uranium producers generally contract in the term market, representing uranium sold under long-term, multi-year contracts with deliveries starting a year or more after the agreement is made. These term contracts do not generally only have a fixed price associated with the purchase/sale of uranium. The price for the amount bought/sold may include a fixed price, but more and more recently, they have a variable price with reference to the market price at the time of delivery. These market reference prices generally have floors and caps that are set at the beginning of the contract. Also, the term contracts may vary in terms of quantities where utilities have had the option to flex the quantity they would like delivered up/down. Price reporters have reported evolutions in these contracting terms, such as the reduction in the number of contracts with flexible quantities, increases in the use of market reference pricing as opposed to portions with fixed pricing and increases in the prices set at the floors and caps. We believe these evolutions in the contracting process between utilities and uranium producers highlight that we are in a sellers’ market and bolster the case for uranium and uranium miners. Furthermore, it is important to note that utilities’ nuclear power plants are very large capital investments and that their fuel cost related to the U3O8 is very small at 4-8% of their ongoing costs. As such, the demand for uranium is inelastic meaning higher prices will not curtail demand.
So far in 2023, U3O8 term contracting has already surpassed 2022’s full-year contracting level. 2022 had the highest amount of term contracting in a decade, at 125 MM pounds, and 2023 full-year contracting is on track to be the first year in over a decade to reach the annual replacement rate. Term contracting had been below the replacement rate for the past decade as excess levels of global inventories of uranium were drawn down. The era of uranium inventory destocking is behind us as utilities are increasingly focused on security of supply. Looking out to 2040, utilities have 1.5 billion pounds of cumulative uncovered uranium requirements. As a result, we believe we are still in the early innings of the contracting cycle. Geopolitical risks related to the nuclear fuel supply chain remain heightened. French President Macron’s recent visits to Kazakhstan, Uzbekistan and Mongolia in search of uranium partnerships and investments is a prime example of the strategic importance of securing uranium supplies.
The nuclear fuel supply chain continues to reshore away from Russia. Orano SA announced that they will spend $1.8 billion to expand their uranium enrichment plant in France by over 30%. As a reminder, Russia accounts for 39% of the global capacity to enrich uranium, and although no sanctions have been levied against Russian services to date, utilities are self-sanctioning by not signing any new contracts with Russian entities. In the U.S., the White House also acted in October by sending Congress an enrichment request for $2.2 billion. We believe that forthcoming additional capacity in enrichment (and conversion via ConverDyn) coupled with an industry shift in enrichment from underfeeding to overfeeding may allow utilities to focus more on their contracting for their future uncovered reactors’ uranium requirements.
Historically, when enrichers had surplus capacity, they introduced a reduced quantity of uranium into the enrichment centrifuges over an extended duration — a method termed "underfeeding". A transition may occur from underfeeding to overfeeding, wherein enrichment centrifuges receive a larger uranium input. Such a pivot in the industry would boost uranium consumption, tilting the balance in this process from creating a supply of uranium to creating demand for uranium.
While the price of uranium held firm in October, the uranium miners retreated. The Uranium Miners ETF returned -3.73%, while junior uranium miners lost -4.47% on profit taking following several months of outsized gains.
Nonetheless, the strength in the uranium price has improved the revenue and profit for producers and raised the prospects for further mine restarts as well as new builds. To this end, there were a couple of positive developments in October.
enCore Energy Corp. (enCore) announced that it had received approval for the renewal of the Radioactive Materials License for its processing plants. With this, enCore reaffirmed its plan to resume uranium production at its Rosita plant before the end of November 2023. enCore also plans to restart its Alta Mesa plant in early 2024. These restarts are both located in Texas and should help to kickstart the revival of the U.S.’s domestic uranium production. Especially since the U.S.’s domestic uranium production in the first half of 2023 was merely 10,000 lbs pounds of U3O8, relative to annual requirements of approximately 50 million pounds.
Australian uranium miner Boss Energy Ltd. announced its commencement of mining operations at its Honeymoon project. Honeymoon has a capacity to produce 2.45 million pounds of U3O8 per year. The project began production in 2011 but was placed on care and maintenance in 2013. This project remains on time and on budget for production starting in Q4 2023.
Regarding new uranium mines, Global Atomic Corporation announced that it has finalized its third Letter of Intent (LOI) for the sale of uranium from its Dasa project in Niger. This brings the total contracted volume to 1.5 million pounds of U3O8 per annum over the project's first five years of operations. This may be seen as a vote of confidence in the company given that just a few months ago, the coup d’état in Niger forced Global Atomic to announce delays of 6-12 months in the first production at Dasa to early 2026.
With global uranium mine production well short of the world’s uranium reactor requirements, the supply deficit building over the next decade, a decade of underinvestment in supply, and future supply inhibited by long lead times and capital intensity, we believe that restarts and new mines in development are of critical importance. The uranium price target as an incentive level for further restarts and greenfield development is a moving target, and we believe that we will need higher uranium prices to incentivize enough production to meet forecasted deficits. Over the long term, increased demand in the face of an uncertain uranium supply is likely to continue to support a sustained bull market.
Source of all performance data: Bloomberg / HANetf as of 31.10.2023. 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.
Ultimately, the demand for uranium and nuclear energy is rooted in the need for electricity. According to a September International Energy Agency (IEA) report, global electricity demand may grow 164.66% by 2050, relative to 2022. Electricity demand is expanding with population growth and as developing nations modernize and urbanize.
Furthermore, 97 countries representing 79.3% of global greenhouse gas emissions have communicated a 2050 net-zero emissions target. In order to fulfill these commitments and decarbonize, committed nations will have to transition their energy supply to low-emissions electricity. This means decarbonizing transport (i.e., transitioning to electric vehicles), heating and industry. Considering other positive factors, like technological advancements, enables us to believe that the demand for electricity will likely be well supported for decades.
Given the positive electricity outlook, nuclear energy’s forecasted prevalence is the next step in uranium’s outlook. Historically, nuclear had significant growth from the 1970s to 1990s but then plateaued since 2000. Going forward, the nuclear energy industry is forecasted to be ushered back into an era of increasing demand with a “Net Zero Nuclear” initiative launched in September calling for global nuclear capacity to triple by 2050. The case for greater nuclear generation has been building for some time. Nuclear energy is:
- Clean: producing similar CO2 equivalent emissions to renewables
- Reliable: provides reliable baseload energy to offset intermittency from increasing renewable energy sources
- Efficient: high energy density reducing the impact of extraction and transport
- Safe: nuclear energy’s impeccable long-term safety track record is gaining acceptance
Nations have been planning to decarbonize and realize they need reliable baseload power, which nuclear is primed to provide. After the Russian invasion of Ukraine in February 2022, many European countries realized how problematic reliance on Russian natural gas was and that nuclear power offered greater energy security.
These realizations have resulted in an increased appetite for nuclear reactors, and there now are 60 under construction and another 110 planned globally, relative to 436 operating today. Notably, China accounts for a significant portion of these, with 24 under construction and 44 planned. China may be leading the development of new reactors, but significant demand is attributable to other countries due to reactor extensions and restarts.
Most nuclear power plants have an operating lifetime of 25 to 40 years, but many can be extended to 60 years or, in the U.S., 80. For example, the U.S.'s Diablo Canyon nuclear power plant has been in operation since 1985 and was scheduled to close by 2025, but regulators gave an extension to operate for five more years. Further, Pacific Gas & Electric is seeking permission to operate for up to 20 additional years. The extensions of planned operating lifetimes incrementally increase the demand for uranium. The Nuclear Fuel Report stated that upward of 140 reactors could be subject to extended operation in the period to 2040.
Nuclear reactor restarts have also contributed to the increasing demand for uranium. Many countries have now made U-turns in their nuclear energy policies and are restarting reactors that were closed in the decade past. The quintessential example of this is Japan. Japan has restarted 11 nuclear reactors, and another 16 are at various stages in the process of restart approval. Japan was not the only example of a country reversing its nuclear energy policy. South Korea fully reversed its nuclear phaseout policy and expanded its program.
Overall, positive sentiment toward nuclear energy has been growing for some time, and we believe it is likely to persist in the decades to come. With support for the nuclear industry increasing, we expect that market participants will have to shift their psychology to contend with higher demand for uranium supporting higher prices. Utilities may not be able to complacently draw down existing inventories in the hope that uranium prices will come down. Over the long term, increased demand in the face of an uncertain uranium supply may likely support a sustained bull market.
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Uranium ETF Performance
As of 31/10/2023
Sprott Global Uranium Miners UCITS ETF
North Shore Sprott Uranium Miners Index
Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/10/2023
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.