Key points ● The price of Uranium is up 47% in the last 30 days. ● Sprott Physical Uranium Trust initiated a massive ‘at the market’ purchasing initiative for Uranium ● The trust company believes that demand will vastly outstrip supply and mining capabilities in the coming years as nations increase their green energy programs in the form of newer fission reactors ● The price increase in Uranium is highly correlated with Sprott purchases.
State of the Market
The savvy commodities trader may have noticed that the price of Uranium stocks have skyrocketed to new highs in the last few weeks. Those who were out of the loop were left scratching their heads and wondering: Why has the price of this radioactive metal gone nuclear? The answer to this is not very clear. It has certainly made waves as a “meme investment” on the internet, but the underlying companies don't seem to support their current value. In the current market, Uranium miners sell their product at a loss. Hard as it is to believe, it actually costs more money per pound for these firms to mine Uranium than the market is willing to pay. In order to stay operational, these firms are required to purchase uranium to meet their committed sales and to maintain a minimum inventory. The end result is that these firms have been forced to operate at a loss for years now.
The recent Q2 2021 Management Report for Cameco Corporation (CCJ) published on June 30th shows that the company’s Average Unit Cost of Sales is $47-$48 per pound of Uranium. For comparison, the spot price of Uranium on June 30th was around $32 per pound, a $15 to $16 deficit. To cap this all off, COVID19 hit Uranium miners very hard, forcing them to close several of their mines.
On paper, virtually none of the miners in this market, even the larger firms, look like an attractive buy. In the short term, it is possible for a firm to operate at a loss. In the long term the company, or in this case, the underlying commodity (Uranium) will either correct, or the firm will go out of business. Since Uranium is, and will continue to be a valuable commodity for manufacturing and energy, bankruptcy is unlikely.
But did the price spike up recently?
The answer to this lies with a new player in the game. In comes the Sprott Physical Uranium Trust (TSX: U.UN). On August 17th, this trust company publicly announced an at the market buying initiative for the radioactive metal. Sprott is purchasing an immense amount of Uranium, and advertising this initiative as a step towards a carbon free energy future. Directly from the August 2021 Fact Sheet: as of the 31st, Sprott currently holds $741,169,791 worth of physical Uranium and they are continuing to purchase more.
To add another dimension to this phenomenon: the current demand for Uranium outstrips the supply. Current global demand fluctuates around 200 million pounds of Uranium, when companies are barely mining at all. Given global production is at 125 million pounds, there is a 75 million pound deficit in production. For more information see the image below, courtesy of Sprott's August 2021 Investor Fact Sheet:
Bank of America/Merril Lynch Analysts also made note of a stunning correlation between the Price of Uranium, and the purchasing habits of Sprott Trust. Given the nature of the Uranium marketplace, it is not surprising to see why Sprott has such an influence on the market.
A combination of factors make Uranium, and Uranium Miners a compelling trading opportunity and a long term investment. The market currently undervalues the metal as supply isn’t meeting demand at current market prices. Based on this factor alone, the price needs to correct or the companies themselves need to adjust their strategy.
The purchasing habits of entities like Sprott indicate a far thinking view of the future of where carbon free renewable energy plays a larger role in developed nations. As countries move away from fossil fuels, they may incorporate more nuclear energy. Uranium, unlike gold, generates interest in the form of power generation and is frequently used in manufacturing. This means there is opportunity for future growth.
One important thing to follow in the future is the narrative surrounding nuclear power generation. Nuclear power will see wider adoption if it is framed as a green energy alternative to fossil fuels. If this begins to occur in the public forum and media, Nuclear power generation will increase, and by proxy, the demand for Uranium will increase.
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