The Biggest Uranium ETF Is Up By 25%, While Uranium Price Collapses. How Is It Possible?

| About: Global X (URA)

Summary

The Global X Uranium ETF has grown despite of collapsing uranium prices.

The uranium miners and explorers are positively affected by the overall energy sector optimism.

Although the long term fundamentals for uranium market are good, the oversupply is poised to haunt the market in the near future.

The Global X Uranium ETF is in a difficult situation, as it is about to start to underperform the overal energy sector significantly, unless the price of uranium recover soon.

The Global X Uranium ETF (NYSEARCA:URA) is up by 11% over the last month and up by 26% over the last 3 months. At first glance, It seems like the uranium bull has returned finally and money started to pour into the uranium mining sector in a big way. But a closer look shows that nothing is further from reality. The price of uranium is down by almost 25% year-to-date and it trades at the lowest levels since 2005.

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Uranium's price had been in a long down-trend since the March 2011 Fukushima disaster. The tsunami that followed a strong earthquake damaged the cooling system at the Fukushima nuclear power plant leading to the biggest nuclear catastrophe since Chernobyl. As a result, Japan suspended all of its nuclear reactors and some other countries such as Germany started to shift from nuclear power generation to alternative sources of electricity. The sudden drop in demand for uranium lead to a significant uranium price slump.

In summer of 2014, the price of uranium bottomed and it rebounded strongly, as Japan started the process of restarting its idled nuclear reactors. However, after an initial wave of enthusiasm, the price fell back to the $35-$40 range, as the restarting process took much longer than originally expected. Only something more than two months ago, the price of uranium definitely broke the $35 level and it crashed down to $26/lb.

Although the long-term uranium market fundamentals are good, as the global nuclear power generation capacity is about to grow by nearly 50% over the next twenty years, the short term weakness doesn't seem to be ending anytime soon. There are still only two nuclear reactors operating in Japan. The Takahama 3 reactor had been restarted in February but it was idled on March 10, due to the court injunction. Pre-restart inspections at other nuclear facilities are underway but they are extremely slow. 26 of the 43 operable reactors have already applied for the pre-restart inspections, but only five inspections have been finished so far. Further uncertainty regarding the restart of the Japanese nuclear facilities has arisen two weeks ago, when a 7.3 magnitude earthquake striked the country. Although no damages of the nuclear plants have been reported, many people are afraid of another Fukushima-like disaster.

Due to the weak demand, the uranium market is in an oversupply. Also some governments help to grow the uranium glut. For example the U.S. department of Energy sells more than 5 million lb of uranium from its excessive inventories per year, according to UPA (the Uranium Producers of America).

Even the major uranium miners don't expect a significant uranium price recovery anytime soon. The proof are also the steps of Cameco (NYSE:CCJ) that decided to shut down its Rabbit Lake mine in Saskatchewan and also to curtail its U.S. operations. As a result, Cameco's 2016 uranium production guidance declined by 16%, to 25.7 million lb. This step should help to reduce the global uranium production by approximately 3% which probably won't be enough to push the price of uranium meaningfully higher.

Although uranium price is down by 21% year-to-date, URA is up by 10% over the same time period. All of the 5 biggest URA holdings did very well during the February-April period, despite the steep uranium price decline. Cameco is up by 17% over the last 3 months, Fission Uranium (OTCQX:FCUUF) is up by 26% and Denison Mines (NYSEMKT:DNN) grew by 41%. The biggest growth was recorded by Nexgen Energy (OTCQX:NXGEF). Shares of the uranium explorer rocketed by more than 200%, as the company announced maiden mineral resource for its Arrow deposit of 201.9 million lb of uranium and further excellent exploration results that indicate that the Arrow deposit resources will grow much bigger.

Source: Ycharts, CME Group

The table above shows that URA as well as share prices of the uranium miners and explorers did much better than the price of uranium during the last couple of months. On the other hand URA performed similarly to WTI oil price. WTI price grew by 12% over the last month and by 29% over the last three months. Not only oil price, but also natural gas price as well as copper, zinc, gold or silver prices did very well lately. Shares of the uranium producers ignored poor uranium market developments and they were lifted by the overall positive commodities markets sentiment.

A similar pattern could be seen also during the second half of 2015, as I noted in my previous article. Although uranium's price increased by 9% from May to October, URA share price declined by 30% over the same time period. Over the last three months, we could see the exact opposite. URA grew while the price of uranium collapsed. As a result, URA is in a vulnerable position right now. If the energy sector starts to decline again, URA will decline as well. Moreover its decline will be very steep, as the weak uranium prices will start to be reflected. And if the energy sector keeps on growing, URA will start to underperform it significantly sooner than later, if the uranium prices remain low.

Conclusion

For the last 12 months, the Global X Uranium ETF didn't reflect the uranium market developments. Its share price is driven by the overall energy sector sentiment. As a result, the ETF grew, although the price of uranium reached new 10-year lows. After the investors start to focus on the current state of the uranium market more, URA will start to underperform the overall energy sector. Although investors should expect higher URA share price in the long term, it will most probably fall back down in the short term.

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