Sprott Physical Uranium Trust: Go Long The Nuclear Revival

Summary

• Most nations falling short of the Paris Accord targets, forcing the adoption of low emission energy sources.
• A European reckoning on Russian gas is forcing a rethink of nuclear.
• Liquidity inflows can have a large impact on Uranium’s thinly traded spot price.

JacobH

Thesis

The Fukushima nuclear disaster of 2011 ushered in a long winter for the nuclear industry. The event resulted in major retrenchment in the sector as reactors all over the world closed, mining operations were curtailed or suspended, and prices plunged. But things are slowly beginning to change as regulatory, industry, environmental, and geopolitical developments are coalescing to push demand and price higher. These developments are often slow moving with new reactors taking in excess of a decade to build. But the changing narrative and growing interest in the sector should be sufficient to bring in enough liquidity to push spot prices higher; given the uranium spot market's thinly traded and illiquid characteristics. The recently created Sprott Physical Uranium Trust (OTCPK:SRUUF) is a good way for investors to gain exposure to uranium's spot price.

Environmental Case

Most readers will probably be well aware of the regulatory pressures being brought to bear on energy producers. These stem from the commitment made by most nations of the world to reduce carbon emissions under the 2016 Paris Accord.

The initial push has been to reduce the use of coal in the mix of most nations' electricity generation. Old coal-fired power plants have been closing at an accelerated rate for most of the last decade to be replaced by a mix of renewables and natural gas fired generating capacity. This has certainly been the case in the US, which has seen coal's share of electricity generation fall from 40% in 2013 to just over 20% today. This happened while renewables and natgas surged. And while natural gas does emit carbon emissions, it is still a much cleaner burning fuel than coal.

US Energy Information Administration

Investor Presentation

The problem with this however, is that current efforts are not enough as most nations, including the US, are falling short of their emissions targets. This is leading to a push for even faster retirement of the coal fleet with an emphasis on replacing it with low-emission power sources. Wind and solar are constrained by their variability, the wind doesn't always blow and the sun doesn't always shine, and these limitations mean that some other source will have to provide baseload capacity. That's one of the reasons why the narrative on nuclear has become much more positive recently.

Geopolitical Case

Another reason for the change in perception has been the quickly evolving geopolitical landscape. Most of Europe's policy makers are now well aware of how bad Germany's decision to shutter all of its nuclear plants was. Even Robert Habeck, Germany's Economy Minister, last week stated that Germany was thinking of extending the life-span of its three remaining nuclear power plants. Although he may not follow through on that remark, it shows how quickly thinking about the issue is has changed.

The stranglehold that Russia and its President, Vladimir Putin, now has over Germany's and much of Europe's energy supply has driven home the need for a greater emphasis on energy security. This led to France's President, Emmanuel Macron, to recently announce plans to build at least six new reactors in the decades to come, this was in spite of having previously promised to reduce the role of nuclear power in France's energy mix.

In doing so, France follows Poland which early last year announced plans to build six new reactors over the next twenty years and Romania which last fall announced plans to double its nuclear capacity and have two new reactors up and running by 2031. Add to this, recent changes to the EU's Taxonomy Regulations which provide guidance on what can be considered environmentally sustainable and in which nuclear technology was recently reclassified as a green tech.

Ostensibly, all of these changes were done with only environmental considerations in mind. All of the announcements were followed by lengthy speeches discussing each government's commitment to the environment. And while that may be true to an extent as environmental considerations were clearly a very important factor; it was not the only factor. What was for the most part left unsaid, was the growing realization of how dependent the continent has become on Russian energy and the need to move away from it.

This has left European governments in a tight spot; they have to get away from coal but don't want to be over-reliant on Russian gas. Most of them favor wind and solar but the aforementioned reliability issues make them unsuitable for the replacement of baseload capacity. This leaves nuclear as one of the only viable options for many European countries and is a reason for growing governmental interest in the sector.

Uranium Market

The uranium sector is responsible for about 10% of the world's electricity but is nevertheless, a very small industry. In fact, Cameco Corporation (CCJ) is one of the world's largest uranium miners and only has a market capitalization of about $9 billion. The market for uranium tends to be small, opaque, and illiquid; characterized by long-term contracts between producers and utilities. There does exist a spot market for Uranium but it's not traded in any meaningful way on commodities exchanges. And while the vast majority of fuel requirements are purchased through long-term contracts, producers and utilities also buy and sell on the spot market. Many of these transactions though are done away from public markets and take place directly between the buyer and the seller.

This lack of transparency and liquidity can make for a very volatile price, a large seller can push the spot price down while an influx of liquidity can lead to a price surge. This becomes rather apparent when looking at a longer-term price chart.

Cameco Corp Investor Presentation

A good recent example of this is the influx of liquidity driven by the creation of the Sprott Physical Uranium Trust last summer. In the months of August and September the trust bought $1.3 billion of physical uranium which led to an over 60% increase in spot price. Since then, the price of the fuel has remained in the mid-$40/lbs range as the dual-listed fund which is traded on both US and Canadian exchanges, has continued to attract buyers and currently has a net asset value of $2.3 billion.

Trading Economics

And while the fund may not have been the only factor driving prices upward, its constant bid was certainly a central factor in uranium's price move. So, when one considers that the influx of $2.3 billion, about the average of one day's dollar volume for SPDR Gold Trust ETF (GLD), drove prices up so quickly and so high; one begins to understand uranium's impressive price surge at the beginning of the century.

As the narrative surrounding uranium and nuclear power continues to change within environmentalist circles and government bodies, increasing liquidity flows should continue to push its price up.

Risks

The risk of this thesis is another disaster such as those that occurred at Three Mile Island, Chernobyl, or Fukushima. Even a relatively minor accident at a nuclear facility will be enough to crash uranium's spot price. The fact that the spot market is illiquid would make it especially prone to price crashes.

Conclusion

The gradual change in perception towards uranium brought about by environment pressures and geopolitical imperatives are driving greater interest in nuclear power and uranium. Investors can position themselves to benefit from these changes through Sprott's Uranium Trust.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SRUUF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.