Weekly Nugget

Wall Street Goes Nuclear: Sprott Moves the Uranium Spot Market

The price of uranium is melting up to the highest level since 2015 due in part to Sprott's new fund pushing prices to meme-worthy highs.

The price of uranium is melting up to the highest level since 2015 due in part to a single fund buying up the physical market and pushing prices of the nuclear fuel to meme-worthy highs.

Investment firm Sprott Inc. earlier this year launched its Physical Uranium Trust and recently commented on Twitter about how much physical uranium it had been buying. 

Between Sept. 2 and Sept. 7, the trust acquired more than 3 million pounds of uranium on the spot market. As of Sept. 7, the trust held 24 million pounds at a market value of more than US$1 billion.

Sprott has bought over 24 million pounds of uranium, sometimes buying more than 500,000 pounds in a single day, according to its website and social media accounts. 

To compare, total spot volume for 2020 was 92.2 million pounds, according to another physical uranium investor Yellow Cake Plc. Yellow Cake holds about 16 million pounds of uranium. 

Due to the market success of the fund, Sprott updated its at-the-market equity program to issue up to an additional US$1.0 billion of units of the Trust through its Canadian listing.

Canaccord says the Sprott uranium trust is also looking to list on the New York Stock Exchange next year in addition to its current listing on the Toronto Stock Exchange, which would spur further purchases of physical uranium. 

The Sprott uranium trust buys uranium through WMC Energy, an Amsterdam-based independent commodity broker, which stores it in Canada, the U.S., and France. Sprott receives a management fee of 0.35% and a commission of 1% on the gross value or any purchases or sales of uranium.

Sprott offers a simple investment thesis: raise buckets of cash to buy physical uranium out of the spot market that was flooded with excess supply following the 2011 nuclear disaster at Fukushima Daiichi in Japan.

"We're just a conduit for investors to express their view, right?" Sprott CEO John Ciampaglia told S&P Global Market Intelligence. "Our job is [to] go out and buy more pounds. If that has a knock-on effect on the price, then I guess indirectly we've got that influence on price discovery."

Ciampaglia said the fund hoped to raise the price of uranium, but higher nuclear fuel costs, in the long run, could harm nuclear power's competitiveness against cheaper forms of renewable power. 

The industry faces a declining market for its fuel. Nuclear power capacity is expected to shrink by more than 20 GW through 2050, according to the U.S. Energy Information Administration (EIA).

However, declining capacity does not necessarily mean diminished demand and a potential reversal on the beneficial use of nuclear power may eventually shift the EIA’s and uranium’s demand forecasts.

America recently saw the closure of the Diablo Canyon reactor in California, only to have its missing energy production supplied by an emergency mandate to use fossil fuels.

In addition, the Illinois Senate on Monday saved two Exelon Corp. nuclear power plants from closure by passing a bill that will provide $US700 million in subsidies to the company over five years.

Looking east may provide a better glimpse of the future

The world’s largest market for energy, Asia, is looking for ways to reduce its reliance on coal and reduce its carbon footprint, and nuclear is part of the future energy mix.  

According to the World Nuclear Association, demand for uranium is expected to climb from about 162 million pounds this year to 206 million pounds in 2030, and even further to 292 million pounds in 2040, driven by increased power generation in China as Beijing seeks to cut emissions. 

Renewed demand helped push up shares in Japanese utility companies after Fumio Kishida of the Liberal Democratic Party, a contender to become the country’s next prime minister, said restarting nuclear power plants is necessary for the country’s net-zero goals. Nuclear power was shut down in Japan after the Fukushima Daiichi meltdown in 2011. 

As of now, India produces about 6.7 GW of power from nuclear fuel from its 22 nuclear power plants, contributing 1.8 percent to the total energy mix, but there are plans for more.  

The government of India announced in its 2017-18 budget, the construction of 10 units with 700 MW. each. As well, the Indian government announced that seven more reactors with a capacity of 5,500 MW are under construction. It has also approved 12 more reactors with 9,000 MW of capacity.

If investors keep buying uranium, analysts quoted in the Financial Times expect utility companies will come under pressure to replace, add and expand long-term supply agreements before they expire. 

According to Yellow Cake, current long-term contracts cover 98% of the uranium needed by US utility companies. But that could drop to 84% next year, and 55% by 2025. At the same time, the supply of uranium is set to fall 15% by 2025 and by 50% by 2030 due to a lack of investment in new mines.

Shares in Cameco (TSX: CCO), the world’s largest publicly-traded uranium company, have risen 70% year-to-date on the Toronto Stock Exchange. In 2016 and 2018, the company suspended operations indefinitely at its Rabbit Lake Mine and McArthur River, and Key Lake mill. In March 2020, the company temporarily suspended operations at its Cigar Lake mine due to COVID-19. 

Either shuttered mines need to come back into production, new sources discovered, or utility companies will have to pay the tolls of the Sprott-induced price spike. 

In the meantime, Sprott, uranium companies, and investors are enjoying the glow of a bomb going off in the market.

There are 228 uranium projects on Prospector Portal.

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