Turning Nuclear

Then there is the financial angle. Demand will be turbo-charged by growing investor appetite for uranium from retail players and financial institutions alike. Generalist investors are slowly turning to this niche sector as evidenced by the growing number of ETFs providing exposure to uranium miners and companies in the nuclear industry. ETF assets under management have increased by a multiple of twenty over the last 3 years alone but remains low in absolute terms. Specialist funds, like the Sprott Uranium Trust are at all time highs with new specialist funds coming to market, set-up to acquire and sequester the commodity from the market. There is also growing interest from key financial players as evidenced by the growing chorus of news stories on uranium across financial data services and publications. The inflow of AUM to this niche and comparatively small sector could have a dramatic impact on price via something known as the fly-wheel effect.

Another factor to consider includes the growing requirement for energy security against a backdrop of escalating geopolitical tensions. To provide an example, the bottle neck in the uranium story is enrichment. Uranium enrichment is the process that is necessary to create an effective nuclear fuel out of mined uranium. Russia currently provides approximately 40% of enriched uranium globally. However, sanctions against Russia, which currently exclude uranium, are set to broaden and there is growing concern that Russia may escalate the ongoing weaponization of energy by pre-emptively cutting supply to western nations.

Kazatomprom, based in Kazakhstan, is the world’s largest producer of natural uranium. The company recently agreed to sell more than 50% of its total book value of assets to China’s State Nuclear Resource Development Company with additional supplies also flowing to Russia, highlighting close geopolitical ties which threatens to leave western nations in the cold. French President Emmanuel Macron recently visited Kazatomprom in an effort to secure a new source of uranium following the recent coup in Niger. Niger supplied 15% of France’s uranium needs and accounts for a fifth of the EU’s total uranium imports. But in a twist of fate, Macron may struggle to secure delivery given the only route to do so, other than Russia, is through Azerbaijan, a country with which he has not enjoyed good diplomatic relations. This example is indicative of the geographical logistical constraints nations face when transporting a highly controlled substance across multiple borders over and above the complex geopolitical backdrop.

To summarise, high demand, driven by pragmatic clean energy aspirations, and growing financial interest in the sector is on a collision course with a long-term structural supply deficit, complex logistics, and escalating geopolitical tensions. We think this will drive the price of uranium meaningfully higher over the coming years. Uranium prices can rise to the prior high, around $150 a pound, or closer to $200 a pound on an inflation adjusted basis. That represents a 2.5x return from current levels. The rise in the price of uranium should also benefit uranium miners and companies operating across the nuclear life cycle. Equities offer leveraged exposure to the underlying commodity, providing an attractive convexity profile and the potential for even greater upside.

There have been three uranium super-cycles over the last three decades. Using Cameco, one of the world’s largest publicly traded uranium companies, based in Canada, as a large-cap high-quality proxy for the sector, we observe the three periods of strong relative performance. The first, in the mid-1990s saw the stock outperform the MSCI World equity index by approximately 450% priced in UK pounds. The second, which took place in the early 2000’s saw the stock outperform the MSCI World by an astonishing 2,300%. We are currently part way through the third wave, with the share price outperforming by 500% since the 2020 low.