What Retail Investors Need to Know About ASX Uranium Juniors

By
Henry Mann
·
October 19, 2021

SPUT has been a catalyst to the start of a uranium bull rally. But why? Is the price going higher? Let’s hear from 3 major players:

They provide us with a deeper insight into what's going on in the market and what can be expected in the future. More specifically, we discussed the events of recent weeks relating to the Sprott Physical Uranium Trust and how these events will affect their strategies going forward. We also discussed how the increased interest in nuclear power as a green energy solution affects the market. 

More importantly, though, we discussed how you, as an investor, should approach investing in uranium towards the end of the year.

In an article a few months ago, we outlined how Sprott Asset Management acquired Uranium Participation Corp. This resulted in the subsequent establishment of the Sprott Physical Uranium Trust. At that stage, we predicted that this could be the catalyst to the start of a uranium bull rally, that could have the potential to drive the uranium price higher. Hopefully in a more sustainable way than the bull market of 2005 to 2007.

And it did. In fact, it's been an exceptional year for uranium investors.

Has SPUT affected company strategy?

The first question is what impact the establishment of the Sprott Physical Uranium Trust and its effect on the market had on the strategies of these companies going forward. Before looking at this, though, let's just recap what happened in the market since then for some context. 

In March 2021, the spot price of uranium reached a low of just over $27.00 per pound, its lowest level since April 2020. From there it saw a gradual increase to about $32.70 in July 2021. In the following month, it fell back to about $30.30 and then skyrocketed to $50.80 per pound on 17 September 2021.

This was not only one of its fastest gains in recent years but also its highest level since June 2012. Since September there was a slight correction to just over $38 per pound but it's up again and currently trading in the region of about $47. So, with that in mind how are the companies dealing with the recent growth in the market?

Alligator Energy

For Alligator Energy, the most important consideration is being ready for growth in the market. The company believes that, as a result of the market’s newfound impetus, there will be room for new start-up projects and restarted projects as well as the enhancement of existing projects.

From past experience during the previous boom in the uranium market, Alligator Energy saw that it took time for both existing projects to ramp up and new projects to come up to speed. Ultimately, this could lead to missed opportunities. 

As such, the company is starting to prepare at an early stage and has several projects in different stages of development and planning, from greenfield exploration projects to early-stage development projects. One such project, Samphire, is now being restarted after being dormant for the past 10 years. Even though this places them behind other projects in the market, Alligator Energy believes that the uranium price will be reasonably sustained for some time to come.

Here, the company's main aim is to get to the scoping stage and do some feasibility work, in order to get it to a potential operational phase. This is all done while also keeping in mind that approvals in South Australia can take anything from three to three and a half years. As Greg Hall, CEO of Alligator Energy says,

“We certainly are focusing on the key area of building up our team, getting on the ground for drilling imminently and then working from there”. 

Lotus Resources

For Lotus Resources, the strategy looks a bit different. The company recently purchased the Kayelekera project in Malawi from Paladin Energy and is starting its feasibility study within the timeframe the team initially anticipated. As far as speeding up the project goes, Lotus Resources is cautious and will reconsider its position when the company receives the results from the feasibility study - and if uranium prices keep increasing.  

At this stage, however, Lotus Resources believes that prices aren’t quite high enough to make a final investment decision. Lotus’s main consideration here is that, although uranium’s spot price has been increasing, the term price generally lags behind the spot price and hasn’t tracked it yet. Because Lotus wants to enter into term contracts, they’ll follow these prices closely before they make any other decisions. 

However, if prices continue to increase and are higher at the beginning of 2022, Lotus might consider more engineering and consider the refurbishment of the existing facility, while still negotiating some of its financing arrangements. The key takeaway is that Lotus will maintain its current strategy and will focus on the completion of its feasibility study, after which the company might decide to accelerate the project or not. 

One major challenge Lotus Resources faces is its source of labour. This is due to the company's Kayelekera operations are in Africa where there’s little skilled labour. When prior owners, Paladin Energy, operated the asset, Paladin relied on a significant number of expat staff. While Lotus believes it would still need to focus on expat staff, from a cost perspective, it makes sense to use as many local employees as possible.

Because this could ultimately impact the feasibility of the project, labour is something they’re planning for at this stage. As a result, the company is considering whether to implement training or educational programs but, as of yet, has not made any final decisions. 

Peninsula Energy

Like Lotus Resources, Peninsula Energy believes that long-term contracts are going to be the driver for not only new projects, but also projects that are being restarted. Fortunately, one of Peninsula’s biggest advantages is that it was able to maintain a high state of operational readiness throughout the downturn and has long-term contracts that extend to at least 2030. 

The company has also focused on their technology and the introduction and testing of new technology. For example, it’s the first company in the United States to use a low pH in situ recovery instead of alkaline in situ recovery. This requires an understanding of how to implement it in a project. Work on this has been ongoing despite no decisions on projects being made to date. 

However, Peninsula sees the increases in price as an opportunity to restart its project earlier than anticipated. The company aims to take advantage of the increases in the spot price as well as the increases in term prices that generally follow.

Considering the above, it's clear that all three companies are taking a cautious and conservative approach to their strategies. Yet, they’re optimistic about uranium’s future and the opportunities it will bring. 

Nuclear as a Green Energy Solution

Over the last few years, environmentally friendly generation of energy has become an increasingly popular talking point. As a result, it naturally follows that nuclear power is being discussed as a green energy solution. Simply put, there is now more support for this where there once was not. For example, for the first time in recent history, there’s a significant trend in the United States towards nuclear power. 

Keith Bowes, MD at Lotus Resources believes that the hesitance of using nuclear power for energy generation stems from the fact that many people have strong negative connotations associated with it. This can often be linked to past events such as Chernobyl or Fukushima.

However, if you consider the past ten years, the nuclear industry has been extremely safe, at least a lot safer than coal-fired power stations. As Wayne Heili says,

“It is the safest form of electricity production that the globe has. You just can’t compare it to any other form.” 

For this reason, and for its increased adoption, people first need to understand the implications of using coal to generate energy and the benefits that nuclear power can provide. Fortunately, many do and see nuclear power as the pathway to a greener and cleaner environment. 

For example, in the past 3 years, the Australian government has shown a willingness to consider nuclear power as an alternative energy source. In addition, a number of interest groups have also highlighted that nuclear power is a clean, carbon-free energy source that should be considered. 

An increasing number of utilities are also already entering into conversations with uranium producers and potential producers, mainly as a result of the short-term supply shortages in the market. 

The above, in turn, has several knock-on effects in the market. For one, in the past few months, an increasing number of ESG (Environmental, Social, and Governance) investors have been investing in uranium. As a result, going forward, companies need to communicate their ESG compliance into the market.

Yet, this is a challenge for many, simply because, to date, there’s no effective way to self-report and communicate these credentials. Moreover, the utilities mentioned earlier are really interested in doing business with uranium producers with good ESG profiles. This is because dealing with suppliers with good ESG profiles, in turn, increases the utilities’ ESG profiles. 

Now, considering that, the question is whether there will be a shift to nuclear power as a green energy solution. Greg Hall believes there could be and there's some movement already. However, for an increased shift to nuclear power, he believes that firstly there has to be a change in the regulatory landscape. Secondly, the skills needed to manage nuclear reactors should be there. 

Uranium Investing Strategies Towards the End of the Year

Although the increased adoption of nuclear as a green energy source will have an impact on the industry in the long term, the recent developments outlined above will have a much more significant effect in the short term. 

For one, the establishment of the Sprott Physical Uranium Trust has led to rather rapid growth in the market. There has, as mentioned earlier, since then been a slight reset in the market. However, this reset was somewhat limited because there is a shortage of supply. And our panel believes that these supply-demand fundamentals are ultimately the key to long-term growth.

When the market is buoyant, it attracts investor interest and creates opportunities for these investors, especially in the short term. In turn, this has a positive effect on the long-term outlook for investors. As a result, companies in the industry will show steady growth based on the increased interest and positive sentiment in the market. 

For that reason, there's been increased interest by generalist investors. The drawback of this is that generalist investors, generally, don't base their investment decisions on education or fundamental principles but rather on the momentum of the market. 

As a result, they typically buy stocks quickly on a whim, but also sell quickly. This could result in significant price swings both up and down in share prices. In contrast, more experienced, specialist investors properly consider all the fundamentals before making an investment decision. 

With that in mind, how should you approach investing towards the end of the year? In other words, the question is whether it's a good time to buy uranium stocks, considering that the price has pulled back a bit? 

Greg Hall believes that, instead of buying the dip, investors should make their decisions based on the fundamentals of a company. In other words, rather than looking at direct pricing or technical analysis, investors should, based on research, decide when is the best time to enter the market.

As a result, investors need to look at companies in more detail, who they are, and what they’re busy with. In fact, he believes that, from a company's perspective, this is the best way to attract investors.

Keith Bowes echoes this sentiment. For him, it's important that you form your own ideas or concepts of the uranium market and how it will unfold in the future. In this way, you will be able to find your comfort level and build an understanding of the market without paying too much attention to news that's often very reactionary.

Then, based on this understanding, you can consider the companies you want to invest in. Here, it's important to remember that, while there are companies that are at value or slightly overvalued, there are still other companies that are undervalued. For Keith, these companies are the ones that general investors should consider. And vital to find the right companies to invest in.

This is simply because as Keith puts it,

“You don’t want to be jumping in and out of stocks. I’m always of the view that you get into a stock, and you stick with it for a while with the intention that you get value by staying in the stock over longer periods of time.” 

So, the key for any investor is, although there have been increases in the stock price in the short term, to look at the long term. Based on the long-term supply and demand forecasts and the fact that the spot price will drive long term increases, the current situation is going to be good for the market. 

As Wayne Heili puts it,

“We’re still quite a way away from where we were 10-years ago. We are coming out of a bear market, and we have a long run ahead of us. This is just the start in my view, not the finish.”

Want to learn more?

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