Uranium: Back to School for Institutional Investors as Retail Lead the Way

• Uranium prices increased significantly in 2023 due to rising demand and constrained supply. Sprott Physical Uranium Trust (SPUT) has raised billions of dollars from investors to purchase physical uranium.
• Institutional investors are taking notice and becoming interested in the uranium sector again after years of low prices. Knowledge gaps exist since many investors exited the sector long ago.
• Mine production is slow to respond to higher prices due to long permitting times and constrained capital. Utilities that did not contract enough supply are vulnerable to shortages.
• More financial products like ETFs are emerging to provide exposure as interest grows. Liquidity and scale are crucial for larger institutions.
• Fundamentals point to sustained higher prices being necessary to incentivize exploration and new mine development to meet long-term demand. The market likely has more room to run.

The Return of Uranium: Higher for Longer

After years of languishing in obscurity, uranium prices are on the march higher again, returning long-dormant investor interest to the radioactive metal crucial for nuclear energy. Once seen as a fading relic of last century's power grid, uranium’s niche appears more relevant than ever amid the global energy crisis. However, the road back for uranium bulls faces continued obstacles before sunny days appear sustainable rather than fleeting good fortune.

Interview with Sprott Asset Management's CEO, John Ciampaglia

Why Uranium Matters More Than Ever

As countries urgently seek to bolster energy security and slash carbon emissions, nuclear power’s reliability and low greenhouse gas footprint increasingly appeal to policymakers. New advanced and smaller-scale reactor (SMR) designs address longstanding cost, safety, and waste concerns that hindered nuclear energy’s expansion for decades. With abundant uranium fueling existing reactors needing replacement and additional units coming online this decade, shortfalls loom between rising demand and stagnant mine supply dogged by chronic underinvestment.

After languishing below the $30 per pound level for years that made most mining uneconomic, uranium rose to $106 in January 2024, an increase of 89% in 2023 alone. Sprott, a high-profile investor in natural resources and precious metals, has actively purchased uranium to back the company’s physical uranium trusts. John Ciampaglia, CEO of Sprott Asset Management stated, “Sprott’s Physical Uranium Trust is around $6.7 billion and Sprott as an entity overall is managing about $9 billion in uranium-related investments, which is probably the largest in the world.”

Institutional Investors Reassess Uranium

With uranium firmly back on the radar after years in the penalty box, institutional investors around the world are taking a fresh look at the sector. As Ciampaglia noted after meeting with investors across Europe, “People have been, obviously very happy with the performance.” However, after many financial players exited the space years ago following the 2011 Fukushima nuclear disaster, knowledge gaps now exist. According to Ciampaglia, “You could have a very sophisticated and successful institutional investor who falls into one or two camps, most have never invested in the sector before. So this is kind of ground zero, uranium 101.”

Even institutions that participated in uranium’s prior bull cycle over a decade ago need to get caught up. Ramping up to speed on issues ranging from market fundamentals to contracting takes time. As Ciampaglia stated, “I do kind of feel like a teacher sometimes, but it's important because nobody is going to make any investment without having an informed point of view.” For investors playing catchup, hitting psychological price points has accelerated re-engagement. “Generally, the pricing signals have acted as a beacon,” Ciampaglia observed.

Mine Development Lagging and Slow Build Out

While more analysts judge uranium’s supply/demand equation as supportive after years of indifference, miners face obstacles translating positive sentiment into pounds-in-the-ground-production. As Ciampaglia cautioned, the uranium market differs from faster-reacting commodities like oil, natural gas or coal. “You don't have this here because we shut the industry in for the most part,” Ciampaglia said, referencing years of deferred mine investment. “So look, we're not saying it's not coming. It will come, it is coming, but it's gonna be a lot slower than everybody thinks.”

Lengthy permitting times, especially meeting heightened environmental standards, delay the best-intentioned projects. “We're very careful about environmental and social issues. A lot of these deposits are in First Nations properties. So there has to be economic sharing of wealth and all those kinds of things that take time to negotiate,” explained Ciampaglia. With the largest global producers like Kazatomprom and Cameco facing challenges accelerating output as some utilities urgently seek additional supply, a precarious balancing act emerges between old and aspiring uranium miners.

Financial Products Proliferate

As uranium garners attention, more access vehicles like exchange-traded funds (ETFs) emerge to provide exposure. However, Ciampaglia believes few can replicate Sprott’s success with physical uranium trusts. As Ciampaglia stated, “The challenges of trying to build and scale a product in a very complex commodity like uranium are real.” Liquidity also poses hurdles for larger investors. “How are you going to scale? Scale and liquidity are so important for institutional investors,” said Ciampaglia. With few alternatives surfacing so far, Ciampaglia thinks Sprott’s first mover position remains solid. However, financial engineering wizardry always stands ready to offer the next hot uranium product when the iron looks hot enough.

Selling May Have Just Begun

While uranium’s resurgence brings back dreams of 2007’s euphoria when the spot price briefly kissed $138 per pound, Ciampaglia preaches patience believing more upside exists.

“From here we need to base higher and we need to stay high at elevated prices for a very long period. Because as you know, these projects have incredibly long lead times and very large, upfront capex requirements.”

With the pendulum only recently swinging to favor uranium sellers over utility buyers, more gains likely occur before demand destruction arguments take hold. As Ciampaglia surmised, “You're talking about buying fuel today that won't get spent, or won't get consumed and accounted for in your reactor and your financial statements, for probably 5 or 6 years from now.”

Burgeoning interest from institutional investors marks a sea change for uranium’s prospects. However, mines and financial products face obstacles matching the scale required by nuclear energy’s immense needs. With time working against solving the widening supply deficit as more reactors come online, uranium prices staying higher for longer appears the only remedy to spur desperately needed exploration spending and new mine investment. Otherwise, rationing schemes and substitutions could become nuclear utilities’ unfortunate future if it is not available to keep the lights on.

The Investment Thesis for Uranium

• Global electricity demand is projected to rise 50% by 2050. Meeting decarbonization targets will require nuclear power to quadruple or quintuple over the same timeframe. This translates to uranium demand from the power sector.
• Ramping up to triple or quadruple existing production levels will require substantially higher uranium prices to incentivize capital investment. Over $100 per pound provides that incentive.
• Market equilibrium suggests uranium prices likely remain around $100 or move higher in coming years. Term contracting by utilities supports higher pricing. Many mines need over $80 per pound to justify new project builds. This pricing power underpins favorable investor fundamentals.
• Pure play uranium miners offer leverage to increase U3O8 spot and term prices. Streaming/royalty companies gain upside exposure with less operations risk. Physical uranium ETFs directly track the commodity while avoiding individual company risks. All offer differentiated exposure to participate in uranium's expected bull run.

With demand strengthening and supply challenges persisting, conditions look ripe for uranium markets to continue recovering from a lost decade. While mining lag times and obstacles bringing financial products to market in a niche sector could cause frustrations, uranium investors with patience for projects playing out should enjoy the ride as this ultimate green energy source grabs more mindshare.