Uranium Prices - Too Much, Too Soon? Temporary Reset Required

• The Sprott Physical Uranium Trust (SPUT) has grown 10x to $6.7B since July 2021
• Uranium spot price hit $100/lb, up 89% in 2023, yet SPUT only bought 4M lbs
• Utilities are under contracted, need to buy 200M+ lbs/yr to replenish inventories
• A potential ban on Russian enriched uranium could further tighten the supply
• 1.5-2.3B lbs of uncovered uranium required by 2040, production needs to double

ETF's - The Way for Retail Investors to Safely Invest in Uranium

The uranium market is attracting increased investor interest after the spot price surged 89% in 2023 to hit $100 per pound. Sprott's Physical Uranium Trust (SPUT) has been a key player in the uranium market, growing assets 10-fold to $6.7 billion since launching in July 2021.

In this article, we examine the key factors underpinning the strengthening fundamentals for uranium, the growing interest from institutional investors, and why this uranium bull market appears to be in the early innings with significant upside potential remaining.

SPUT Reflects Strengthening Uranium Market

The Sprott Physical Uranium Trust is the largest and most liquid vehicle for investors to gain exposure to physical uranium. SPUT's assets have grown to $6.7 billion currently, a 10-fold increase from $600 million at inception in July 2021. Remarkably, uranium is now Sprott's largest commodity fund, even surpassing its gold trust.

This growth is even more impressive considering SPUT only purchased 4 million pounds of uranium in all of 2023, a fraction of the 20 million pounds it bought in 2022. Despite the reduced buying, the uranium spot price still appreciated 89% to $100 per pound, largely driven by strong underlying demand from utilities and producers.

The tightening market is evidenced by SPUT's agreement with regulators to limit spot market purchases to 9 million pounds per year for the next two years. However, it's going to be very challenging to find 9 million pounds in this market. The other challenging factor is the dramatic rise in the spot price for uranium. It needs to be tempered with the reality of the current buyer v seller market. Is it exciting, yes, as equity shareholders expect mammoth gains. The reality is that uranium equities, as with the rest of the equities, are not following normal response behaviour.

We want low and steady accretive growth in price with slow and accretive growth in equities. If we don't see this, there will inevitably soon be a sharp reset in the uranium spot price, which in turn will create a sharp and negative reaction from retail investors.

Utilities Need to Accelerate Contracting

Back to uranium supply-demand fundamentals. A key driver for higher uranium prices is the need for utilities to return to more normal long-term contracting to replenish dwindling inventories. Ultimately what everybody is expecting is that over the next few years, the contracting cycle will continue, it'll be very healthy, and that we need to get back to levels where utilities are buying 200 million pounds and above.

In the last contracting cycle in the mid-2000s, utilities were buying upwards of 250 million pounds per year, well above the 160 million pounds contracted in 2023. The past decade saw utilities drawing down inventories, but a shift is underway as security of supply becomes paramount again.

Producers are essentially sold out for the next few years, and utilities are becoming more concerned about relying on Russian supplies. If the U.S. passes legislation to ban Russian enriched uranium imports, it could spark a near-term uranium price spike and accelerate contracting.

Massive Supply Gap Requires Higher Prices

Looking further out, the world will require an additional 1.5 to 2.3 billion pounds of uranium between now and 2040 to meet reactor requirements. Current annual mine production is only about 130 million pounds, so output needs to basically double in the next two decades.

Developing new uranium supply is extremely time and capital intensive requiring much higher prices.

The only way you solve that is to double production globally between now and 2040, which is a huge undertaking and is going to require very robust uranium prices. Not just for 3 months or 6 months and then it goes back to some other level. It's going to have to stay elevated for a very long period of time because of the long lead times and the large capex that's required to get these projects built

While the uranium price has already appreciated significantly, the market appears to be just at the beginning of a new, sustained bull cycle. The price will need to go much higher for much longer to incentivize the required production growth to meet uncovered demand.

Growing Institutional Interest

The strong fundamentals are not going unnoticed by institutional investors. In a recent Crux Investor interview, Sprott's John Ciampaglia, said it is seeing "much greater inquiry from generalist investors" doing their homework on the sector. However, the scale of institutional involvement is still in the early stages.

Everything from family offices to small boutique funds to very large funds within very large asset managers.

As the uranium market grows in size and liquidity, more institutional capital will enter and provide a further tailwind to prices. Investors are looking for exposure to the strong fundamentals, but also the portfolio diversification benefits uranium provides. The uranium story intersects with multiple investment themes, including decarbonization, energy security, and a necessary complement to intermittent renewable energy for reliable baseload power.

The Investment Thesis for Uranium

• Long-term supply deficit of 1.5-2.3 billion pounds requires doubling of production
• Much higher uranium prices are needed for an extended period to incentivize new supply
• Utilities have under contracted and need to accelerate long-term purchasing
• Russia's large role in conversion/enrichment poses supply risks, and could spike prices
• Significant institutional interest in uranium building, but still in the early innings
• Exposure to energy security, decarbonization, and energy transition themes
• Sprott Physical Uranium Trust provides a liquid, convenient way to own physical uranium

For investors constructive on uranium, gaining exposure through physical holdings like SPUT or uranium miners provides upside participation to rising prices. Given the long-term nature of the bullish thesis, sizing positions appropriately and being prepared to hold through volatility is important.

Uranium equities in particular tend to be a volatile but high beta way to play the theme, so the use of ETFs for diversification may be warranted. Overall, the uranium investment case appears quite timely and compelling. The supply/demand imbalance is not a short-term blip but a structural deficit that will take decades of much higher prices to resolve.

The uranium spot price has surged on tightening supply/demand dynamics, but more upside likely remains as the market is just in the early innings of rebalancing. Utilities are under-contracted and will need to accelerate long-term purchasing to replenish inventories. This comes as the world faces a massive uranium supply deficit in the coming decades that will require a doubling of mine production. Much higher incentive prices will be needed for a sustained period to bring sufficient new supply online.

Risks around Russia's large role in conversion and enrichment could further exacerbate the supply shortage and put upward pressure on the uranium price. Institutional investors are taking notice of the strong fundamentals and getting up to speed on the sector.

The uranium bull market appears to be on a solid footing with significant room to run. Investors can gain exposure through physical trusts like Sprott's or uranium equities. A long-term time horizon and appropriate position sizing are key, but the supply/demand backdrop creates an attractive, differentiated way to play energy security and the global energy transition.