Uranium: The Contrarian Commodity Set to Deliver Multi-Fold Returns

• The uranium market faces a significant supply deficit, with existing mines and projects unable to meet future demand
• Uranium prices are expected to rise substantially as utilities are forced to secure long-term supply contracts at higher prices
• Conversion and enrichment capacity constraints will exacerbate the uranium shortage and lead to even higher uranium prices
• The shift towards nuclear energy globally will drive strong long-term growth in uranium demand
• Uranium equities offer asymmetric upside potential for investors as the market rerates to reflect the structural supply deficit

Why Uranium's Bull Market Breakout Is Just Beginning!

The uranium market is poised for a major bull run that will create significant opportunities for informed investors. A structural supply deficit, increasing demand, and a growing appreciation for nuclear energy's role in a low-carbon future are setting the stage for uranium prices to increase multi-fold from current levels over the coming years. Investors who position themselves in high-quality uranium mining, as well as developers and physical holding companies, stand to reap substantial rewards.

The Supply Deficit

The looming supply cliff is the most compelling aspect of the bull case for uranium. Current global uranium consumption is around 180-200 million pounds per year. However, existing uranium mines are only producing about 140 million pounds annually following years of low prices. The shortfall has been filled by secondary supplies and inventory drawdowns, but those sources are rapidly depleting.

A staggering 23% of the uranium supply required by 2030 will need to come from mines that have not even been built yet. Another 8% needs to come from mines that are not fully permitted, financed or constructed. Try to think of another commodity where almost a quarter of the supply that's needed doesn't exist yet. The mines are not permitted, not fully licensed, financed or constructed.

As utilities increasingly return to the market to secure long-term uranium contracts, the lack of ready supply will force prices dramatically higher. The current long-term uranium contract price of $80/lb is lagging the market, and prices will need to rise to incentivize new mine development.

The Enrichment and Conversion Bottleneck

An under appreciated factor that will further increase uranium demand is the limited capacity for uranium conversion and enrichment. Uranium must be converted to uranium hexafluoride and then enriched before it can be used as nuclear fuel.

The global enrichment capacity is around 60 million SWUs (separative work units). The uranium feedstock required depends on the enrichment level, or "tails assay". At a 0.2% tails assay, about 180,000 lbs of uranium is needed per 1 GWe reactor. However, with enrichment constraints, the tails assay will need to increase to 0.3% or higher, which will require about 11,000 lbs of additional uranium per 0.01% increase.

In other words, enrichment constraints mean more uranium will be needed per reactor. Due to a higher tails assay, the market does not widely understand this increased uranium intensity. Even with planned enrichment expansions, the world will remain undersupplied, which means "overfeeding" the enrichment facilities with extra uranium will be required.

Demand Growth Drivers

While the supply constraints alone would be enough to drive a uranium bull market, the demand side of the equation looks equally promising. Countries around the world are increasingly embracing nuclear energy as a critical component of their decarbonization plans.

There are currently around 455 operable reactors globally, with 60 under construction and over 400 planned or proposed by 2050. In the near term, demand will grow to 205-215 million pounds by 2030, up from about 190 million pounds currently.

The growth will come from countries like China, which plans to expand from 55 to around 100 reactors by 2030. But it's not just China - major Western economies are also recommitting to nuclear. For example:

• France plans to build 14 new large reactors and is targeting over 50% nuclear by 2035, up from a previous goal of reducing to 50% by the late 2020s
• The UK recently announced plans for 8 new large reactors
• The US is providing subsidies to keep existing plants online and paving the way for new advanced reactor designs

This represents a complete 180-degree shift from the outlook for nuclear just 5 years ago, when many countries were looking to phase out their nuclear fleets post-Fukushima. In addition to the reactor growth, we can expect 15-20 million pounds of secondary demand as utilities look to restock their dwindling inventories. Historically, utilities would keep 2-3 years of supply on hand, but that has fallen to minimal levels after the last decade of oversupply. As they move to secure long-term contracts, they will also look to replenish their stockpiles.

The Investment Opportunity

The most direct way to gain exposure to rising uranium prices is through mining companies and developers. The uranium mining sector has been decimated by a decade of low prices, with the number of companies shrinking and many high-quality assets remaining undeveloped. As uranium prices rise, companies with proven, low-cost resources in safe jurisdictions will rerate substantially. Investors should look for miners with the following attributes:

• Tier 1 assets with robust economics at higher uranium prices
• Strong balance sheets and access to capital
• Experienced management teams with a track record of developing mines
• Exposure to safe mining jurisdictions like Canada, Australia and the US

Examples of well-positioned miners include Cameco, Paladin Energy and Boss Energy. Earlier-stage developers with high-quality resources like NexGen Energy, Denison Mines and Bannerman Energy also offer significant upside as their projects advance.

Another option is to gain exposure directly through uranium holding companies like Sprott Physical Uranium Trust and Yellow Cake plc. These vehicles hold physical uranium and aim to provide investors with direct exposure to spot prices. While these holdings alone aren't enough to move the spot market, they do offer a way for investors to play the thesis without company-specific risk.

The bottom line for uranium is that supplies are simply not sufficient to meet growing demand at current prices. With structural supply deficits looming, enrichment constraints increasing uranium intensity, and strong demand growth on the horizon, uranium prices will need to rise substantially to incentivize new production.

In the last cycle, prices went to $137, which is $200 today, with a surplus in the market. Where does that go when there's a deficit in the market? The market will figure it out. Investors who dig into the supply and demand fundamentals will find an extremely compelling opportunity in uranium. As the market wakes up to the inevitable surge in prices, uranium miners and physical holding companies are poised to multiply in value. Now is the time for contrarians to stake their claims in the uranium bull market.

The Investment Thesis for Uranium

• The uranium market has a structural supply deficit, with up to 1/3 of required supply by 2030 needing to come from yet-to-be-built mines
• Rapidly growing nuclear energy demand globally will require 205-215M lbs of annual supply by 2030, up from ~190M lbs today
• Uranium enrichment and conversion constraints will exacerbate the shortage and lead to higher uranium prices
• Long-term contract prices will need to rise substantially to incentivize new mines to come online
• Secondary demand sources are depleted, forcing utilities to secure long-term contracts and restock inventories
• The sector is under-owned, with generalist investors yet to appreciate the opportunity
• Investors can gain exposure via miners, developers and physical uranium holding companies
• Now is the time to position for multi-fold returns as the market rerates over the coming years

Actionable Advice for Investors

• Build positions in quality uranium miners and developers; focus on assets, jurisdictions, balance sheets and management
• Consider an allocation to physical uranium holding companies for direct commodity exposure
• Be prepared to hold for the next 3-5+ years to see the bull thesis fully play out
• Expect volatility; use dips to accumulate positions for the long term
• Monitor key indicators like long-term contract prices, mine restarts/construction, and country-level nuclear energy plans

The uranium market offers a highly compelling opportunity for long-term investors. A combination of structural supply deficits, growing nuclear energy demand, and tightening enrichment capacity is setting the stage for uranium prices to rise multi-fold from current levels. Investors who build positions in high-quality uranium miners, developers and physical holding companies stand to generate substantial returns as the market rerates over the coming years. While volatility should be expected, the uranium bull thesis is grounded in robust supply and demand fundamentals making it a rare asymmetric opportunity. As such, contrarian investors would be wise to dig into the uranium market and start staking their claims today.