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Uranium: A $300-Million Elephant Just Entered The Room

A friend of mine who has been in the uranium space for years sends me a daily uranium price update. Uranium is an opaque sector – there’s no spot price that you can just look up – so it’s great that he shares the pricing info he gets from a few (expensive) subscription services with a list of friends.

I always look. Of course, the daily change is often a few cents, or tens of cents. But for three days last week uranium gained between $0.75 and $1 a day.

That stood out.

What happened was a new player entered the uranium market and started buying. The amounts were not massive but the bids were consistent – and expected to remain so for months. And the uranium bought is being tucked away in storage, because it’s being bought as an investment.

Will this new buyer be the force that finally propels the uranium price upward, the straw that break the monotonous uranium market’s back? It might be.

This new player did not come out of nowhere. For the last few years, one of the most significant changes in the uranium space has been the development of stockpilers. I don’t mean shady warehouses. I mean public companies buying physical uranium in an investment bet that the price will increase significantly over the coming years.

These new players had a major impact earlier this year. In the spring several junior uranium stocks (near producers or producers) raised tens of millions of dollars and immediately used those funds to buy uranium. Uranium funds jumped into the fray, also buying up physical.

Denison Mines did it, as did Uranium Energy and Uranium Royalty and Energy Fuels. Yellowcake, the uranium fund and royalty company, added to its holdings.

The result was a uranium price that rose from US$30 per lb. to US$33.25 per lb. in a few months. In response, many uranium stocks gained 50 to 100%.

Then things calmed and in the last few months uranium equities have traded sideways or slid.

But now that spring excitement is returning: just as seasonality turns positive, a new player with very deep pockets has entered the stockpiling game and the price is responding again.

The new player is the Sprott Physical Uranium Trust (SPUT). This new publicly-traded vehicle (trades under U.UN on the TSX and SRUUF on the OTC; a NYSE listing will follow) has an At The Market equity program to raise up to US$300 million. An ATM is a financing that happens on a rolling basis; the company gets approved to issue new stock up to a set amount and then does so at market pricing when investors want to buy and the company wants to sell.

The ATM was approved last Tuesday and SPUT immediately entered the spot market, with enough bids that sellers just kept raising prices. The action lifted the spot uranium price to its highest level so far in 2021.

The next question is: how long can this last? What’s interesting is that it might last a while. When junior uranium stocks and smaller scale funds jumped into the physical fray in the spring, they collectively spent something like $150 million buying uranium in about six weeks.

SPUT has access to US$300 million and has a mandate to basically spend all of that on physical. I am not privy to SPUT’s boardroom chats but I imagine they plan to build their stockpile fairly quickly because their business is based in the idea that uranium is underpriced and primed for a re-rating and that their buying could well be the final push that launches uranium higher.

It’s not a far-flung idea by any means. Remember that uranium market players have been working for five years now to shift the market from a fundamentally weak footing to one of strength with multiple players (including larger producers like Cameco and Kazatomprom who have to supply to their contractees more than they currently produce) competing for limited spot supplies and where the pipeline of new production is insufficient.

It was that strong fundamental footing that encouraged funds and junior uranium companies to buy uranium in the spring. Canaccord charted the price action over the last 19 months below. The price surged when COVID prompted major mine shutdowns. It eased through 2020 as mines came back online, though the shutdowns did erased a significant chunk of supply and continue to impact output today. By spring of this year a host of players decided en masse that it was time to step in, and so began the $150 million in buying that lifted the price 10%.

And SPUT won’t be the only uranium fund on the bid. Other parties, like Denison Mines and Uranium Royalty, have announced that they are also planning ATMs to be able to buy more physical.

Several uranium analysts pointed out that SPUT didn’t enter as a massive buyer – volumes last week were larger than average but not by a lot – but as a consistent buyer. And that might well be the key: the addition of a consistent buyer to a market known for its inconsistency.

SPUT is also debuting at a good time seasonally. Like so many commodities, summer is generally a weak time for uranium. Utilities, the end user for uranium, are usually quiet in the spring and summer; buying ramps up in late August into the World Nuclear Association Symposium that takes place in early September and then keeps rising through the fall into winter, with October through December having historically been uranium’s strongest months.

What does it all mean?

I’m tired of expecting uranium to go. For the last few years I have said that I needed to see utilities return to the market and sign new long-term contracts before I would be convinced that the price would go in a big way.

But that was before all these funds and companies started buying physical uranium to stockpile, as an investment that ideally will also help kick off the bull market on which it is a bet.

This has become a very real force in the uranium space. And SPUT takes it to the next level, with deeper pockets and an intent to buy consistently over many months.

Will this be the last straw, the thing that pushes uranium up and away? It’s possible, especially with seasonality on their side.

Of course it’s not guaranteed. What is close to guaranteed is that uranium and uranium equities have limited downside from here. The fundamentals show a supply gap in the medium term, the price is far too low to incentivize new mine builds, and utilities are very uncovered, which means they lack contracts to cover their uranium needs.

There is shadow uranium, in unregistered warehouses that therefore doesn’t show up on official counts, that seeps back into the market when prices rise. But even shadow inventories are not that large (one sector expert I asked estimated perhaps 150 million lbs.) and are only available at whatever price the holder wants to sell. Some – perhaps a good portion – of those holders are probably inclined to wait for higher prices.

Utilities are also carrying more than they usually stock, which is probably why they are ok with their unusually high uncovered needs.

Shadow stocks and unmotivated utilities are the two biggest risks to uranium.

But there are a lot of committed players working together to push the market higher. They are not just buying but buying with purpose, such as trying to sop up supply from Uzbekistan, which still sells its product blindly into the spot market instead of using any savvy to sell into contracts. Oddly, some large miners who produce uranium as a by-product (such as BHP at Olympic Dam) also sell blindly into the spot market instead of into contracts, which hurts; the funds and companies buying uranium are working tactically to clean up these weak links.

It’s a slow process. But if it works, there’s real potential for a cascade effect. That’s what happened in the last uranium bull market: once the price really started to climb, utilities jumped into the market simultaneously and fought with each other to sign long-term supply contracts. Of course, those fights pushed the market higher and higher.

When uranium goes, it really goes.

The corollary is that uranium is very boring for long periods in between. Anyone who positioned in uranium years ago to be ready, like I did, has needed a lot of patience.

But if (when) this market goes, it will reward that patience. And we might be getting close to that time.
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