Sprott ETF Product Management Director Steven Schoffstall Explains Why Uranium Prices Are Soaring This Year And How Investors Can Trade The Rally
Detroit, Michigan
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November 21, 2023 09:25 AM Eastern Standard Time
By Rachael Green, Benzinga
As nuclear energy surges back into the limelight, promising a smoother transition away from fossil fuels, long-stagnant uranium markets have been booming. The once-obscure commodity is increasingly gaining the attention of investors looking for a new way to trade the clean energy transition. To learn more about uranium and what investors new to the space need to know, Benzinga sat down with the Director of ETF Product Management at Sprott Asset Management, Steven Schoffstall.
Uranium prices have soared this year, outperforming other metals. Can you talk about why this is happening now and where you see uranium prices headed going forward?
There are a couple of things that are at play here. Year-to-date through the last couple of days or so, [physical uranium] is up about 55%. Uranium tends to be much less sensitive to shorter-term economic noise. So when we see slow-down discussions about what's going on with the Chinese economy, that tends to affect other commodities more than what we see flow over into uranium.
There is a really strong case for uranium and the future growth of the price as well as the sector going forward. If you were to look back at uranium prices about five or six years ago, they were somewhere around $20 a pound. Now, we're sitting closer to $74 or $75 per pound.
The incentive price is really important to look at when we look at uranium. That is the price at which producers can produce uranium and still turn a profit. That's currently around the $75 to $80 range. That would suggest that, at least in the short term, there is some additional room for the price of uranium to move.
When you look over the longer term, there is a severe supply-demand imbalance that we see developing. If you go out to 2040 or so, you see about a cumulative 1.5-billion-pound shortfall in the supply of uranium. So, we think over the longer term, that's going to be conducive to much higher prices in uranium.
As demand for uranium increases, what is the outlook on the supply side? What should investors be watching here?
I mentioned the longer-term supply shortfall that we're expecting. What it's really going to take to get us there is to get more mines up and running. There are a couple of things that really impact that.
One would be the permitting process. To go from finding a mine or developing a site that hasn't previously been mined, it can take 10 to 15 years or longer. That's something that we would expect to see get shortened as we see governments start to sign on to nuclear energy and uranium as the answer to the energy transition.
We have a number of mines that were set on care and maintenance because incentive prices weren’t quite there for them to remain operational. So we need to see some increases in the price of uranium to incentivize those companies to get those mines up and running again.
The third leg of this stool is bringing the supply of uranium to Western countries. Kazatomprom, in Kazakhstan, is the world's largest producer of uranium. Given its proximity to Russia and the route in which it gets uranium to market, it would be great to diversify that part of the supply chain.
We do see companies like Cameco, based out of Canada, with very substantial operations that are bringing a lot of uranium to market. But it’s not going to be smooth sailing. Cameco announced an expected uranium production shortfall relative to its guidance for the rest of this year, which has driven prices higher.
Something that we see with any commodity is the potential for supply disruptions. Whether it's logistically, from a labor standpoint or from a permitting standpoint, we would need to see improvement in those areas in order for us to be able to limit the impact on prices as we see the supply and demand gap widening for the next one to two decades.
For investors who are new to the space, what unique risks should they be aware of in the uranium market?
The biggest one is probably geopolitical. The Russia-Ukraine war is ongoing and leading to energy security considerations. The coup in Niger, which produces about 5% of the world’s uranium could also impact supply.
Thinking more from an equity risk profile, these names tend to be smaller cap names. In our uranium miners ETF (NYSE: URNM), the total market cap of the entire index is less than $40 billion. So, it’s a much smaller segment that starts to introduce those risks that investors might not necessarily see if they're investing in larger companies like those in the S&P 500.
What are some upcoming catalysts and market movers in the uranium market you’re watching as we head into 2024?
For us, it's really about the price action that we're seeing on the physical side. That's going to be driving how much more uranium is coming on to market. What the miners are able to produce profitably and how quickly they are able to get the mines up and running, that's something that we're seeing as a tailwind for the price of uranium.
On the energy transition side, on a global scale, [uranium] is a metal that is being looked at more and more to provide the solution to the energy transition.
The International Energy Agency recently came out with a new report projecting that fossil fuel usage, particularly oil and natural gas, may peak by about 2030. We will see somewhat of a dip over the next decade or two, but they will still be heavily used. At the same time, we will see a 76% increase in electricity demand on a global basis when you're looking at 2050 relative to 2021.
Solar and wind have traditionally been the main ways of generating cleaner energy. But we are starting to see countries really warm up to the uranium story and nuclear energy.
One piece that really demonstrates that is, if you look on a global scale, there are about 435 reactors that are currently up and running, mostly in the United States. But we're starting to see a lot of interest from Asia, particularly from China, in increasing their reliance on nuclear energy.
Over the next decade or so, there are another 170 reactors that are either already under construction or planned for construction. That's about a 30% to 35% increase in nuclear reactors, which is also going to be driving the opportunity in the coming years.
The uranium market can be a bit opaque and hard to access for retail investors. How can they best gain exposure to this market?
We have three different ways to provide investors access to the uranium market. Our first option is the Sprott Physical Uranium Trust, a $4.5 billion fund that invests in and stores physical uranium. That's available [on the OTC market] in the United States under the ticker SRUUF.
We also have the Sprott Uranium Miners ETF (NYSE: URNM). That's an all-cap exposure to uranium miners that also includes about a 15% to 17% allocation to physical uranium. Most recently, we launched the Sprott Junior Uranium Miners ETF (NASDAQ: URNJ) back in February of this year. That ETF is for those who want to access the smaller-cap names in the uranium universe.
When we develop our strategies, whether it's uranium or broader energy transition funds, one thing we really focus on is pure-play companies that are upstream in the supply chain. In our view, the closer we can get to the source of bringing these critical minerals out of the ground, the better.
It’s a potentially better investment opportunity because we're moving away from the downstream companies. If companies are involved in building the nuclear reactors or building components that are going to be used in nuclear reactors, there could be cost overruns and a lot of logistical issues and delays. Being upstream allows us to stay away from that because there is a certain baseline of uranium that is necessary to keep not only the reactors that we have now up and running but also to meet that future growth.
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