Best Ideas 2023 Preview: Sprott Physical Uranium Trust

This article is authored by MOI Global instructor Samir Mohamed, a collaborative value investor based in Bangkok.

Samir is an instructor at Best Ideas 2023.

After the Fukushima nuclear accident in 2011 and the political reaction to it, many people thought the industry was in phase out. Uranium prices fell from a peak of 140 USD per pound in 2007 to 18 USD in 2015 – a level where almost all mining companies lost money. It was cheaper for them to buy uranium in the spot market to fulfill their long-term supply contracts instead of keeping their mines open. Mining CAPEX fell by 2/3 since 2013 with the uranium price staying below 25 USD until 2020. At least since 2011 uranium demand has exceeded supply with the balance coming from a large historic stockpile in Russia of unknown size (to Western observers). Kazatomprom, the largest uranium miner worldwide estimates that 34-37% of global uranium demand in 2021 was supplied from stockpiles.

Since 2020, the perception towards nuclear energy in many countries has improved a lot for the following reasons:

• A change from abundant, cheap electricity to much higher electricity cost and risk of shortages due to the war in Ukraine.
• An increasing realization that intermittent solar and wind power cannot quickly (if at all) replace baseload power from coal or gas.
• The best solution with available technology for fossil free baseload power is nuclear for most countries.

Consequently, Japan is restarting its large nuclear fleet and many Western countries are prolonging the operating life of their current reactors and announced plans to build more. Asian countries (especially China and India) continue their nuclear buildout at an accelerated pace. The industry has switched from phase out (in Western countries) to global growth industry.

However, there has not been a massive supply response yet to the long-term growth and the shrinking stockpile mentioned above. The reason for this is that the break-even price for new uranium mines is around 70-80 USD at 2021 cost. The current uranium spot price is below 50 USD. With significant cost increases to build new mines in 2022 and higher interest rates driving up capital cost, the hurdles to build new mines are too high to make final investment decisions for most projects. In other words: Either the uranium price goes above the break-even price to build new mines or those mines do not get built, the uranium stockpile depletes and nuclear reactors run out of fuel. As building uranium mines takes several years and more than 50% of global capacity needs to be added just to close the supply gap in 2021, a price spike in uranium within the next couple of years is likely. (Inflation adjusted the last peak in 2007 was at 200 USD.)

While there are two large uranium miners — Kazatomprom and Cameco — the most direct bet on uranium without taking company risk is the Sprott Physical Uranium Trust (U.UN, trading in CAD) listed in Toronto. It is by far the largest physical uranium trust worldwide with almost 3 bio. USD net asset value. That scale means it is the most liquid and has the lowest total expense ratio at around 0.68% p.a.. As a closed end fund it can have significant swings around NAV – unlike ETFs. The premium/discount to NAV is an indication for investor demand and can be used at extremes as a contrarian indicator to enter or exit positions.

The biggest risk is a catastrophic nuclear accident that changes public perception and nuclear energy policies. Other risks like a general commodity selloff due to a recession are more temporary in nature as uranium demand is not cyclical.