The uranium market has made legendary price moves throughout August and September 2021 after spending several years as a forgotten commodity, dormant in a bear market.
Uranium producers suffer from a problem familiar to commodity producers in secular bear markets: their cost of production is above the spot price of the commodity.
They find themselves stuck in a situation where turning on their machines loses them money. Pretty tough to raise capital or get anyone excited about your commodity in that position.
But there’s hope on the horizon for all fans of the glowing green rock. There’s a huge buzz about the market.
There’s a lot of speculation, lots of big calls by pundits and fund managers, even some of the folks over at WallStreetBets are along for the ride.
So a lot of money is chasing the very small amount of assets in the uranium market right now, leading to what some are calling a bit of a ‘squeeze,’ leaving all of us wondering if uranium is going the way of crude oil, or if it will just settle back into a sideways market like it has for the last several years.
In this article we’ll explain how Sprott, primarily a commodity trust manager, is making huge waves in what was previously a very boring and forgotten commodity: uranium.
Sprott Physical Uranium Trust: The New Whale of the Uranium Market
If you’ve read any headlines about uranium as of late, you’ve certainly heard about Sprott. Sprott, an asset manager known for their physical commodity trusts, recently took over a uranium trust and it’s clear they have pretty big plans for it.
A uranium trust essentially allows everyday investors to buy some uranium through a ticker symbol in the same way you’d buy $GLD if you wanted some gold exposure.
The trust is called SPUT: Sprott Physical Uranium Trust. SPUT is a closed-end fund (CEF), meaning that when the trust is initially created, a fixed number of shares are created and those shares float on the open market, waning between trading at a discount or premium to the net asset value (NAV).
This is in contrast to ETFs, which constantly redeem and create shares in order to keep the price fixed near the NAV of the fund.
Because of the speculative buzz surrounding uranium and specifically the Sprott trust right now, Sprott initiated an at-the-market (ATM) offering in order to issue shares when the share price of SPUT is above the NAV of the fund.
They then use that capital to buy more uranium. They’re basically making the trust a huge player in the uranium market as a result of investor demand.
As a consequence of issuing all of these new shares, Sprott is quickly becoming the biggest whale in the uranium market, buying up all of the physical uranium that they can. They’ve purchased well over 6.6 million pounds of uranium since launching the trust.
To provide some context, roughly 100 million pounds of uranium were mined in 2020, according to the World Nuclear Association, meaning that Sprott has vacuumed up more than 6% of annual production and stored it (rather than quickly trading it back to a uranium consumer, as a producer might).
This obviously takes supply away from a market which many expect to get hungrier and hungrier for supply (a supply which those same analysts expect to be structurally constrained).
Source: SPUT Tracker Google Sheet
The most important thing to note about Sprott is that they’re a source of elastic demand.
The demand equation can vary dramatically based on the whims of financial investors in uranium. Sprott is buying because people are buying their trust, which makes them money. If the market gets bored of uranium, Sprott becomes a far less important player in the market.
As you can see in the chart below, it’s pretty early to call this a start to a new bull market in uranium, but it’s possible that Sprott’s increased activity in the physical market will push the bear market over the finish line.
The Other Players in the Uranium Market
We won’t get too deep into the business of uranium here, but if you’re just learning about this pretty small market now, it’s good to get a quick rundown on the important figures in the market besides Sprott, because they’re just one part of the equation.
There are producers and consumers of uranium. The producers are uranium miners.
Uranium is a natural resource, and like many other natural resources, the primary way that new supply comes to the market is that entrepreneurs search for places where there is a high probability that the natural resource lies, and then raise money from investors to extract it and hopefully strike it rich.
Because there is natural demand for uranium because of its utility as an alternative source of energy, there are naturally plenty of companies that do exactly this and mine uranium for a living.
There are well established players, like Cameco (NYSE: CCJ) with large, fully functional projects, but there are also junior miners. Junior miners are like Matthew McConaughey in 2016’s Gold.
They have an idea of where some uranium might be, and maybe a rough plan on how to get it, but they ultimately rely on some investors to take a big risk in giving them money to follow this plan.
The well established miners have a good idea of their cost of production, in other words, the price per pound/ton where they break even mining the uranium. Right now, many of the established miners are offline because the price of uranium is so depressed that turning on their machines actually loses them money.
So you have a situation where supply is constrained right now because the cost of uranium is too low for the producers to make profits from mining new uranium.
On the other hand, though, the consumers of uranium aren’t diving over each other to buy all of the uranium off the shelf, either, so it’s not a completely skewed supply/demand situation.
The primary consumers of uranium are utility companies that have nuclear power plants. Remember Homer Simpson’s job in The Simpsons?
These are nuclear power plants, and they’re substantially the only consumers of uranium in the market, making the demand side of the equation very different from that of traditional commodities markets.
The power plants are mostly owned by local governments and utility companies. They’ve been buying their uranium for dirt-cheap prices ever since the crash of the uranium market.
These power plants have become accustomed to sub-$50 uranium since the early 2010s and don’t have deep stockpiles of the commodity to protect against shortages.
There are some analysts who think these folks are in for a rude awakening should a bulk of demand hit the market, because these plants will be caught flat-footed.
Uranium is still mostly a small niche commodity. The counterparties on your trades might be local experts that have been in the trenches of this market for several years, with knowledge of every player and the nuances and rhythms of the market.
Even when a thesis sounds interesting, entering a trade as a “macro tourist” is always dangerous, meaning you should do your research by learning the market and seeking out contrary viewpoints and information at odds with popular narratives.
As always in trading, anything can happen, which is why it’s interesting to see a player like Sprott barge into a quiet market like a bull in a China shop.